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Small business

A small business is a privately owned corporation, partnership, or sole proprietorship. Many small businesses have fewer than 20 employees. At the top end, a “small business” may have up to 1,500 employees depending on its industry.

What is a small business?

According to the U.S. Small Business Administration (SBA), the definition of a small business is based on its average annual receipts (total income plus cost of goods sold), the number of employees, and any business affiliates. This designation is important when applying for SBA business loans and bidding on contracts with federal agencies.

To find out if you qualify as a small business, start by finding your North American Industry Classification System (NAICS) code, then look up the size standard for that code on the SBA Table of Size Standards [PDF]. Most industries use annual receipts to determine eligibility; a few, like manufacturers, go by the number of employees.

According to the SBA, a plumbing, HVAC, or electrical contractor is a small business if it has less than $15 million in average annual revenue. A building construction business would need to earn less than $36.5 million to qualify.

In real estate, those who lease buildings would qualify if they earn less than $27.5 million. Real estate agents and brokers, appraisers, and property managers would need to earn less than $7.5 million.

Many health care businesses, such as dentists and chiropractors, are also considered small businesses at less than $7.5 million in annual earnings.

To be designated a “small business” by the SBA, a company must also be a for-profit American business that’s independently owned and operated, headquartered in and doing most of its business in the United States or otherwise contributing to the nation’s economy.

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The benefits of being a small business

Small businesses are often quicker to adapt to changes in technology in the marketplace than their larger competitors. There are other advantages as well:

  • SBA loans make it easier for small businesses to borrow money, and at a lower interest rate than they might receive on their own from lenders.
  • The SBA offers government contracts to small business owners. Many state and local governments set aside contracts for small businesses as well.
  • Small businesses may be eligible for grants. Offered by the federal government, Small Business and Innovation Research (SBIR) grants provide funding to small businesses for research and development that have commercial possibilities.

What are the differences between a small business and a startup?

While startups may begin small, they’re not typically referred to as a “small business” because the owners don’t intend for them to stay that way for long.

A startup begins with an idea and a business plan that could rapidly help it grow into a large business. It offers a new product or service, or a considerable improvement on one that already exists. The owners are looking to disrupt the marketplace, and possibly create a new industry.

A small business starts with someone intent on meeting an already existing demand with a product or service already known to the marketplace. It might start as a part-time project by the owner, with the goal of the business owner become self-employed full-time.

Whereas a startup might develop a new cell phone app or social media platform with the idea of selling it to the world, a small business would offer goods or services within a city or neighborhood.

Startups begin with a high risk of failure, but the potential for rapid growth and high profits within a few years. Small business owners look for a long and steady source of income.

Startups are likely to seek funding from venture capitalists, angel investors, and an initial public offering (IPO). Small businesses may rely on their own savings, loans from family, their local bank, or loans backed by the SBA.

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