Definition of a Small Business
A small business is a company of limited size, often measured by its revenue, number of employees, or both. Often regarded as the backbone of the U.S. economy, small businesses span from sole proprietorships to partnerships and corporations with multiple owners and sometimes hundreds of employees.
According to the U.S. Small Business Administration (SBA), over 33 million small businesses operate in the United States, collectively employing approximately 62 million Americans.
Understanding Small Businesses
Small businesses are generally defined by metrics like employee count and annual revenues. The SBA’s Office of Advocacy describes small businesses as “an independent business having fewer than 500 employees.” However, SBA standards allow for variations based on industry, with some small businesses employing up to 1,500 workers and generating annual revenues of up to $40 million.
Notably, most small businesses are truly small. In 2023, SBA data revealed that 82% of U.S. small businesses were one-person operations.
What Are NAICS Codes?
The North American Industry Classification System (NAICS) was introduced in 1997 by the federal government to standardize business classifications for statistical purposes. Each business is assigned a six-digit code, where:
The first two digits represent the economic sector.
The next two digits define the subsector and industry.
The last two digits provide further specificity.
For instance:
An orange grove is classified as 111310.
An advertising agency is categorized as 541810.
Although NAICS codes do not differentiate between small and large businesses, the SBA applies size standards—based on annual receipts or employee count—to determine small business eligibility. For example:
An orange grove qualifies as small if its annual revenue does not exceed $4 million.
An advertising agency is considered small if its revenue is under $25.5 million.
Importance of Small Businesses
Small businesses play a vital role in the U.S. economy, accounting for 99.9% of all businesses, 43.5% of gross domestic product (GDP), and 39.4% of private-sector payrolls. Between 1995 and 2023, they contributed to 62.7% of net new job creation.
Small Business Resources
Small businesses can access various funding and support resources:
SBA Loans: These loans range from $500 to $5.5 million and can fund working capital or fixed asset purchases. The SBA also offers specialized programs for exporters.
Grants: While harder to obtain, small business grants—such as the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs—support specific industries.
Government Contracts: The U.S. government is legally obligated to consider small businesses for federal contracts. Programs exist to assist specific groups, such as women, Native Americans, and veterans, in competing for these opportunities.
Additionally, Small Business Development Centers (SBDCs) provide valuable resources and guidance for entrepreneurs across all U.S. states and territories.
Types of Small Business Structures
Small businesses can choose from various legal structures based on their needs:
Sole Proprietorship: The simplest structure, where the owner reports business income or losses on their individual tax return.
Partnership: Two or more individuals share ownership, either through a limited partnership (LP) or limited liability partnership (LLP).
Limited Liability Company (LLC): An LLC offers reduced personal liability for its owners and flexibility in tax reporting, which can be done on individual or business tax returns.