How small is small? Redefining small business

You could have 499 employees and you’d still be called a small business, never mind that you are zillions of light years away in terms of size, revenue-earning capacity (and all other measurement criteria) from the really “small” business that has perhaps fewer than 10 employees.

This one-size-fits-nearly-all definition makes 99.9% of businesses in the US small and you wonder why do we need to bother with any classification at all? The definition of ‘small business’ put forth by the Small Business Administration (SBA) does not take cognizance of the differences between micro businesses (lesser than 10 employees), small businesses (10 to 24 employees), medium-sized businesses (25 to 99 employees), and large small businesses (100 to 499 employees). They differ drastically in their ownership patterns, ways of working, problems, the need for resources and the ability to procure them, and so on.

How big or small can your business be, and still be considered a small business? The U.S. government has fixed ideas on such things.

Defining “small” through the times

The definition actually predates the SBA and was originally used by the Reconstruction Finance Corporation and the earlier Small War Plants Corporation, which was a World War II Government contracting agency channeling Federal contracts to small manufacturers. The House Committee on Banking and Currency in 1957 observed that “the standard of 500 or less employees originated in World War II with several variations. For the want of a better definition, the 500 rule generally gained acceptance in the Government, although in many instances there was considerable reluctance by many Government officials and members of Congress to accept such a rigid formula.

To the SBA’s credit, it has kept on reviewing the definition of small business almost ever since its inception in 1953. Here’s a timeline excerpted from the SBA’s white paper on size standards methodology:

  • 1959: Size standards regulations distinguished between manufacturing and financial industries. The Agency set 250-employee, 500-employee, and 1,000-employee size standard for its financial assistance programs, but retained the 500-employee standard for Federal contracting programs.
  • 1963: SBA size standards were as follows: $1 million for retail trade industries; $1 million for services industries; $5 million for wholesale industries; and $7.5 million for construction industries. There continued to be two sets of size standards for manufacturing industries – 250 employees to 1,000 employees for SBA financial programs, but basically 500 employees for Federal contracting programs.
  • 1963 to 1975: Many manufacturing size standards were increased to 750 or 1,000 employees and some of the services industries, such as engineering and janitorial services, with size standards of $5 million and $3 million, respectively, were broken to separate industries.
  • 1975: SBA implemented a general increase to its monetary based size standards to account for the effects of inflation. The adjusted standards were $2 million for retail trade and services industries, $12 million for general construction, and $5 million for special trade construction. Employee based standards remained unchanged.
  • 1984: The current size standards framework was put in place.

Current size standards

Currently, most prevalent size standards are

  • $7.0 million in annual receipts for retail trade and services
  • $33.5 million for general construction
  • $14.0 million for special trade construction
  • 100 employees for wholesale trade for all Federal programs except for Federal procurement where it is 500 employees under the non-manufacturer rule, and 500 employees for manufacturing industries

Yet, with all the changes along the years, the SBA has still not managed to hit the perfect chord and is currently reviewing its classifications all over again. It is inviting public comment on its proposed three “base” or “anchor” size standards:

  • 500 employees for manufacturing, mining and other industries with employee based size standards (except for wholesale trade)
  • $7.0 million in average annual receipts for most non-manufacturing industries with receipts based size standards; and
  • 100 employees for all wholesale trade industries

 

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