What Determines Small Business vs. Large Business?
Classifying a business as small or large can impact its ability to qualify for financing, certification and potential contracts. Determining the difference between the definition of a small business and a large business depends on a number of factors, including the type of business, number of employees and annual receipts, each calculated over various periods of time.
The Small Business Administration establishes guidelines for classifying businesses based on a number of factors. The SBA is authorized by the Small Business Act, which was established to help small businesses compete. Certain programs, such as government contract opportunities, are only available to those businesses classified officially as small, using the standards outlined by the SBA. Factors vary depending on the industry or types of activity in which the business engages.
One factor to consider when determining whether a business is defined as small or large is the amount of annual receipts, averaged over a three-year period. Some service businesses can have average annual receipts as high as $21.5 million and still be classified as a small business. On the other hand, some agriculture businesses cannot have more than $500,000 in average annual receipts to be considered a small business. A retail business can be classified as a small business with as much as $21 million in average annual receipts.
As with average annual receipts, the number of employees varies with the type of business when determining whether that business is considered a small business. For example, for some wholesaling businesses, a maximum of 100 employees qualifies it as a small business. However, some manufacturing businesses can have as many as 1,500 employees and still be considered a small business by SBA standards. The maximum number depends on the type of business and the type of product or service offered by the business.
In addition to average annual receipts and number of employees, the SBA specifies additional factors for qualification as a small business. The business has to be operating for profit. It also has to be independently operated. The SBA has also determined that a business cannot be dominant in its field and still qualify as a small business when competing for government contracts or other preference programs.