How Large is a Small Business?

As my dialog with the White House and Congress to reduce the Government’s burden on my business unfolds, a question in a conversation emerged:

How large is a small business?

To the uninformed, this would seem to be a pretty simple question to answer – less than $ in revenue and/or less than # of employees, and the business is classified as a small business by the Government. There is guidance from the government – some pretty clear, and some implied by legislation, but in my view, it is all baloney.

For the record, my S-Corp engineering consultancy is best classified as NAICS 541330; my LLC medical device design company is best classified as NAICS 541712.

Here are several “footprints” to answer this question: How large is a small business?

The Small Business Administration –

What is a Small Business? | SBA.gov

From this link, you can find a comprehensive pdf document Size_Standards_Table to identify revenue (and numbers of employees for some industries) thresholds that define a small business specified by NAICS code.

NAICS 541330 – $14M revenue or less is a small business;
NAICS 541712 – 500 employees or fewer is a small business.

500 employees? That is a HUGE research firm… Businesses in certain classifications are small with up to 1500 employees (though many SBA classifications with employee limits top out at 500)! These are certainly not small businesses as far as I am concerned.

The Internal Revenue Service –

Small Business and Self-Employed Tax Center

From this link, after a few clicks and some browsing, you can find this introductory publication for small business p334 Tax Guide for Small Business. The focus on this publication is a high level overview of terms and definitions, accounting procedures and processes for the novice that satisfy IRS expectations of a business, but nowhere in this publication does it define a small business… This part of the IRS website is dedicated to service “small business with assets under $10 million.” So, there is one revenue number to define a small business. The focus in this part of the IRS website, though, and in this publication is on the sole proprietorship organization of business, and not small corporations, and not applied to some particular measure of revenue or employee size that the SBA utilizes to classify businesses.

By the way, Pub 334 has specific text dedicated to treatment of “statutory employees” – what are they? Darned if I know – never defined…

With some further browsing (and being a knowledgable business owner and regular IRS website visitor), I located the following article, S Corporations.This part of the IRS website is more appropriately focused on my particular business organization, but this article still leaves the question largely unanswered: “What is small?” Fewer than 100 shareholders is the measure of this classification of small business.

Reference to IRS Section 179 provides for immediate expensing of capital assets up to $500,000 – offset by qualified property exceeding $2,000,000 – to benefit the small business. Again, a reference to assets, and to not revenue or employees.

And finally, reference to the Small Business Health Care Tax Credit for Small Employers (part of the Affordable Care Act) which applies to employers with fewer than 25 employees establishes another reference to “small”. After reading portions of the ACA (26 hrs or so), and reading thoroughly the IRS website articles on this topic (another 10 hrs or so), and reading the instructions for form 8941 (with an estimated burden to read and understand, prepare and submit is 17 hrs or so), well,  of banging my head against the wall on this for 50+ hours to see if I quality for the 35% credit for healthcare insurance premiums I pay, I still don’t understand this topic sufficiently to know… But it does add another measure for “small” – fewer than 25 “equivalent full-time employees” or FTS’s. Yes, this is a rational measure for “small”.

Dad-gum-it, I know that the IRS has some specific language defining a small business… I can’t recall where I saw the definition in the IRS Tax Code.  I’ll find it some other time.

Pragmatically, the IRS definition of small seems to be up to $10M in total assets; fewer than 25 employees. This is a more reasonable criterion for a small business than the SBA guidance.

United States Census Bureau –

Statistics about Business Size (including Small Business) from the U.S. Census Bureau

The United States Census Bureau compiles encyclopedic statistics about business size in the US. About 3/4 of all businesses have no payroll – they are fundamentally sole proprietors.  The Census Bureau’s statistics are compiled for businesses with fewer than 5, 10, 20, 100, 500, and more than 500 employees.  2008 statistics for businesses in rough and round numbers are as follows:

Classification: Employment_Size	#_Firms.	#_Employees.	__Annual_Payroll ($1,000)
Nonemployer_firms (proprietorships)	21,351,320	n/a	n/a
1-4 Employees	3,617,764	6,086,291	232,062,907
5-9 Employees	1,044,065	6,878,051	222,504,912
10-19 Employees	633,141	8,497,391	293,534,352
20 to 99 Employees	526,307	20,684,691	774,589,335
100-499 Employees	90,386	17,547,567	706,476,693
500+ Employees	18,469	61,209,560	2,901,340,979

(sorry for awkward table formatting…)

Notice that an “order of magnitude” decline in the number of businesses counted occurs at the 100 employee measure.

Wikipedia –

I am reluctant to site Wikipedia, though it is convenient:

Small business – Wikipedia, the free encyclopedia

Small and medium enterprises – Wikipedia, the free encyclopedia

My Opinion –

So, how large is a small business? My business is a small business with two employees currently. The Local doughnut shop has 4 employees (the entire family) – clearly a small business. The local Quick-Kar Oil Change store has 14 employees – it is a small business from anyone’s perspective – clearly a small business. The local “watering hole” has 43 employees including part timers – still a small business.

Here is where I think I will talk from when I refer to the scale of a business:

SOHO – 1 to 4 employees – a “one or two-room” business;
Small – 5 to 49 employees – a “one or two-building” business;
Medium – 50 to 499 employees;
Large – 500 to 4999  employees;
Giant – 5000 or more employees.

Anyone have an opinion to offer? Yes, I know these numbers aren’t nice powers of 10, but they are orders of magnitude!

Tags: Internal Revenue Service, IRS, SBA, small business, Small Business Administration, tax law, US Census Bureau, Wikipedia