What is a small business?

According to the US Office of Advocacy, a small business is one that has  fewer than 500 employees  . Additionally, Part 121 of the Code of Federal Regulations (CFR)  presents more in-depth requirements for small business  .

According to the CFR, a small business is an independently owned, profit-making organization that has a business location and that operates primarily within the country or makes a significant contribution to the U.S. economy. Small businesses tend not to have a lot of market share, which means they are not a household name or dominant in their field.

Defining Small Businesses by Industry

While the Office of Advocacy and the CFR have clear definitions, the U.S. Small Business Administration has a more complex answer to the question, ""What is a small business?"" This federal agency's definition varies according to the industry in which the business operates.

For each industry, the definition of a small business is based on the number of employees or average annual receipts. These parameters are called ""size standards,"" which serve as boundaries. Businesses that exceed these are no longer considered small.

The size standards are based on the North American Classification System, a set of six-digit codes developed by the federal government that categorizes businesses based on their sector, sub-sector, industry, and type. The following table includes some examples of the SBA's size standards.

The SBA's  table of small business size standards  includes a complete list of size standards for each sector and industry.

Resources that may be limited to small businesses

There are over 33 million small businesses spread across the U.S., accounting  for 99.9% of all businesses  . In the 26 years between 1995 and 2021, small businesses were responsible for creating 17.3 million net new jobs.

The federal government recognizes how important small businesses are to the American economy. As a result, it sets aside certain resources to ensure that small businesses continue to thrive. Here is a list of resources that are only for organizations that can be classified as small businesses.

loan

While the SBA does not lend money to small businesses, it does guarantee loans through approved lending institutions. This is done to reduce lender risk and increase small business owners' access to funds to start or expand their businesses. SBA loans can range from $500 to $5.5 million and include the following loan types:

• 7(a) loans:  Provides guarantees to lenders so they can help small businesses with a variety of financial needs
• 504 Loans:  Provides long-term, fixed-rate financing through nonprofit partners (called certified development companies) for prime real estate
• Microloans:  Provides up to $50,000 through nonprofit, community-based intermediary lenders and cannot be used for loans or real estate

SBA loans often come with unique benefits like competitive terms, low down payments, and counseling and education to help small business owners use their financial capital wisely.

grant

Grants are funds provided to small businesses that do not have to be paid back. While the SBA does not offer startup or business development grants, the federal agency does offer grants for specific purposes.

This includes research and development, supporting veterans (including service-disabled veterans), and supporting nonprofit microenterprise development organizations. Special grants are also available to help businesses wishing to export.

The U.S. Treasury Department also offers the State Small Business Credit Initiative. This $10 billion program provides both financing and technical assistance to help small businesses grow and succeed.

The USDOT accomplishes this goal by providing funds to states, territories, and tribal governments to create their own financing programs. These programs may provide loans, equity/venture capital opportunities, and more.

Contract

The federal government purchases goods and services from all types of businesses through the federal contracting process. The government reserves some contracts specifically for small businesses to provide a level playing field. This method has proven effective, as small businesses  win about 23% of all federal contract dollars  .

Some contracts automatically go to small businesses of a particular socioeconomic status. These include businesses located in historically underutilized business areas and businesses owned by women or service-disabled veterans.

Small business owners will likely need to certify their business through the System for Awards Management (SAM.gov) or apply for certification with the SBA.

Health insurance

Recognizing that it  can be challenging for small business owners to provide  employee benefits , the federal government created the Small Business Health Options Program (SHOP) to help provide health insurance options to small business owners.

This insurance exchange allows small business owners to control which coverage options they offer and how much employees pay for premiums.

Note that the SHOP program uses different business size requirements than typical SBA programs. As a result, it's only open to small business owners with one to 50 full-time employees. Those with fewer than 25 employees may qualify for a tax credit of up to 50% of the premiums they paid.

Most Common Small Business Structures

Because the federal government defines and qualifies small businesses based on size or revenue, not tax structure, small business owners can choose to structure their business however they want. These are some of the most common small business structures:

• Sole proprietorship  :  An unincorporated single-owner business where there is no distinction between business and personal assets and liabilities
• Partnership  :  A business structure where two or more people share ownership (and, in some cases, liability) of the company
• Limited Liability Company:  A business with one or more owners that limits personal liability and allows pass-through or corporate taxation
• Corporation:  An incorporated business that is separate and distinct from its owners and operates with a board of directors

86.5% of small businesses  that do not have employees are sole proprietorships. However, more than half of small businesses that do have employees are   S -corporations .

Benefits and Risks of Small Businesses

Starting a small business is often an exciting venture, but it can undoubtedly be challenging. Here are some of the benefits and risks that small business owners can expect to incur when they open their doors.

Small business benefits

Small businesses are popular for a reason. Generally, they offer business owners several benefits:

• More freedom for business owners who won’t have as many people to answer to
• Greater flexibility to respond to external changes in the industry or market
• Lower salaries and other expenses, which can translate into bigger personal profits for the business owner
• Employees will have more opportunities to see the direct impact of their work, which can increase employee engagement and satisfaction
• Greater trust from the local community, especially when customers can see and interact with the business owner

These benefits make starting a small business very attractive for people who have an entrepreneurial spirit but have limited funds.

small business risks

Despite all the benefits that small businesses offer, it is important for aspiring entrepreneurs to understand that they also come with certain challenges:

• Less access to capital, especially through traditional bank lending
• Owners will have less free time, may have to work longer hours, and may need to perform multiple roles across the business
• High risk of financial loss if the business fails
• Attracting top talent is more difficult when competition for labor is high
• It is more difficult to find stable staff when the business is very small

These challenges should not deter someone from starting a business they are truly passionate about. However, it is important to consider and be prepared for these when you attempt to start and grow a small business.