Size Matters: Small Business Size Standards
The term small business size has a variety of meanings. Not just to you and your customers but also to any one of the many government agencies that impact how you operate your company.
You may think of a small business as the mini-mart down the street but your operation with dozens of employees and three production shifts…that’s anything but small. Or you file your taxes, and based on the check that you send in, your business seems pretty big.
The federal government’s way of defining a small business is pretty complex, and your need to be aware of the different standards that are used by different agencies. Of course, you want and need to comply with the law, but based on the size of your business, you may also be able to take advantage of the perks of small business classification.
The Definition of a Small Business
There is no exact way to define a small business.
In general, a small business is an independently-owned and -operated company that’s limited in size and in revenue based on its industry. However, the size of your business for a variety of laws and entitlements can depend on several factors, such as your industry, annual sales, and the number of full-time employees. Different industries have different standards for the definition of a small business.
The government’s size standards will determine what rules apply to your company. As a result, you need to be able to define your business’s size. Here are some of the most common agency guidelines for small business size:
The Affordable Care Act (ACA)
The size of the business is important for health care coverage. The ACA requires businesses of a certain size to provide this benefit to its employees.
The ACA stipulates that your business is deemed to a small business if you have 50 employees or fewer. The employees must be full-time workers or full-time equivalent (FTE). A full-time equivalent employee is someone who works an average of 30 hours per week, per the ACA.
If your company employs part-time workers, you’ll have to calculate full-time equivalent (FTE) employees. This is accomplished by adding the number of hours your part-time employees work, then dividing that sum by the number of part-time workers for the total full-time equivalents.
You then add your part-time equivalent employees to the number of full-time workers for your total. If the total is 50 or fewer—you company qualifies as a small business. If the number is greater than 50, it’s a large business. Company with 50 or fewer employees are not required to
provide health insurance to employees. However, a business owner can still elect to implement a health care plan for his or her employees.
If the business has 25 or fewer employees, it could be eligible for a tax credit when purchasing a plan through the SHOP Marketplace.
The Small Business Administration (SBA)
The SBA provides funding, advice, and other resources to small businesses. The SBA size standards determine if your company is eligible for the agency’s assistance in growing your business.
The SBA looks at your industry, annual sales, and the number of employees to determine its size standards. However, a business must be headquartered and operated primarily in the U.S., be a for-profit firm, be independently owned and operated, and be a minority player in your industry.
In analyzing your business’ annual sales and the number of people you employ, as a general rule, the agency deems a small business to be one that is between or below $750,000 and $35.5 million in annual sales and between or below 100 and 1,500 employees.
The SBA guidelines range widely, again due to the fact that industries have different standards. Depending on the kind of business, your company will have higher or lower sales and employee standards.
If the SBA considers your company to be a small business, it’s eligible for government aid through financial assistance and business counseling. The SBA also ensures that at least 23% of government contract work goes to small businesses.
In addition, a small business can obtain a loan guaranteed by the SBA if the lending requirements are satisfied. SBA loans are typically easier to secure than a traditional bank loan. The SBA’s 7(a) loan has a maximum amount of $5 million, with an average amount of $371,628 in 2015.
The Internal Revenue Service (IRS)
You might guess that the IRS is special. The IRS doesn’t have a standard small business size. The size of your company depends on individual tax laws for specific types of business organizations. You must determine your business entity to find out your tax responsibilities.
These are the most common business organizations:
* Sole proprietorship: a single owner pass-through tax entity that files Schedule C;
* Partnership: a multi-member pass-through tax entity that files Schedule K;
* An LLC or limited liability company: a single member pass-through tax entity that files Schedule C or multi-member pass-through tax entity that files Schedule K; and
* Corporation: a company with one or more owner that acts as a separate tax entity and files Form 1120.
Most single-owner small businesses operate as sole proprietorships or single-member LLCs, and the majority of multi-owner small businesses operate as partnerships or multi-member LLCs. Corporations are usually large businesses.
As a business owner, you must, of course, report and pay taxes based on your company’s income. Again, your business’s tax entity determines your business tax obligations.
Questions about business size? Speak with Sacramento business advisor Andrew Rogerson. He has been helping businesses in California for years.