What Is a Small Business?

Definition & Examples of a Small Business

Small business workers in an office
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A small business is a for-profit entity with certain size measurements (either the average annual receipts or the average number of employees) that fall below a set limit. The exact definition of a small business depends on both the country and industry in which it operates. In the U.S., these limits are set by the Small Business Administration.

Review some examples of small businesses and the benefits that these companies enjoy.

What Is a Small Business?

In the U.S., the Small Business Administration (SBA) is a federal agency that is tasked with both defining and helping small businesses. The primary factor in determining whether a business is a small business is a measure of either revenue or employees.

This all varies by industry and business model. For example, a retail bakery can employ up to 500 people and still be considered a small business, while a commercial bakery can hire up to 1,000 employees. A new car dealership can hire up to 200 employees and still be a small business.

Other businesses are limited not by employee count but by average annual receipts. For example, a small beer, wine, or liquor store can make up to $8 million in sales. Radio stations and television broadcasters can make up to $41.5 million in sales.

You can find the size standard for your industry by using the SBA Table of Size Standards. These standards are updated every five years, so check back every so often to ensure that you're aware of the latest size standards.

Beyond those revenue and size requirements, there are a few more requirements an organization has to meet before it can be considered a small business in the U.S. It must:

  • Be organized for profit
  • Have a place of business in the U.S.
  • Operate primarily within the U.S. or make a significant contribution to the US economy through payment of taxes or use of American products, materials, or labor
  • Be independently owned and operated
  • Not be dominant in its field on a national basis (though this point isn't specifically defined)

How Does a Small Business Work?

No matter what industry you're hoping to break into, the initial steps for forming a small business are pretty similar. The SBA outlines steps that they recommend taking to get started.

Researching

You may have a great idea for a business, but if there aren't enough customers to support it, your business will fail. That's why your first step should be to research exactly what customers want, where they want it, and how your business model can fit into that. You should also research your competition by searching for businesses that offer a similar service in nearby areas.

Planning

A detailed business plan serves many purposes. It'll guide your decisions and make sure you don't forget any of the little details along the way. It'll also help attract others to your business. A good business plan can convince potential investors to believe in your vision, and it'll convince banks that you're a reliable borrower.

Funding

Once you have the business plan you need to attract investors or lenders, you need to decide how much of either funding you'll need. Debt and equity financing each come with unique benefits and drawbacks, so it's important to carefully consider your options before loading up on too much of either.

Locating

Your level of funding will help shape where you can afford to locate your business. Consider the costs of rent in different areas, then start looking for any availabilities that fit your needs. Even if you're an online business, you'll have to plan for some location-related issues such as where you'll store inventory. If you plan on listing your home address as the business address, check your lease or homeowners association guidelines to ensure that you're allowed to run a business out of your home.

Choosing a Structure

There isn't a mandatory legal structure for small businesses. A small business can take any form, such as a sole proprietorship, LLC, partnership, or corporation. Since you have options, explore each of them to see what will best fit your business. The main differences between these structures have to do with taxation, registration requirements, and personal liability. No structure is inherently better than others, you just have to figure out what's best for your situation.

Naming and Marketing

This is a good time to start thinking about what you will name your business. You'll need a name for registration and other steps that follow, but this is also your first opportunity to think about branding and marketing. What does your name mean? How will it resonate with customers? Is it (or a similar name) already being used by another business? These are all important questions to consider at this stage.

Registering Your Business

With your plan, legal structure, and business name in mind, it's time to make it all official by registering your business with the government. You'll need to register with the federal government, and you may also need to register with your state. Registering will protect your brand, and it also allows you to get employer tax identification numbers. These tax numbers allow you to open a business bank account and pay taxes.

Licensing and Permitting

Depending on what you do, where you do it, and how you do it, you'll need corresponding licenses and permits that allow you to operate in the way you envision. It may help to hire an attorney who specializes in business to ensure that you're properly permitted and licensed.

Hiring and Operating

At this point, you're all set to open the doors to your business, but it might be tough to handle everything yourself. Consider hiring employees or contractors to help the business operate smoothly. You'll also need to keep extensive records so that you can accurately pay taxes and ensure that your business is as efficient as possible.

Benefits of a Small Business

Since the aim of the SBA is to help small businesses compete, being qualified as a "small business" can bring several benefits to a company.

Small Business Loans

Some of the most popular benefits for small businesses are the SBA loan programs. Keep in mind, these loans aren't actually loans from the SBA. Rather, the SBA loan program finds lenders who will lend small businesses money in exchange for the SBA guaranteeing a portion of the loan. Essentially, the SBA acts as a co-signer so the lender has more assurance of being repaid. Only small businesses can get these loan guarantees.

Each of the various SBA loan programs has specific criteria, based on the structure and purpose of the loan. Some loans are designed for specific situations (such as disaster loans), while others are more general small business loans.

Government Contracts

Another major benefit to small businesses is the SBA's government contract program. Helping small businesses compete for government contracts is a huge benefit to these businesses. This program allows a small business in a specific industry to compete with much larger businesses in the same industry. The SBA helps to ensure that the government considered both businesses equally, despite any potentially significant size differences.

Visit the SBA federal contracting site to find resources that can guide you through the process of registering to be a government contractor.

Research and Other Grants

Small businesses are eligible for special research grants that are set aside in several U.S. government agencies specifically for small businesses. These are known as Small Business Innovation and Research grants, or SBIR grants. The program's goal is to stimulate research while helping small businesses.

Key Takeaways

  • A small business is a for-profit entity that falls below certain size requirements.
  • The size requirements that define a small business vary by both country and industry.
  • Small businesses in the U.S. enjoy certain benefits, including special loan programs and assistance applying for government contracts.