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What defines a “small business”?

On Behalf of | Feb 25, 2021 | Business Law

Common language is full of imprecise terms. One of the most common terms we hear in the business world involves classification. Everybody loves a small business – but how small is small? There are vast differences between a mom-and-pop shop and a regional chain, yet both are modest when compared to national or international companies.

When most people think of small business, they think of Main Street or local. They picture an organization small enough that the owner might know everybody’s name. And those small companies make up the majority of businesses in the United States, even if they employ a much smaller percentage of the total workforce. According to the Small Business & Entrepreneurship Council, 89% of businesses have fewer than 20 employees. But the federal government generally defines a small business as having 500 or fewer employees, a fact that drew controversy when the Paycheck Protection Program debuted last year.

As businesses grow their employee base, they have very different in-house needs that range from human resources to tax services to new market specialties. The size of a business does not just affect its reach or scale, but also how it utilizes resources and what liabilities it may need to address. Broadly speaking, the more employees a company has, the more it handles in-house, as one example.

Another perspective

Using a benchmark of 500 or fewer employees defies most people’s concept of a small business significantly. According to data reported by the U.S. Small Business Administration, 99.9% of businesses fall under this threshold. The needs of a business with a few employees is very different than the needs of a business with hundreds of employees.

A key distinction is that this is a government definition, not a dictionary definition. The government point-of-view is its own resourcing and modeling, which includes investment in the private sector, job growth and the overall economic picture. While some federal measures seek to boost the smallest of businesses and to provide opportunity or investment, often the purpose is spurring larger economic concerns. The 500 cut-off has been disputed ever since the creation of the Small Business Administration in 1953.

Opportunity still exists

Ultimately, government’s goals in defining small business differs from the goals of small businesses themselves. Government seeks to administer a sector of the economy while small businesses seek growth and sustainability – often as they complete with much larger competition – sometimes internationally.

While the 500 number is contentious, it is also not ironclad. For example, the number is currently reduced to 300 employees in updates to the Paycheck Protection Program. The business world, and related regulations, are continually complex and evolving.

An underlying point within this discussion is that small businesses – however one defines them — have many unique opportunities. By taking a closer look at federal rules, it also helps to learn what additional opportunities may be available for growth or assistance.


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