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What is a Small Business?

Business and Economy

What is a Small Business?

Business and Economy

The Majority of U.S. Businesses Have Fewer Than Five Employees

Small businesses are often hailed as a vital segment of our national and local economies and a primary driver of U.S. financial growth.

But just what is a small business?

Is it based on a company’s number of employees or sales? Is it defined by the size of individual business locations (“establishment”) or the size of the company (“firm”) that owns those locations?

No matter how we define “small businesses,” there’s no question they drive economic growth and are created the way most businesses are: as small start-ups.

Firm Size

To many, a small business is based on the amount of money it makes and number of employees at all (rather than at each) of its business locations.

This definition of “size” aligns with the U.S. Small Business Administration’s (SBA) definition of a small business. SBA’s Table of Size Standards provides definitions for North American Industry Classification System (NAICS) codes, that vary widely by industry, revenue and employment.

It defines small business by firm revenue (ranging from $1 million to over $40 million) and by employment (from 100 to over 1,500 employees).

For example, according to the SBA definition, a roofing contractor is defined as a small business if it has annual revenues of $16.5 million or less. But an Asphalt Shingle and Coating Material manufacturer is defined as a small business if it has fewer than 750 employees.

These statistics help users understand how individual businesses that are part of a larger company or firm may be able to withstand economic shocks better than businesses with only one location.

For example, the nation’s 37,513 Limited-Service Restaurant (NAICS 722513) firms with fewer than five employees in 2017 accounted for 23.7% of the 157,214 firms in this industry but only 4.0% ($10.2 billion) of the total sales in this industry.

So, if our practical definition of “small” aims to capture 50% of the revenue of all firms in this industry, firms with fewer than 250 employees may be a good cutoff to use for “small” in this industry, as these firms accounted for 51.7% ($131.1 billion) of the total revenue of $253.3 billion in 2017.

 

 

Similar firm size data are also available by revenue size.

While there were only 236 Truck Transportation (NAICS 484) firms (of a total of 112,134 firms in the industry) with more than $100 million in revenue in the United States. in 2017, these firms accounted for 41.1% or $119.3 billion of the $290.5 billion in revenue for the entire industry.

So, in this case, a practical definition of “small” could be firms with less than $5 million in revenue.

 

 

While the Economic Census provides insight into the performance of businesses with more than one location, it also provides data tabulated for “Single-Unit” and “Multi-Unit” firms that make this comparison even easier.

For example, only 1,524 (of all 106,579) firms in the Offices of Real Estate Agents and Brokers industry (NAICS 5312) had more than one establishment  but they accounted for nearly half ( $48.2 billion) of the industry’s $112.9 billion total revenue in 2017.

Among those multi-unit firms, those with 25 or more establishments accounted for more than half of the multi-unit firm’s total.

 

Establishment Size

To many, a small business is simply based on the number of employees at an individual business location rather than the total number of employees of a company that may own those businesses.

According to the Census Bureau 2018 County Business Patterns survey, more than half (54%) of all employer businesses in 2018 had fewer than five employees but they s only accounted for 5.5% of total employment in all industries.

There were only 8,155 establishments with more than 1,000 employees in the United States in 2018 and these large businesses employed 20 million or 15.3% of the total 130 million U.S. workforce.

The biggest businesses also accounted for more than 20% of the total annual payroll in 2018, paying their employees an average $73,590 a year compared to $52,743 for establishments with fewer than five employees.

In this case, if our own working definition of small businesses aims to reflect businesses that employ fewer than 25% of the workforce, an establishment employment size of fewer than 20 employees might work.

 

Differences by Sector

The Economic Census not only includes data on the number of establishments, employment, and payroll (as shown in CBP), but also business output measures such as sales, shipments and revenue

For example, 14,051 (49.3%) of the 28,460 U.S. Convenience Stores (NAICS 445120) in the had fewer than five employees and accounted for 33.4% of all sales in this industry in 2017.

 

 

In comparison, the 4,965 establishments with fewer than five employees in the Computer and Electronic Product Manufacturing industry (NAICS 3348) accounted for only 1.2% ($3.6 billion) of the industry total in 2017. The 639 establishments with more than 250 employees accounted for 67.7% of the industry’s shipments.

 

Sales, Shipment or Revenue

Data on the sales, shipments or revenue of an establishment provide a different perspective on the definition of “small business.”

For example, establishments with more than $5 million in annual revenue in the Ambulatory Health Care Services industry (NAICS 621) accounted for 59.3% of the revenue in this industry in 2017. That indicates that establishments with less than $5 million in revenue might be an appropriate definition of “small” for this industry.

 

Other Definitions of a “Small Business”

The way a business is legally structured (Legal Form of Organization or LFO) also signals importance of small businesses. Businesses organized as a corporation are often considered larger businesses while those that are sole proprietorships or partnerships are often thought of as “small”.

For example, if we compare the LFO Economic Census data for Janitorial Services (NAICS 561720) and Offices of Certified Public Accountants (NAICS 541211), we see that the majority of revenue in the Janitorial Services industry in 2012 was from C- and S-Corporations.

“C-Corps” business owners are taxed separately from their business. “S-Corps” business owners have a special tax status and typically don’t have to pay federal income taxes.

The vast majority of the revenue from accounting firms was from partnerships.

 

 

No matter how we define “small businesses,” there’s no question they drive economic growth and are created the way most businesses are: as small start-ups.

The Economic Census and other Census Bureau business s can help economic development organizations, chambers of commerce, and other groups tailor their resources to reach the businesses that need their assistance the most.

The quality of these data are key and the Census Bureau thanks all the businesses who completed their 2017 Economic Census survey. 

 

Andrew W. Hait is an economist at the U.S. Census Bureau.

 

 

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This story was posted in: Business and Economy


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