The term “small business” is more than just a title — it’s a government-defined designation that comes with unique benefits. If your company qualifies as a small business, it may be eligible for the Small Business Association’s programs, which include loans, grants and disaster assistance. Furthermore, the federal government sets aside contracts for competition among small businesses. As long as you can meet the SBA’s standards for a small business, your company can enjoy access to these opportunities. But what are these qualifications? There are a few basic criteria, though most others vary depending on your industry. They can involve the number of employees you have, your annual receipts or your affiliates.
In order to qualify as a small business, your company must be organized for profit. Nonprofit organizations have their own set of rules and benefits. Your for-profit company can have any legal structure, be it a sole proprietorship, partnership, corporation, or limited liability company. However, it must have a place of business in the United States, it must operate primarily with the U.S., and it has to make a significant contribution to the nation’s economy through paying taxes, or by using American products, materials or labor. A small business is also required to be independently owned and operated, and it can’t be nationally dominant in its field.
Average annual receipts
This figure is your gross income plus the cost of goods sold. You can typically find it on your company’s IRS tax return. Average these figures over three complete fiscal years to find your average annual receipts. If your business hasn’t existed for three years, multiply its average weekly revenue by 52 to calculate its average annual receipts. Your average annual receipts must be below a certain figure for your company to qualify as a small business — and this figure varies based on your industry. For instance, a peanut farmer can have up to $750,000, while a flooring contractor can have up to $15 million in average annual receipts.
Number of employees
This refers to the average number of workers employed for each pay period over the latest calendar year. It doesn’t matter if they were temporary or part-time workers — anyone on the payroll must be counted as an employee. Much like the average annual receipts, the number of employees a small business can have varies by industry. A motor home manufacturing company can have as many as 1,250 workers, while a fresh fruit wholesaler is limited to a staff of 100.
Your affiliates are businesses that have the power to control your company, whether they exercise it or not. Typically, this means owning 50 percent or more of your company. However, an affiliate may also hold power based on a contractual agreement, or when multiple parties own a large share of your company relative to other parties. You are required to include your affiliates’ employees and receipts when determining the size of your business.
Once you have determined your average annual receipts and your number of employees, use the SBA.gov Size Standards Tool to determine if you qualify as a small business for government contracting purposes. If your business meets these criteria to become a certified small business, you may have access to some incredibly lucrative opportunities. Before implementing any changes in your company, discuss your ideas with your business partners and financial advisors.