Understanding Small Businesses: Definition and Characteristics
Small businesses come in different forms, such as a local bakery, an auto repair shop or a hotel franchise. Regardless of their size, small businesses play a crucial role in the American economy. In general, a small business is defined by two elements: annual receipts and number of employees. A small business typically makes less than $38.5 million in annual receipts and has fewer than 1,500 employees.
Types of Small Businesses
A small business can be a sole proprietorship, partnership, limited liability company or corporation. Depending on the business structure, small business owners can enjoy unique taxation policies and limited liability for their personal assets.
Small Businesses by Industry
The size standards of small businesses vary by industry. For instance, a small business in agriculture can have a maximum of $750,000 in annual receipts while a small business in healthcare and social assistance can have a maximum of $28.5 million in annual receipts. This means that the definition of a small business must be considered in the context of the specific industry.
Other Characteristics of a Small Business
The Small Business Administration (SBA) distinguishes a small business from a mid-market or large enterprise based on other factors besides industry, number of employees and annual receipts. These include the company’s headquarters, business location, ownership status, and minority status in the industry.
Importance of Business Size
The size of a business matters as it determines the eligibility for loans, as well as business, finance and entrepreneurial programs. Small businesses play a significant role in the economy by providing employment, diversity in business ownership and community identity.
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This article was originally published in 2019. It has been updated with new information.