What Is a “Small Business”?
Before we talk about the role of small businesses in the U.S. economy, it’s important to first specify what we mean by “small.” The Small Business Administration (SBA) uses size standards to determine whether a business counts as small. These thresholds indicate the largest that a business concern, including all of its affiliates, can be and still qualify as a small business for most SBA and federal programs. The SBA has established two widely used size standards, expressed either in terms of average number of employees during the previous twelve months or the average annual receipts during the previous three years: five hundred (or fewer) employees for most manufacturing and mining industries and $7.5 million (or less) in average annual receipts for many non-manufacturing industries. (There are exceptions to these size standards, however; these are spelled out in the SBA’s Small Business Size Regulations). In addition to qualifying on the basis of its number of employees or total receipts, small businesses must also meet the following SBA requirements:
- Is organized for profit
- Has a place of business in the U.S.
- Operates primarily within the U.S. or makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials, or labor
- Is independently owned and operated
- Is not dominant in its field on a national basis
The business may be a sole proprietorship, partnership, corporation, or any other legal form. The definition of “small business” varies somewhat according to industry, but generally when we talk about small business we’re referring to companies that employ fewer than five hundred people.
Small Business Is BIG!
Consider the following impressive statistics:
- The 28 million small businesses in America account for 54 percent of all U.S. sales.
- Small businesses provide 55 percent of all jobs and 66 percent of all net new jobs since the 1970s.
- The 600,000+ franchised small businesses in the U.S. account for 40 percent of all retail sales and provide jobs for some 8 million people.
- The small business sector in America occupies 30 percent–50 percent of all commercial space—an estimated 20 billion to 34 billion square feet.
And, the small business sector is growing rapidly. While corporate America has been downsizing, the number of small business start-ups has grown, and the rate of small-business failure has declined.
- The number of small businesses in the United States has increased 49 percent since 1982.
- Since 1990, as big business eliminated 4 million jobs, small businesses added 8 million new jobs.
Economic Contributions of Small Business
Small business and entrepreneurs contribute to the larger economy in four very distinct ways:
- Job creation
- Innovation
- Opportunities for individuals to achieve financial success and independence
- Support large business by providing component parts, services, and product distribution.
Each of these contribution