What Makes a Small Business

Lawmakers spend a lot of time talking up the virtues of the American small business, and a lot of time finding new ways to define it. The Marketplace Fairness Act — the high profile bill passed by the Senate last week that would make online retailers collect sales taxes — has what many have called a “small business exemption” for firms making less than $1 million in out-of-state revenue.

A small business tax reform bill introduced by House Minority Leader Eric Cantor, R-Va., last year defined small businesses as those with 500 or fewer employees. The healthcare reform law exempts businesses with fewer than 50 employees from the so-called employer mandate.

Meanwhile, a new draft bill from Rep. Dave Camp, R-Mich., would change tax rules for any business with less than $10 million in annual average gross receipts.

The Small Business Administration is no clearer. While its Office of Advocacy defines a small business as having fewer than 500 employees, the agency’s Office of Size Standards has a different definition for every industry, with a table of size standards that spans nearly 1,200 spreadsheet rows. Only cattle feedlots with less than $2.5 million in annual revenue are small businesses. Power plants are only small businesses if they produce 4 million megawatt hours or fewer per year. A chocolate confectionery manufacturing plant must have fewer than 500 employees to be a small business. For beet sugar manufacturing, it’s 750 employees. For breakfast cereal manufacturing, it’s 1,000.

Small business advocacy groups have their own ideas. A spokesperson for the National Federation of Independent Business says that the majority of the group’s members have 20 or fewer employees. However, the organization allows any private company to be a member, meaning that agribusiness giant Cargill, which takes in nearly $134 billion in annual sales according to Forbes, could theoretically join.

Another advocacy group has a three-tier philosophy.

“Our back-of-the-envelope definition, or the one I’ve always used, is that fewer than 100 is small and 100 to 500 is midsize, and above 500 is a large business. But, bottom line, there is no hard and fast definition for that,” says Raymond Keating, chief economist for the Small Business and Entrepreneurship Council.

However, that organization allows anyone to be a member.

Any definition, it seems, is vulnerable to critiques. As tax policy think tank Citizens for Tax Justice pointed out when Cantor introduced his 2012 bill, Oprah Winfrey’s Harpo Productions has fewer than 500 employees, as does the Trump Tower Sales & Leasing office and some professional sports teams.

And “small businesses” are, by many definitions, a large share of the U.S. business landscape. Indeed, by the 500-employee definition, over 99 percent of all businesses in the United states are small businesses, and nearly half of all U.S. workers are employed at such firms. Likewise, a majority of companies take in less than $10 million per year. The most recent Economic Census data, from 2007, show that nearly 97 percent of all employer firms in the U.S. took in less than $10 million in sales or receipts that year (Democrats and Republicans on the Ways and Means Committee have not yet responded to U.S. News requests for comment on how they decided upon this threshold).

Such broad definitions of small business raise questions about what type of initiative truly makes small businesses more competitive. As one Forbes commentator asked last year, “If 99.7 percent of all businesses in the U.S. fall under the umbrella of the SBA, who are they really speaking for?” Depending on how you slice it, small business may, in fact, be considered big business.