Last month included National Small Business Week. Politicians are continually claiming to help small businesses. My website is dedicated to educating small business owners. So what exactly is “small business”? There’s no easy answer.
Overview of the problem
There’s no single definition of “small business.” The answers vary by government departments and agencies as well as banking, insurance, and other private-sector industries. Definitions may be based on:
- Number of employees
- Amount of revenue (often gross receipts)
- Amount of assets
Different departments and agencies use different definitions. The following is a sampling of some of the most common ones:
SBA: revenue (ranging from $1 million to over $40 million) and by employment (from 100 to over 1,500 employees), depending on the industry. The U.S. Census Bureau aligns with this definition for purposes of its regularly conducted Economic Census.
IRS: In my book J.K. Lasser’s Small Business Taxes, I’ve identified nearly 3 dozen different definitions used in the Internal Revenue Code for federal tax purposes. The definitions use number of employees, gross receipts, and/or assets as the basis for being “small” and eligible for special breaks. This means you may be a small business for some tax rules but not for others.
ACA: number of full-time and full-time equivalent employees. Employers with 50 or more such employees are subject to the employer mandate. Small employers are exempt from the mandate and may buy coverage for employees through the federal government’s Small Business Health Options Program (SHOP). Some state SHOPs may be used by employers with up to 100 employees. But self-employed individuals, even though in business, can’t use the SHOP; they’re part of the individual health market.
DOL: the number of employees determines whether an employer is subject to various employment-related laws. Small employers are those exempt (i.e., do not have a sufficient number of employees to be subject to the laws), including:
- Age Discrimination in Employment Act (ADEA), barring discrimination of workers age 40 and older: 20 employees
- Americans with Disabilities Act (ADA), requiring employers to make reasonable accommodations for employees with a disability: 15 employees.
- Family and Medical Leave Act (FMLA), requiring certain unpaid leave time (not COVID-19-related leave): 50 or more employees
- Worker Adjustment and Retaining Notification (WARN) Act, requiring at least 60 days notice of plant closing or mass layoff: 100 more employees
Private sector definitions
Businesses use their own definitions. Here are some examples:
Health insurance. Group health insurance is separated into the small and large group market. The small group market generally applies to businesses with 50 or fewer full time-equivalent employees (i.e., employers not subject to the employer mandate under ACA). Premiums per employee generally run higher than those in the large group market.
But coordinating private group health insurance and Medicare for those who are still working to determine which is primary and which is secondary coverage has different rules. If the employer has 20 or more employees, the group health plan pays first. If there are 19 or fewer employees, Medicare is the primary coverage and group health is secondary.
Banking. Some banks and credit unions offer special banking services for small businesses, such as free checking. They may have a separate lending division to handle small business loans. There’s no fixed definition of small business for banking purposes. Each bank applies its own rules and may have different definitions for different purposes (e.g., accounts versus loans).
The point of this blog is not to detail every definition of small business, which is impossible to do, but to demonstrate that there’s no easy way to know if you are considered one.
Bottom line: Look at every law and every opportunity individually to determine if you are a small business.