A small business is any privately owned entity, whether it is a partnership corporation, or sole proprietorship that has fewer employees and/or lower annual revenue than an average-sized corporation or business. In addition, the definition of “small business” does not necessarily mean that the entity must be operated in a home office. Small businesses may be located on retail lots, in storefronts, in restaurants, in hospitals, or any place where there is access to a computer and the Internet. Some small businesses are seasonal or temporary in nature, such as carnivals and fairs; others are permanent establishments like furniture stores and hotels. There are also many small businesses that are considered “vertical industries,” such as publishing, insurance, banking, oil drilling, transportation, and computer service companies.
In its basic form, the size definition for small businesses is based on revenue (in millions) less the number of employees. The second factor used in the size definition of small businesses is the number of sources of income, including sales and manufacturing or sales and service activities. The revenue and income components are then summed to calculate the business’s gross revenue.
Generally speaking, if a small business owns, operates, and controls a single facility, then it is called a “sole proprietorship.” If the small business owner maintains more than one facility – for example, if he owns a manufacturing facility and service center that collectively produce the products that are sold under his brand name – then he is considered a “incorporated company.” Similarly, if the small business owns or controls more than one location and sells a product exclusively from those locations rather than shipping that product from locations in which he ships products to customers, he is performing sales and marketing functions at more than one location.
There are approximately 1.5 million small businesses in the United States, according to the Small Business Administration’s latest statistics. Of these, nearly one million of those businesses are sole proprietors, meaning they are the sole owners of the business. An additional eight million of these businesses are franchises, which indicate that they are franchises owned by entities other than the owner. In either case, the majority of businesses would be categorized as small business. One hundred fifty thousand small businesses are multilevel marketing enterprises, which means they require at least two employees to operate.
Some people believe that the definition of a small business should exclude all businesses that do not have employees. Others believe that the Small Business Administration’s numerical count does not apply to many small businesses. Still others believe that small businesses should be broken down into categories as described above and further subdivided based on whether or not they are family owned and operated, privately held corporations, publicly traded corporations, cooperative businesses, limited liability partnerships, and ownership by employees. Only the last category, cooperatives, should be considered separately from the others.
When we examine the size definition used by the Small Business Administration, we see that it is very broad. It includes any privately held corporation with one to fifty employees, regardless of its size. It also includes cooperatives, which may not be owned and operated by the majority of the owners. Limited liability partnerships are excluded from the SBA’s size definition because they are primarily cooperative businesses, although they are members of the general cooperative owning structure.
Another problem with the SBA’s size definition is that it is extremely generic and difficult for courts to construe. Even if the majority of small businesses fall into one of the classes described above, there is no guarantee that the courts will view them in the same way. The Small Business Administration also takes a rather vague view of its own definition of a small business. The US Congress has provided the SBA with authority to define what constitutes a small business for federal purposes; however, the agency does not have the authority to prescribe a definition for use by state courts. This inherent conflict of power between the federal government and state government creates a significant risk of confusion and uncertainty for small businesses seeking relief from Federal rules and regulations.
In short, the Small Business Administration’s size standards are confusing. They generally do not lead anyone to a precise definition of what makes a small business. The US Congress, which defined the standard in passage, also provides only a ballpark figure for the sizes of small businesses. The courts have even refused to apply the standard across the board, classifying all small businesses automatically as “micro-businesses.” This means that every business is subject to the same minimum standards of size and operation, creating a tremendous degree of risk and uncertainty for investors and entrepreneurs seeking SBA protection from the Federal regulatory agencies.