The majority of businesses are not aware that small business size standards exits. Ask any small business owner if they are a large business or small business and they will say small? But are they really a small business? Why does it matter?
Why Does My Business Size Matter?
If you want to qualify for an SBA loan or to become a government contractor then you need to know whether the government considers your business small. Remember, you cannot compete on small business set-asides unless you qualify as a small business. Furthermore, it will matter if you want to be eligible for SBA’s loan programs. The last thing you want to have happened is to lose a government contract due to your business size. Or worse, apply for an SBA loan only to find out your SBA considers your business to be large. So before that happens, find out if your business is small or large.
What Does the Government Use To Determine a Businesses Size?
The North American Industry Classification System (NAIC codes) is a manual that includes definitions for each industry. NAICS codes assigned a six-digit code to twenty broad sectors. For example, if you are in general construction, your NAICS code would be 236220. NAICS code 236220 is defined as Commercial and Institutional Building Construction. If you are a government contractor, then you are already familiar with NAICS codes. The Census Bureau maintains the NAICS Code Manual, and you can go to it here.
North American Industry Classification (NAICS)
The creation of the North American Industry Classification System established industries based on similar production processes or supply based framework. This system is very comprehensive, covering all economic activities. Presently, there are 20 sectors with 1,057 industries. NAICS replaced the Standard Industry Classification System (SICS).
Why mention NAICS codes?
NAICS codes are used extensively in government contracting. Every government contract will be assigned a NAICS code. The NAICS code will also determine if your business is considered large or small. NAICS is vital because a large company cannot compete on a small business set-aside. Now that we have our necessary foundation, we can move on to size status calculations.
Size Standards Calculations
The U.S. Small Business Administration (SBA) is responsible for determining the size of business on government contracts and SBA loan programs. NAICS code will determine the method that SBA will use to compute whether a company is large or small.
First Method To Compute Size
The first method used is annual receipts. SBA states that annual receipts are the total income (gross income) plus the cost of goods sold. To calculate your size, take your latest three complete fiscal years’ annual receipts and remember to include the cost of goods sold. Add them together and divide by three. Don’t forget to include all your affiliates. But what happens if my company has not been in business for three years? Well, SBA has a calculation available to assist you with that.
Not In Business For Three Years
For businesses that have not been in business for three years, you can still compute your size. You multiply your average weekly revenue by 52 to determine your average annual receipts.
Which NAICS Codes Use Annual Receipts?
If your business provides a service, then SBA will use annual receipts. If you are not sure, you can always go to SBA’s website and download the Table of Small Business Size Standards. Also, SBA provides a tool that you can use to determine the size of your company. Now let’s find out the second way SBA computes the size of business. The Code of Federal Regulations covers the calculations for annual receipts in detail. Please see 13CFR121.104 for more information.
Second Method SBA Uses To Compute the Size of a Business
The second method for determining the size of the business uses employees. SBA uses the average number of personnel employed for each pay period over the company’s’ latest 12 calendar months. Every individual on the payroll must be included regardless of the number of hours worked or the temporary status.
Not In Business for a Full Year
If your company has not been in business for a full year, you can still compute your average number of employees. You use the number of employees averaged for each pay period that you have been in business.
Just like the annual receipts, you can find the CFR reference at 13CFR121.106. We have one last topic to discuss, and that has to be with affiliation.
Which NAICS Codes Are Employee Based?
Manufacturing industries size determinations use employees to determine size.
Affiliation
Affiliation is a complicated topic. SBA states that affiliation exists when one business has the power to control the other business. It does not matter whether that control is exercised or not. As long as the ability to control exists, then affiliation exists. SBA has a compliance guide for size and affiliation that provides detailed information. If you have any questions, see the manual for more details.
Why mention affiliation?
To accurately compute the size of your company, you need to include all affiliates in the computations. Individuals who own more than one business will need to refer to the compliance guide and the CFR to make an accurate decision on affiliation. SBA will look at the following factors in determining affiliation: ownership, management, previous relationships with or ties to another business and contractual relationships. The CFR reference is 13CFR121.103. We will go in-depth on affiliation in a separate article.
The next topic is on adjustments to size standards.
Adjustments to Size Standards.
Each year SBA reviews approximately 20% of the NAICS to make the necessary adjustments for inflation and other determining factors. In fact, SBA will make adjustments to the size standards twice each year. Remember that not all the NAICS codes are review only 20% so that once every five years all the NAICS codes have been reviewed. SBA will send notifications to you when they revise the NAICS codes. All you need to do is sign up for their newsletter.
Summary of Size Standards
Size status determinations is a complicated process. But one that all small businesses need to comprehend. As a small business owner, you can only make the best-educated guess based upon the facts that you know. Therefore, it is important that you educate yourself on small business size standards.
Review the size standards for the NAICS codes used in your business. Make sure to review these NAICS codes year for any changes or signup to be notified when SBA makes these changes.
Affiliation is a complicated matter and will greatly impact the size of your business. If your business relies on another business for 30% or more revenue then look at the affiliation rules. Especially if you are partnering with another business.
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