8.2: Small Business
What you’ll learn to do: Discuss the contributions of small business to the U.S. economy
Individual business ownership is a fundamental aspect of the American dream. Through the lens of award-winning documentary filmmaker Ken Burns: “Entrepreneurship is at the heart of who we are in terms of the American promise and the American dream.”
In this section, we’ll discuss the definition and significance of the term “small business” and explore the impact small business has had on the U.S. economy.
Learning Objectives
- Discuss the contributions of small businesses to the U.S. economy
Understanding Small Businesses
The U.S. Small Business Association, referred to as the “SBA,” is the go-to source for all things small business—including the statutory definition of a small business. Classification as a small business is determined by size standards—either number of employees or revenue—based on industry. Specifically, size standards are based on the 6-digit “NAICS” or North American Industry Classification System code that describes a business’s economic activity. Note that the form or legal structure of a business (e.g., sole proprietor, limited liability corporation (LLC), partnership, or corporation) is not a factor in determining whether an enterprise is a small business.
For manufacturing businesses, the standard is generally number of employees, with maximums ranging from 500 to 1,500. For example, the employee maximum for a commercial bakery is 1,000 and for a business brewery, 1,250. For nonmanufacturing industries—think retailers and wholesalers—the standard is based on a three-year average of annual revenue, with the maximum ranging from $750,000 for agriculture enterprises to $38,500,000 for Electronic Shopping and Mail-Order Houses, Hospitals and Building Material and Garden Home Centers. The small business size standard for professional services (NAICS prefix 541) ranges from $7,500,000 for Architectural Services to $38,500,000 for Military and Aerospace Engineering. Research activities are subject to an employee standard. Financial institutions are an exception to the employee or revenue rule; commercial banks, savings institutions and credit unions are subject to a $550 million asset limitation. Clearly, small is relative! Note that size standards change periodically (above data is current as of 10/4/2018). For the most recent criteria information, refer to the source: Code of Federal Regulations (eCFR) Part 121-Small Business Size Regulations , Section 121.201; direct link: Small Business Size Standards by NAICS Industry
Another determination option is to use the SBA’s interactive Size Standards Tool . This tool is designed to answer the question “Are you a small business eligible for government contracting?” The tool provides a determination of either Yes (“you may be”) or No, with the relevant small business size standard. To use this tool, you need to know your NAICS code or codes (multiple selections allowed). You can use the search tool on the census.gov site to determine the NAICS code(s) associated with your primary business activity (activities).
As alluded to above, classification as a small business matters because the SBA size standard is used to determine whether a business, including any affiliates or subsidiaries, is eligible to participate in SBA and federal contracting programs. This eligibility can have significant financial implications, from obtaining access to financing , including access to loans, investment capital and grants to preferential access to government contracts, totaling $392.4B (billion!) in eligible dollars in 2018.
In addition to meeting the relevant numerical size standard, a business must also meet the following criteria in order to be eligible for SBA and government contracting programs:
- For-profit enterprise
- Independently owned & operated
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Physically located & operating in the United States or its territories
- If located outside the United States, it must maintain a US operation and make a significant contribution to the US economy through the payment of taxes or use of American labor, materials, or products
- Not in a dominant market position nationally
practice question \(\PageIndex{1}\)
Which of the following determines if a business is to be defined as a "Small Business"?
- form or legal structure of a business, such as Sole Proprietor, Limited Liability Corporation, or Partnership
- company assets and year in business
- number of employees or revenue, based on the category of the economic activity
- approval from the Small Business Administration (SBA) based on relevant IRS documents
- Answer
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c . The size standard dictates that either number of employees (manufacturing activities) or revenue (retailers, wholesalers, agriculture) determines if a business can be classified as a small business
learn more
For perspective, the value of small business contracts rose from $100.1 billion in fiscal 2016 to $105.9 billion in fiscal 2017. To see data by year and category (e.g., Women Owned, Small Disadvantaged Business, Service Disabled Veteran) view the source at Small Business Dashboard . For additional information on federal contracting, visit the SBA’s Federal Contracting page.
Contributions of Small Businesses on the U.S. Economy
When the Small Business & Entrepreneurship Council states that “American business is overwhelmingly small business,” it’s not just hype. According to the U.S. Small Business Administration, there are over 30 million small business in the United States, with small businesses accounting for 99.9% of all businesses. Small businesses play a crucial role in the US economy, responsible for roughly half of new job creation and economic activity, measured by GDP or Gross Domestic Product. Small businesses employ approximately 60 million Americans, or 47.5% of all U.S. employees. Embedded in the community, small businesses also drive local economic growth and vitality. There’s a multiplier effect—an additional economic benefit that accrues to the community—when people spend locally. For example, If you spend $100 at a locally-owned business, $68 stays in the community. If you spend $100 at a national chain, only $43 stays in the community.
Small businesses are not only economic engines, they represent a source of innovation. In an article for Inc., Babson College entrepreneurship professor Patricia Green refers to small businesses as “the innovators of the world.” In research done with Goldman Sachs 10,000 Small Business Program participants, Green found that the small-business owners were actively engaged in pursuing opportunities that met one or more of the innovation criteria established by economist and author Joseph Schumpeter:
- new products
- new methods
- new markets
- new sources of supply
- new market structures
Entrepreneurs have conceived many of our most beloved products, including beer, chocolate chip cookies, Monopoly and personal computers. More recent innovations include a 3D printer for fabricating living cells, charitable crowdfunding, disinfectant light fixtures, artery stents, microfinance, non-toxic paints, and Structural Insulated Panels (SIPs).
Small businesses are as unique as the individuals that start them. Starting your own business allows you to develop a business concept and future vision that achieves your specific definition of “success.” And different entrepreneurs will pursue different paths in achieving that vision.
practice question \(\PageIndex{2}\)
The two most important contributions made by small businesses to the U.S. economy are:
- Innovation and internships
- Economic activity and social growth
- Economic activity and innovation
- Job training and working capital
- Answer
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c. Small business accounts for 99% of all U.S. businesses (economic activity) and are the "innovators of the world" (innovation)
biosip
Award-winning architect and Colorado University architecture professor Julee Herdt is developing and testing her green building innovations primarily in the academic environment, using collegiate home design competitions as proof of concept. Herdt’s BioSIP invention was cited by the international Solar Decathlon judges as being critical to the CU team’s back-to-back (2002, 2005) wins in the Solar Decathlon competition.
Since those awards, Herdt has advanced BioSIPs structural insulated wall, floor and roof panels to exhibit strengths surpassing other SIPs in specific areas (compressive and transverse loading) as well as to exhibit super thermal values.
Herdt has been awarded 2 patents and her BioSIPs inventions have garnered a State of Colorado, US Green Building Council (USGBC) “New Products” and “Excellence in Renewable Energy in Buildings” awards and numerous grant awards.
Herdt is CEO of BioSIPs, Inc., a woman-owned tech-based corporation and CU’s technology spin-off for commercialization of BioSIPs and other products from 100 percent diverted waste fibers.
lisnr
LISNR CEO Rodney Williams co-founded Lisnr, a technology start-up, while he was still working at Procter & Gamble. Technology wasn’t new to him; he had 3 patents by the age of 27.
Williams, who had a vision for the Lisnr technology, met co-founder Chris Ostoich at P&G. The two co-found took their idea on The Startup Bus, a 72-hour technology business concept competition. The team met their third co-founder and first investor at South by Southwest, where the aspiring entrepreneurs made their pitches to business scouts and investors.
Their journey includes a number of lessons and cash flow challenges—common challenges for entrepreneurs. Read Williams’ CNBC profile or watch the video for perspective on lessons learned on his journey from a six-figure corporate salary to $100,000 in debt to now, with 40 employees and founding of over $14 million. LISNR leadership was named a 2017 E&Y Entrepreneur of the Year.
additional reading
- Time’s 25 Best Inventions of 2017 .
- Inc. The 14 Coolest Products From Millennial Entrepreneurs