What I Learned Today

I’ve heard of small businesses, but the other day it occurred to me that I wasn’t sure how we actually determine whether a business is “small.”

I figured the Small Business Administration must have a definition, to determine who falls into their jurisdiction. And sure enough, here’s where the SBA defines small businesses. This matters because if your business is “small”, it can qualify for certain loans and other opportunities that only small businesses can access.

In general, they use a threshold on either “average annual receipts” or on the number of employees. But here’s where it gets interesting. If you click through to the table of “small business standards”, you will see that the threshold is different for each industry! In 41 pages! So for example, a chicken egg business qualifies as “small” if it has less than $19M in annual receipts, while a sugar beet farm making that much would not be small (it must make less than $2.5M). In contrast, a nuclear power plant with fewer than 1150 employees is “small”, but a geothermal power plant must have fewer than 250 employees.

There’s no rationale given for how these thresholds were chosen, so I don’t know how much work is involved, but tailoring thresholds for every one of these business areas seems like it must be quite tedious. They are updated once or twice a year. I’m thinking it’s more than a simple formula, since otherwise they could replace the entire table with the formula. Is it the result of negotiation between the SBA and business owners? Is it a capacity constraint, and they pick a threshold so only a fixed number of businesses that year qualify? Do economists weigh in? Mysterious!