What’s the Definition of a “Small” Business?
According to the U.S. Small Business Administration (“SBA”), the answer to this question would generally be any independent business with less than 500 employees.
In 2026, the SBA’s Office of Advocacy statistics show that under that definition, there are 36,207,130 small businesses in the United States. Eighty-two percent of those businesses (nearly 30 million) have no employees and eighteen percent (nearly 6.4 million) have paid employees. The same stats show that small businesses employ 45.9 percent of private sector workers and their economic activity makes up 43.5 percent of America’s gross domestic product. In 2022, businesses with under 500 employees and their employees paid over $500 billion in payroll taxes.
When any business meets the SBA’s definition, that business becomes eligible for special government federal contracting preferences, for certain federal and state tax breaks, and can access low-interest government-backed loan financing with favorable interest rates and down payment requirements.
Because there is a lot at stake for businesses to fit under the federal definition of “small,” Citizens For Free Enterprise has been tracking the SBA’s very large effort to revise its “Small Business Size Standards,” which are the regulations that establish the definitions and set the size thresholds by industry sector. Late last month, the SBA published a proposed regulation containing sweeping changes to the size standards. Public comments were accepted through September 21st.
Congress has mandated that the SBA review its size standards at least once every five years so that current market and industry conditions of businesses are addressed. The SBA has completed and issued revised size standards in 2016 and 2023. Currently, there are 102 different size standard levels that cover 978 separate industry and sub-industries that are characterized under six-digit NAICS (North American Industry Classification System) codes. The standards are based on employee size and/or average annual business receipts. The regulation proposes to dramatically increase both the employee size and the annual receipts of qualifying businesses.
SBA’s laudable approach to revising the standards started with the premise that having 978 separate NAICS codes is unmanageable and creates more work for the agency and other contracting agencies in the federal government. On paper, that is a good premise. The agency’s proposed regulation would collapse the 978 separate six-digit code into 338 four-digit groupings.
The fundamental approach of the SBA’s rulemaking is to dramatically increase the size standards. The agency estimates that the new standard will allow an additional 114,541 businesses to qualify for the “small business” designation and become eligible for all federal benefits that are tied to that designation. While perhaps an unintended consequence, this change adversely affects many very small and start-up businesses competing against large, sophisticated firms within the streamlined categories.
As a specific example, current NAICS Code 721191 Bed-and-Breakfast Inns caps qualifying “small” businesses at $9 million in receipts. The new limit proposed by the SBA’s draft regulation collapses NAICS codes into the four digit 7211 NAICS Code. This will allow all hotels, motels, casino hotels, and bed-and-breakfast establishments with receipts under $503 million to be designated as “small.”
The proposed regulation changes drew approximately 70,000 separate comments from independent business owners. A small woman-owned machine shop owner in Beatrice, Nebraska expressed concerns that a change in her business line from 500 employees to 1,900 employees do not operate under the same competitive conditions. An online scrapbooking and paper-crafting supply company in Gilbert, Arizona suggested refinements to the headcount and receipts changes outlined in the proposed regulation.
Two independent bookstore owners, one in Lincoln, NE, and one in Milwaukee, Wisconsin, expressed concern that the 500-employee threshold is already too large. The founder of a freight trucking line in Dallas, Georgia highlighted both the positive and negative aspects of the proposed changes but expressed concern with raising the current $20 million in average annual receipts cap to $104 million.
While streamlining regulations is a laudable goal, and the proposed rule change is a clear improvement over the status quo, Citizens For Free Enterprise submitted formal comments suggesting that the SBA consider further differentiating among business classes to avoid unintended negative impacts to small business. We suggested that the SBA implement sub-designations of “start-up,” “growing,” and “established” businesses.
By acknowledging the nuance that comes with business categorizations, the agency could achieve streamlined processes while preserving opportunities for the truly start-up or small businesses that utilize and rely on the benefits of the SBA’s “small business” designation.
The federal agency will now review and respond to the public comments. The agency will either adopt the original proposed regulation, make amendments to it based on public input, or decide to re-work the regulation.