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Sunday, August 8, 2010

Defining Small Business: An Historical Analysis of Contemporary Issues

Robert Jay Dilger
Senior Specialist in American National Government

Small business size standards are of congressional interest because the definition used determines eligibility for Small Business Administration (SBA) loans and consultative support assistance as well as federal contracting preferences and federal tax preferences.

Although there is bipartisan agreement that the nation's small businesses play a key role in the American economy, there are differences of opinion concerning how to define them. The Small Business Act of 1953 (P.L. 83-163, as amended) authorized the Small Business Administration and made it responsible for establishing size standards for determining eligibility for federal small business assistance. The SBA currently uses one of the following four criteria to determine program eligibility for firms in 1,159 industrial classifications described in the North American Industry Classification System (NAICS): (1) number of employees; (2) average annual receipts in the previous three years; (3) asset size; or (4) for electrical power industries, the extent of power generation. Overall, the SBA currently classifies about 99.7% of all employer firms as small.

Since issuing its initial small business size standards in 1956, the SBA has based its industry size standards on economic analysis. However, in the absence of precise statutory guidance and consensus on how to define small, the SBA's size standards have often been challenged, typically by industry representatives advocating a broadening of the size standards to allow more firms in their industry to be eligible for assistance and by Members of Congress concerned that the size standards may not adequately target the SBA's assistance to firms that they consider to be truly small.

Congress is currently considering several bills that would authorize an alternative size standard as a means to allow more small businesses to meet the SBA's requirements to access SBA-backed loans. In the Senate, S. 3103, the Small Business Job Creation Act of 2010, S. 2869, the Small Business Job Creation and Access to Capital Act of 2009, and S.Amdt. 4519, an amendment in the nature of a substitute for H.R. 5297, the Small Business Jobs and Credit Act of 2010, which was introduced on July 27, 2010, would authorize the SBA to establish an alternative size standard using maximum tangible net worth and average net income after federal taxes for both the 7(a) and 504/CDC loan guaranty programs.

In the House, H.R. 4302, the Small Business Job Creation and Access to Capital Act of 2009, was introduced as a companion bill for S. 2869, the Small Business Job Creation and Access to Capital Act of 2009. Also, H.R. 3854, the Small Business Financing and Investment Act of 2009, passed by the House on October 29, 2009, would authorize the SBA to establish an alternative size standard for the SBA's 7(a) loan guaranty program that is based on the business's maximum tangible net worth and average net income after taxes. Until that alternative size standard is established, the bill would authorize an interim alternative size standard for the 7(a) loan guaranty program that is based on the SBA's size standard for the 504/CDC loan guaranty program—a maximum tangible net worth not in excess of $8.5 million and average net income after federal taxes not in excess of $3 million for the preceding two completed fiscal years.

This report provides an historical examination of the SBA's size standards, competing views that have been presented concerning how to define a small business, and how various proposals for changing the SBA's size standards would affect program eligibility

Date of Report: July 30, 2010
Number of Pages: 27
Order Number: R40860
Price: $29.95

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