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Friday, April 1, 2011

Defining Small Business: A 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 management training assistance as well as federal contracting and tax preferences.

Although there is bipartisan agreement that the nation’s small businesses play an important 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 SBA to establish size standards for determining eligibility for federal small business assistance. The SBA currently uses two size standards to determine program eligibility: industry-specific size standards and an alternative size standard based the applicant’s maximum tangible net worth and average net income after federal taxes.

The industry-specific size standards determine program eligibility for firms in 1,158 industrial classifications described in the North American Industry Classification System (NAICS). They are based on one of the following four criteria: (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 of each industry’s overall competitiveness and the competitiveness of firms within each industry. 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.

P.L. 111-240, the Small Business Jobs Act of 2010, authorizes the most recent changes to the SBA’s size standards. The act authorizes 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. The act also establishes, until the date on which the alternative size standard is established, an interim alternative size standard for the 7(a) and 504/CDC programs of not more than $15 million in tangible net worth and not more than $5 million in average net income after federal taxes (excluding any carry-over losses) for the two full fiscal years before the date of the application. It also requires the SBA to conduct a detailed review of not less than one-third of the SBA’s industry size standards every 18 months beginning on the date of enactment (September 27, 2010).

This report provides a historical examination of the SBA’s size standards, assesses competing views concerning how to define a small business, and discusses how the alternative size standards adopted under the Small Business Jobs Act of 2010 might affect program eligibility.

Date of Report: March 22, 2011
Number of Pages: 29
Order Number: R40860
Price: $29.95

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