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A Project of The Annenberg Public Policy Center

What’s a ‘Small Business’?

Politicians often talk about "small businesses." But how small is a small business? Fifty employees? One hundred? Two hundred?

Actually, it’s often much more than that. The Small Business Administration’s Office of Advocacy defines a small business as one with fewer than 500 employees. And that’s the standard politicians often use.

For example, President Barack Obama repeated a familiar claim on Aug. 19: that "small businesses … create two out of every three new jobs in this country." That statistic is on the SBA’s "frequently asked questions" page. And perhaps it’s not that surprising once you know what size "small" is. In fact, by the 500-employee definition, the vast majority of all firms are "small businesses." As SBA says: 99.7 percent of the approximately 6 million businesses with employees are small businesses.

Many employer firms are truly small: Nearly 80 percent have under 10 employees. But, of course, the bigger businesses employ more of the U.S. workforce. (See this chart from SBA for a breakdown of firm sizes and employment.)

Republican Senate Leader Mitch McConnell said on Sunday’s "Meet the Press" that in the last quarter of 2009, "84 percent of the jobs that were lost were lost in small business." That figure is based on Bureau of Labor Statistics data for firms with up to 499 employees. (The total percentage of job loss for those firms is actually close to 87 percent.)

Viewers may not have been aware that the "small businesses" McConnell referred to employ a little more than half of all private sector workers.

The job stats for smaller small businesses wasn’t that uplifting, either. In his statement last week, Obama cited a Bureau of Labor Statistics report that had been released the day before. BLS said that in the fourth quarter of 2009, 61.8 percent of all net job losses occurred in businesses with fewer than 50 employees.

So when a politician speaks of "small businesses," it’s wise to ask: What exactly is "small"?

Footnote: The 500-employee standard used by SBA’s Office of Advocacy isn’t the only official definition of "small." For purposes of qualifying for federal programs, the legal standard varies by industry. For example, for cookie and cracker makers the standard is 750 workers, and firms engaged in manufacturing breakfast cereal or specialty canning can employ up to 1,000 workers and still qualify. A "small" oil refiner can employ up to 1,500. And many industries have no limit on the number of workers, so long as their average dollar receipts stay within a set limit. A "small" chicken or egg producer can take in an average of $12.5 million a year and still qualify as "small" under SBA guidelines, for example.

Update, Aug. 25: "Small business" provisions in the new health care law also vary. Subsidies are offered to small businesses with fewer than 25 employees and average yearly wages under $50,000. Employers with less than 50 workers are exempt from penalties for not offering health coverage.