Small Business Size Standards: A Historical Analysis of Contemporary Issues Page: 5 of 41
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Small Business Size Standards: A Historical Analysis of Contemporary Issues
What Is a Small Business?
There is bipartisan agreement that small businesses play an important role in the American
economy.' However, there are differences of opinion concerning how to define them. This issue is
of congressional interest because the definition used determines business eligibility for Small
Business Administration (SBA) assistance as well as federal contracting and tax preferences.
The Small Business Act of 1953 (P.L. 83-163, as amended) authorized the SBA and justified the
agency's existence on the grounds that small businesses are essential to the maintenance of the
free enterprise system.2 In economic terms, the congressional intent was to use the SBA to deter
monopoly and oligarchy formation within all industries and the market failures they cause by
eliminating competition in the marketplace.
The Small Business Act of 1953 provides the SBA authority to establish size standards for
determining eligibility for federal small business assistance. The SBA currently uses two types of
size standards to determine SBA program eligibility: (1) industry-specific size standards and (2)
alternative size standards based on the applicant's maximum tangible net worth and average net
income after federal taxes. The SBA's industry-specific size standards are also used to determine
eligibility for federal small business contracting purposes.
The SBA's industry-specific size standards determine program eligibility for firms in 1,037
industrial classifications (hereinafter industries) in 19 sub-industry activities described in the
2017 North American Industry Classification System (NAICS). Given its mandate to promote
competition in the marketplace, the SBA has based its size standards on an economic analysis of
each industry's overall competitiveness and the competitiveness of firms within the industry.3 The
size standards are based on four measures: (1) number of employees (504 industries), (2) average
annual receipts in the previous three years (527 industries), (3) average asset size as reported in
the firm's four quarterly financial statements for the preceding year (5 industries), or (4) a
combination of number of employees and barrel per day refining capacity (1 industry). Overall,
the SBA currently classifies about 97% of all employer firms as small.4 These firms represent
about 30% of industry receipts.
As will be discussed, the SBA began a comprehensive size standards review in 2008. At that time,
the SBA used 41 different size standards: 7 employee based size standards, 31 receipts based size
standards (based on average annual receipts over the previous three years), 1 asset based size
standard, 1 megawatt hours size standard (based on electrical output over the preceding fiscal
Senate Democratic Policy Committee, "Senate Democrats Are Committed to America's Small Businesses,"
Washington, DC: Senate Democratic Policy Committee, May 18, 2009, at http://sbc.senate.gov/
DPC_small_bizdoc.pdf; Senate Republican Policy Committee, "Taxing Success: President Obama's Tax Increases on
Small Businesses are Bad for Job Creation," Washington, DC: Senate Republican Policy Committee, March 17, 2009,
at http://rpc.senate.gov/public/_files/031709TaxingSuccess.pdf; and President Barack Obama, "Remarks by the
President to Small Business Owners, Community Lenders and Members of Congress," press release, Office of the
Press Secretary, March 16, 2009, at http://www.whitehouse.gov/thepressoffice/Remarks-by-the-President-to-small-
2 P.L. 83-163, the Small Business Act of 1953, 202.
3 U.S. Small Business Administration (SBA), Office of Government Contracting and Business Development, "SBA
Size Standards Methodology," April 2009, p. 1, at http://www.sba.gov/sites/default/files/
4 SBA, "SBA's Size Standards Analysis: An Overview on Methodology and Comprehensive Size Standards Review,"
power point presentation, Khem R. Sharma, SBA Office of Size Standards, July 13, 2011, p. 4, at
Congressional Research Service
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Dilger, Robert Jay. Small Business Size Standards: A Historical Analysis of Contemporary Issues, report, April 17, 2018; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc1156786/m1/5/?q="business": accessed April 23, 2019), University of North Texas Libraries, Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.