What Is A "Small Business"?

Today, the term "small business" is one of the most ambiguous words in the English language. It is a term that has been so twisted, turned and abused in today's political landscape that it is difficult to decipher whether there is a true definition of "small business." For evidence of the abuses of "small business" one has to look no further than The Center for Public Integrity's attack on the federal government for its small-business contracting procedures and Allan Sloan's article entitled "Small Business, Ill-Defined" .

The Center for Public Integrity attacked federal agencies' small business contracting procedures because they allow large companies to obtain contracts that are meant for small businesses. Federal Agencies are required by law to award 23% of all contracts to small businesses (small business for this purpose is defined as 500 employees or less). The small business contracting procedures fail to provide safeguards that prevent large companies from obtaining these lucrative contracts. The main problem hinges on the fact that the contact can run for up to 20 years and the entity with the contract is grandfathered in under the definition of small business even if the company is later purchased or grows beyond 500 employees. Therefore, many small businesses are obtaining long-term government contracts and are then expanding well beyond the definition of small business or are using the federal contracts to entice larger companies into buying them out since the large company can assume the lucrative government contract. In this context, small business could mean a company that had less than 500 employees at one time in the last 20 years or a large company that purchases small companies. Either way, this falls outside of what most people consider the definition of small business.

As Allan Sloan reports, the debates have brought another twisted definition of small business. President Bush defines small business as a taxpayer that derives any income from self-employment, a partnership or Subchapter S Corporation. This means that a single small business with 20 partners would constitute 20 small businesses under the Bush definition of small business (even if 19 owners do not actively participate in the business affairs of the company). Again, this falls outside of what most people consider to be the definition of small business.

Thus, today a small business could mean anything from a company with one employee, to the largest company in the world that has experienced great growth within the last twenty years, to the largest company in the world that has just purchased a small business, to a doctor who has a 1/100th interest in an investment real estate partnership. I guess the ultimate lesson to learn from this is to be leery whenever the term "small business" is used.