Small busi­ness­es, explained

The US Small Business As­so­ci­a­tion (SBA) clas­si­fies a small business as a privately-owned and operated business with a small number of employees. However, this can include up to 1,500 employees for some in­dus­tries or profits less than $7 million (in some in­dus­tries). In other instances, the SBA uses receipts or revenue to identify a small business.

In this article we will explain the dif­fer­ence between a small business and a com­mer­cial business, as well as the ad­van­tages and dis­ad­van­tages of a small business. 

As pre­vi­ous­ly mentioned, a small business can be iden­ti­fied by either the amount of employees or its annual revenue. When running a small business, it is important to remember that there are different rules to follow, whether it comes to ac­count­ing or the law. A small business is

• A prof­itable business with a legal structure
• Located and run in the USA
• In­de­pen­dent­ly owned and operated
• Not a monopoly in its field

When starting a small business, you also need to decide whether you are a small business owner or self-employed – after all, it can affect what your profits are. If you are self-employed, you can either be a sole pro­pri­etor, part of a part­ner­ship, or an in­de­pen­dent con­trac­tor. As a sole pro­pri­etor, you are es­sen­tial­ly a one-man business, re­spon­si­ble for all elements of the business and finances without a legal entity. Being in a part­ner­ship is very similar – it es­sen­tial­ly involves two or more in­di­vid­u­als who own the business and act as sole pro­pri­etors without a legal entity. In­de­pen­dent con­trac­tors are freelance workers who undertake contract work for other busi­ness­es. In all three cat­e­gories, you are not con­sid­ered to be an employee. Instead, the business begins and ends with you (and your partners).

If you run a small business, then you have employees. Having employees means taking re­spon­si­bil­i­ty for their taxes and salary, and requires a whole new area of ac­count­ing knowledge. One of the most common business types for a small business is a limited liability company. These are companies that bring together the concept of a cor­po­ra­tion with a part­ner­ship or sole pro­pri­etor­ship. LLC members are not re­spon­si­ble for company debts or li­a­bil­i­ties.

The SBA has a variety of different criteria that define a small or large business depending on the industry. Here are the most common ones:

• Man­u­fac­tur­ing: As an employer, you may have anywhere from 500-1,500 employees and still be con­sid­ered a small business. For example tobacco man­u­fac­tures are allowed up to 1,500 employees, but retail bakeries can have a maximum of 500 to still be con­sid­ered a small business.
   
• Services: To be con­sid­ered a small business in the service industry, your yearly receipts must not exceed $38.5 million.
   
• Whole­sal­ing: A small business whole­saler would have less than 500 employees.
   
• Retail: A retail small business does not have annual receipts totaling more than $38.5 million.
   
• Agri­cul­ture: Annual receipts must not exceed $750k in order to be con­sid­ered a small business farmer.
   
• Special trade con­trac­tors: As a small business owner in this field, your annual receipts must not exceed $15 million.
   
• General and heavy con­struc­tion: Your annual receipts must stay below $36.5 million to remain in the small business category.

Your business must adhere to SBA sizing clas­si­fi­ca­tions in order to file for small business tax returns, or to avail of contracts des­ig­nat­ed for small busi­ness­es.

There are a number of legal re­quire­ments that small business owners must adhere to when setting up their small business. Once you have come up with an idea for your business and created a business plan, you will have to:

• Register your business name
• Learn about and adhere to federal, state, and local taxes
• Learn about and adhere to the relevant business laws and reg­u­la­tions
• Obtain any relevant business permits and licenses

Depending on the type of business you are running, you may need to register your business. For the majority of small busi­ness­es, this will just involve reg­is­ter­ing your business name with local and state gov­ern­ments. It is often suf­fi­cient to register with a “Doing Business As” (DBA) or “Fic­ti­tious Business Name” (FBN). If you do not choose one of these, the company will simply be named after you. You are not required to register with the federal gov­ern­ment to create your company, other than reg­is­ter­ing to receive a federal tax ID. If your small business is a non-profit, you can register as a tax-exempt entity with the Internal Revenue Service (IRS). You will also need to file with the IRS if creating an S or C corp.

If you are planning on expanding your business in the future to locations out of state, it is worth reg­is­ter­ing your name with the United States Patent and Trademark Office to ensure that only you have legal rights to the title.

As pre­vi­ous­ly mentioned, the US federal gov­ern­ment does not legislate for any par­tic­u­lar ac­count­ing method. As long as your accounts are clear, accurate, and can stand up to an in­spec­tion, the gov­ern­ment is satisfied. You must also ensure that your chosen ac­count­ing method will allow you to ac­cu­rate­ly assess and pay your taxes. Cash basis and accrual ac­count­ing are ac­knowl­edged as best practice for small busi­ness­es. Cash ac­count­ing records income and expenses when money is exchanged, while accrual ac­count­ing records income and expenses when they are earned or billed, but perhaps not yet paid.

The kind of taxes you pay as a small business owner depends on what kind of business you are. Sole pro­pri­etors, part­ner­ships, and LLCs all have different tax oblig­a­tions. Here is an outline of which taxes are relevant to which kinds of business:

• Sole pro­pri­etors include their business taxes on their personal tax returns by preparing a Schedule C (profit or loss for a small business) and attaching that to Form 1040.
   
• Part­ner­ships file a separate tax return, and each partner in the part­ner­ship must also provide paperwork. The part­ner­ship itself is required to file an in­for­ma­tion tax return Form 1065, and each in­di­vid­ual partner in the business will receive a Schedule K-1 that they include in their own Form 1040.
   
• LLCs use either one of the above methods, depending on how many owners the company has. This is because an LLC is not a taxing entity.

As well as paying income tax, small business owners must pay self-em­ploy­ment tax which currently stands at a rate of 15.3% of income from self-em­ploy­ment business. Small business income taxes can be filed online or in the mail to the IRS, through their official website, or mailed to the address provided on Form 1040. If your business is in the retail sector, you will also be liable to pay state and/or federal sales taxes on your products.

Since small business tax returns are filed as part of an in­di­vid­ual’s personal tax returns, the deadline is the same as their personal income tax deadline which is April 15^th of each year. Ex­ten­sions are available for up to six months after the deadline.

There are plenty of ad­van­tages and dis­ad­van­tages to starting a business of any kind. Risks are always going to be taken, things might not work out – but by starting a small business, you are in control of all aspects of your career which can be an exciting (and sometimes daunting) process. There are a whopping 28 million small busi­ness­es reg­is­tered in the USA, and these busi­ness­es inject almost $8.5 trillion into the economy – that is almost half of the GDP for the entire nation. However, one must also keep in mind that almost 50% of busi­ness­es fail, and there are plenty of legal and bu­reau­crat­ic hurdles to overcome, as well as endless hard work to make your business a success.

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