What Is a Small Business? Definition and Guide (2025)

Small businesses drive the economy forward—each new small business idea brought to life creates opportunities for employment and innovation.

Though small businesses make up most US companies, defining what makes a business “small” can be tricky, since it varies by industry, revenue, and number of employees.

Here’s what you need to know about how small businesses are defined in the US.

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Definition of a small business

A small business is a for-profit company that typically has fewer than 500 employees and generates lower revenue compared to larger businesses. You can structure your small business as a corporation, partnership, LLC, or sole proprietorship. Registering as a small business opens up opportunities for funding, government programs, and tax benefits. Small businesses often build closer relationships with their customers. 

The US Small Business Administration (SBA) provides specific criteria for small businesses. According to the SBA, a small business:

• Works within industry-specific standards for employee count and annual revenue
• Operates to make a profit
• Has a US-based business location, primarily works in the US, or contributes significantly to the US economy
• Is independently owned and run, without holding a dominant national market position

The business can take any legal structure, from sole proprietorship or partnership to a corporation.

Small businesses dominate the US market

As of 2023, more than 34 million small businesses operate in the US, employing nearly half of all private sector workers. In fact, 99.9% of US companies qualify as small businesses. Here’s how they break down:

• 5.4 million companies have fewer than 20 employees
• 27 million are run by the owner alone

Recent US Census data shows diverse ownership across small businesses: 

• 57.9% of single-owner businesses are run by men
• 42.1% are owned by women
• 37.9% are minority-owned
• 10% are co-owned by spouses
• 5% are franchises

According to Pew Research, most small businesses stay relatively small:

• 49% have 1–4 employees
• 27% employ 5–19 people
• 8% have 20–99 employees
• 1% employ 100–499 workers 

Understanding small business size standards by industry

The SBA sets different size standards for each industry. These standards define the maximum revenue or number of employees your business can have while still qualifying for federal small business programs. The limits vary widely—from $2.25 million to more than $47 million in revenue, or 100 to over 1,500 employees, depending on your industry.

The SBA’s definition protects smaller companies by helping them compete with larger corporations. You can find size standards for your industry iIn the SBA’s table of size standards.

How NAICS codes determine your business size

The SBA uses North American Industry Classification System (NAICS) codes to classify businesses (Mexico and Canada have also adopted NAICS). Think of these six-digit codes like UPC codes for different types of businesses. The first two digits in an NAICS code shows your business sector (like manufacturing or retail), while the remaining digits specify your exact industry.

Your NAICS code:

• Helps banks and lenders determine your business type
• Is required for business filings, accounting, and tax documents
• Makes it easier to research competitors in your market
• Determines if you qualify for small business grants, SBA loans, or government contracts

💡 Check the employee count or total revenue limits for small businesses in your industry.

Benefits and challenges of running a small business

Running a small business comes with unique advantages and challenges compared to larger companies. Here are some pros and cons to consider before scaling your small business:

Advantages:

• You can adapt quickly to market changes.
• You’ll have simpler decision-making processes.
• You can build stronger customer relationships.
• You have more options for industry collaborations.
• You can run your business entirely online from an ecommerce platform.

Challenges:

• Securing business loans can be difficult
• Competing with larger companies’ prices
• Reaching customers beyond your local area

Types of small business structures

Before you start your business, you’ll need to choose a business structure. Here’s a small business tip: Each type has different benefits and requirements that can affect your taxes, liability, and ability to grow.

Sole proprietorship

A sole proprietorship lets you sell products or services under your own name without incorporating. You and your business are considered the same legal entity, making this the most common structure for small businesses.

One of the advantages of a sole proprietorship is that it’s the easiest business to start—especially if you have limited funds. You won’t need to register or incorporate, and tax filing is straightforward. However, you’ll have no separation between personal and business liability and limited access to funding and government programs, and it can be harder to build business credit.

LLC (limited liability company)

An LLC creates a legal separation between you and your business. You can form one as a single member or with multiple owners.

Compared to a sole proprietorship, an LLC builds credibility with customers and partners. It protects your personal assets and provides tax advantages while giving you flexibility in how you manage your business. These advantages of LLCs make them a popular choice among first-time entrepreneurs. 

Corporation

Corporations have shareholders who own the company and a board of directors who help manage it. Compared to an LLC, a corporation offers the strongest liability protection and tax benefits. 

There are two main types of corporations: 

1. S corp: This type of corporation passes profits directly to shareholders, who pay taxes on their personal returns. This passthrough taxation model means S Corps have some limits on liability protection.
2. C corp: A C corp pays corporate tax and shareholders also pay taxes on dividends, but unlike S corps, they offer the strongest personal liability protection.

Partnership

Partnerships let two or more people run a business together. Like corporations, there are different types of partnerships: 

• General partnership: In a general partnership, partners share all liability and profits equally. It’s the simplest partnership structure, but each partner is personally liable for business debts.
• Limited liability partnership (LLP): An LLP restricts partners’ liability to their business investment, protecting personal assets. They’re common for professional services firms.
• Limited partnership (LP): An LP has one partner with full liability, while other partners have limited liability, creating a more complex management structure.

Examples of successful small businesses

Take a look at some real-world examples of small businesses that have found success:

Fire Dept. Coffee

Fire Dept. Coffee is a veteran-owned coffee roaster in Rockford, Ill. The small business started as a hobby, but it now employs a team of fewer than 25 active and retired firefighters and veterans. Fire Dept. sells coffee online and through subscriptions.

It also runs a nonprofit—The Fire Department Coffee Foundation—supporting firefighters injured on the job or facing serious health challenges.

FreeTheRoots

Three brothers started hair care brand FreeTheRoots in 2018 after struggling to find products for their dreadlocks. The small business saw consistent growth during the first few years, after accessing funds through Shopify Capital and Shopify Balance. 

Knya

Founded by husband and wife duo Vanshika and Abhijeet Kaji, Knya sells comfortable, stylish scrubs for health care professionals. Since its incorporation in 2021, Knya has served over 500,000 customers across India.

Kimbo Coffee

Family-owned coffee business Kimbo Coffee, started by the Rubino brothers in 1963, now employs about 200 people. They sell coffee in more than 100 countries around the globe through one-time purchases and subscriptions.

Launch your small business today

The definition of a small business covers many aspects, from industry type and revenue to employee count and legal structure. While the SBA’s specific definition varies by industry, these size standards determine which businesses can access government programs and grants.

The diversity of small businesses reflects their importance to both local and national economies. Whether you’re starting a retail shop, service business, or online store, there’s never been a better time to launch your idea. With Shopify, you can manage your entire business from one platform in just minutes.