What Is Considered a Small Business in the USA (And Why It Matters for Your Bookkeeping)

ByDesiree

What Is Considered a Small Business in the USA?

According to the U.S. Small Business Administration (SBA), a small business is defined as any independently owned and operated business with fewer than 500 employees. However, industry-specific standards can vary based on revenue, number of employees, and NAICS code.

Here are a few quick examples:

  • Retail and Service Businesses: Usually under $8 million in annual revenue
  • Construction Companies: Up to $39.5 million
  • Manufacturing: May qualify as small with up to 1,500 employees, depending on the sector

Why it matters: This classification affects your eligibility for tax breaks, grants, and loans—and shapes your financial obligations.

Common Types of Small Businesses (and Their Bookkeeping Needs)

Different types of businesses require different bookkeeping systems. Here’s a breakdown:

1. Sole Proprietors & Freelancers

  • Often use cash-basis accounting
  • Minimal software needs—spreadsheets or apps like Wave
  • Must keep personal and business expenses clearly separate

2. Retail & E-commerce Businesses

  • Need to track inventory, sales tax, and multiple payment processors
  • Require software integrations (e.g., Shopify + QuickBooks)
  • More complex revenue tracking and returns/refunds process

3. Service-Based Businesses (Consultants, Coaches)

  • May use hourly billing or project-based income
  • Track time, invoices, and client payments
  • Fewer physical expenses, more digital tools

4. Partnerships & LLCs

  • Shared finances require clear tracking of owner distributions and capital contributions
  • Need to prepare more complex year-end reports

5. S-Corps & Corporations

  • More strict legal requirements
  • Require payroll systems, quarterly tax estimates, and formal financial statements
  • Often outsource to a bookkeeper or accountant

What This Means for Your Bookkeeping

Understanding what kind of business you run helps you:

  • Choose the right bookkeeping system
  • Stay compliant with tax laws
  • Set up efficient daily, monthly, and year-end routines
  • Avoid the most common bookkeeping mistakes

Verify the requirements for different entity types before getting ahead of yourself with setting up an entity. Requirements vary by location including different state and local guidelines. Not having the whole picture can cost you money.

For instance, in California LLCs have to pay an $800 tax annually. If you are just getting started this can be a big hit financially if you aren’t prepared.

I also see a lot of recommendations to set up your business as an s-corp to avoid self-employment taxes, but s-corps come with a lot of responsibilities including the owner being on payroll and filing separate corp tax returns. These can be a big expense and it MIGHT be a good option for you, but you want to make sure your business is in the right place.

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