SBA seeks to classify 'small'

Proposed rule to restructure small business size standards

Like almost everything affecting the role of small businesses in federal contracting, a proposed new rule for defining small businesses is drawing mixed reactions.

The Small Business Administration published the rule last month, with public comments due by May 18. Agency officials want to reduce the number of size categories for businesses and base most

size classifications on the number of employees.

SBA officials are seeking to simplify the current system, which includes 37 size standards, some based on a company's number of employees and some based on annual revenue, depending on the industry category the company fits in. Some critics charge that companies have too much leeway to pick categories that will allow them to grow as much as possible before no longer qualifying for the small-business classification.

The new rule won't fix that problem, said Lloyd Chapman, president of the Microcomputer Industry Suppliers Association.

"This is bad for legitimate small businesses, and it's consistent with what the SBA's been doing for the past 50 years, which is to pass regulations that allow increasingly larger businesses to qualify as small businesses," he said.

Under the proposed rule, most businesses would be measured by number of employees. There would be 10 size levels that apply to most industries, with only a few measured using other criteria. Some industries would have to stay below both a maximum number of employees and a maximum annual revenue standard to qualify.

The proposed size standards range from 50 employees to 1,500.

Chip Mather, senior vice president of Acquisition Solutions Inc., said he is concerned that measuring business size by number of employees would give companies on the cusp of outgrowing the small-business world an incentive to limit their growth.

"If you start measuring by employees, you're going to have people try to limit the number of employees," he said. "There's already enough incentive for companies not to employ people."

A company could freeze its head count at a low enough number to continue to qualify as a small business and use contractors to meet increasing demand, Mather said. That would lead to more people in jobs without the benefits of full-time employment and also allow businesses to grow significantly without losing their small-business qualification, he said.

"I would hope your strategic plan would be much broader than just 'Do I fit into this category?'" said Diane Bloodworth, who was chairwoman of the Industry Advisory Council's Small Business Shared Interest Group until December. "I think it's shortsighted when companies do that."

Gary Jackson, SBA's assistant administrator for size standards, said the agency will count more than the full-time staff of a company. "Employees counted in determining size include all individuals employed on a full-time, part-time, temporary or other basis," he said. "SBA will consider the totality of the circumstances, including factors relevant for tax purposes, in determining whether individuals are employees of the concern in question."

Penny Pompei, president of the Women's Business Center, said that if loopholes exist, most small businesses will not limit their growth indefinitely to exploit them.

"If people are going to fudge, they may fudge for a couple [of employees], two or three," she said.

Mather said Chapman is right to some extent. "The rules as they exist are problematic," he said. However, Chapman's counterproposal that all businesses should be classified as small if they have fewer than 100 employees but not if they are any larger is too simplistic.

"I think it should be 100 employees, across the board," Chapman said. "No matter how you do it, somebody's going to complain that it's not equitable."

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Measuring size

Some proposed classifications to define the size of a small business are:

Computer storage device manufacturing firms: 1,000 employees.

Internet publishing and broadcasting companies: 500 employees.

Internet service providers: 150 employees.

Data processing, hosting and related services: 150 employees and $30 million in annual revenue.

Custom computer programming companies: 150 employees and $30 million in annual revenue.

Source: Small Business Administration