Understanding what constitutes a “small business” in California is crucial for entrepreneurs seeking to leverage state programs, qualify for government contracts, or access specific tax benefits.
While the federal Small Business Administration (SBA) provides general guidelines, California has its own set of criteria that can vary by industry, revenue, and number of employees.
1. California’s Legal Definition of a Small Business
California defines a “small business” under various statutes, each with its own criteria:
- Government Code Section 12100.82: Defines a small business as a business with fewer than 100 employees and average annual gross receipts of $15 million or less over the previous three years. Manufacturers with 100 or fewer employees also qualify under this definition.
- Health and Safety Code Section 40503: Specifies that a small business is independently owned and operated, with 10 or fewer employees and annual gross receipts of $500,000 or less.
- Code of Civil Procedure Section 1028.5: Provides specific revenue thresholds by industry. For instance:
- Agriculture: $1 million
- Retail trade: $2 million
- Services: $2 million
- Manufacturing: 250 employees
These definitions are used to determine eligibility for various state programs and benefits.
2. Industry-Specific Size Standards
California’s Department of General Services (DGS) has established size standards for small businesses seeking certification. These standards often align with the revenue thresholds mentioned above but can vary based on industry and other factors.
For example, a business in the manufacturing sector may qualify with 100 employees or fewer, while a retail business may qualify with annual gross receipts under $2 million.
For more information on certification and size standards.
3. Federal vs. State Definitions
It’s important to note that the federal SBA’s definition of a small business may differ from California’s. The SBA generally defines a small business as one with 500 or fewer employees, but this can vary by industry.
For instance, a roofing contractor may qualify as a small business with annual revenues of $16.5 million, while an asphalt shingle manufacturer may qualify with fewer than 750 employees.
California’s definitions are more stringent in some cases, particularly concerning revenue thresholds and the number of employees.
4. Importance of Accurate Classification
Properly classifying your business as a small business is essential for accessing various benefits:
- Government Contracts: Many state and federal contracts are set aside for small businesses. Misclassification can lead to disqualification.
- Tax Incentives: Certain tax credits and exemptions are available exclusively to small businesses.
- Financial Assistance: Small businesses may qualify for loans and grants that are not available to larger enterprises.
5. Steps to Determine Your Business’s Status
To determine if your business qualifies as a small business in California:
- Assess Employee Count: Count all full-time, part-time, and temporary employees. Include employees of any affiliates.
- Calculate Annual Gross Receipts: This includes all income from sales of goods or services, minus returns and allowances.
- Consult Relevant Statutes: Refer to the specific California codes applicable to your industry to verify if your business meets the criteria.
- Seek Certification: If eligible, apply for certification through the DGS Procurement Division.
6. Resources for Small Businesses in California
- California Department of General Services: Offers resources and certification programs for small businesses.
- California Secretary of State: Provides information on business registration and compliance.
- Small Business Development Centers (SBDCs): Offer counseling and training .
- California Governor’s Office of Business and Economic Development (GO-Biz): Provides resources and support for businesses operating in California.
Conclusion
Understanding the legal definition of a small business in California is vital for entrepreneurs to navigate the state’s regulatory landscape effectively. By accurately assessing your business’s size and seeking appropriate certification, you can unlock opportunities for growth, funding, and participation in government programs designed to support small enterprises.
