Small and Mid-size Enterprise (SME)

What is a 'Small and Mid-size Enterprise (SME)'

Small and mid-size enterprises are businesses that maintain revenues, assets or a number of employees below a certain threshold. Every country or economic organization has its own definition of what is considered a small and medium-sized enterprise. In the United States, there is no distinct way to identify SMEs, but in the European Union, a small-sized enterprise is a company with fewer than 50 employees, while a medium-sized enterprise is one with fewer than 250 employees. In addition to small and mid-size companies, there are micro-companies, which employ up to 10 employees.

BREAKING DOWN 'Small and Mid-size Enterprise (SME)'

The abbreviation "SME" is commonly used by the European Union, United Nations, and World Trade Organization (WTO). In the United States, it is frequently called a small-to-mid-size business (SMB). Just as the requirements for the categories differ per nation, so do the names and abbreviations. For example, in Kenya, it is MSME for micro, small, and medium-sized enterprises, and in India, it is MSMED for micro, small, and medium enterprise development. Despite the differences in nomenclature, they share the commonality of separating businesses according to size or structure.

SMEs are strong in innovation, and they promote competition. However, these businesses struggle to attract capital to fund their endeavors. For sustainability, some national governments and world organizations advocate implementing business education programs and increasing SMEs' access to loans and government incentives.

The Role of SMEs in Putting People to Work

Small and mid-size enterprises (SMEs) play a significant role in emerging economies. SMEs create 80% of the new jobs in emerging economies. Also, most people with formal jobs in these emerging economies find work in an SME. Over half of SMEs do not have access to capital to fuel growth. They typically rely on personal funds and loans from friends or families, known as angel investors, rather than traditional loans.

The importance of SMEs is not limited to emerging nations. Between 2002 and 2012, SMEs created 77% of new jobs in Canada, nearly the same percentage as in most emerging economies. These companies are vastly important to the country's well-being, both in terms of creating jobs and generating tax revenues. However, small and mid-size enterprises tend to have low survival rates, and in some cases, they fail to comply with tax reporting laws for several reasons. To remedy these types of issues, Canada and many other countries have implemented programs to coach SME business owners on making their businesses grow and survive. They also have special audit programs to target high-risk areas and to boost tax compliance.

SMEs in the United States

In terms of tax reporting, the Internal Revenue Service does not categorize businesses into SMEs. Instead, it separates small businesses and self-employed individuals into one group and large to mid-size businesses into another. The IRS classifies small businesses as companies with assets of $10 million or less, and large businesses are those with over $10 million in assets. The Small Business Administration (SBA) classifies small businesses according to its industry, ownership structure, number of employees, and earnings. Like the European Union, the United States distinctly classifies companies with fewer than 10 employees as a small office/home office (SOHO).