Small and Mid-size Enterprise (SME)

What Is a Small and Mid-size Enterprise (SME)?

Small and mid-size enterprises (SMEs) are businesses that maintain revenues, assets or a number of employees below a certain threshold. Each country has its own definition of what constitutes a small and medium-sized enterprise (SME). Certain size criteria must be met and occasionally the industry in which the company operates in is taken into account as well.

Key Takeaways

  • Small and mid-size enterprises (SMEs) are businesses that have revenues, assets, or a number of employees below a certain threshold.
  • Each country has its own definition of what constitutes a small and medium-sized enterprise.
  • SMEs play an important role in the economy, employing vast numbers of people and helping to shape innovation.
  • Governments regularly offer incentives, including favorable tax treatment and better access to loans, to help keep them in business.

Understanding Small and Mid-size Enterprises (SMEs)

Though small in size, small and mid-size enterprises (SMEs) play an important role in the economy. They outnumber large firms considerably, employ vast numbers of people and are generally entrepreneurial in nature, helping to shape innovation.

In the United States, there is no distinct way to identify small and mid-size enterprises (SMEs). The European Union (EU) offers clearer definitions, characterizing a small-sized enterprise as a company with fewer than 50 employees and a medium-sized enterprise as one with less than 250 employees. In addition to small and mid-size companies, there are micro-companies, which employ up to 10 employees.

Just as the requirements for the categories differ per nation, so do the names and abbreviations. SME is commonly used by the EU, the United Nations (UN), and the World Trade Organization (WTO), whereas in the United States these firms are frequently referred to as small-to-mid-size businesses (SMBs). Elsewhere, in Kenya, they go by the name MSME, short for micro, small, and medium-sized enterprises, and in India, it is MSMED, or micro, small, and medium enterprise development. Despite the differences in nomenclature, countries share the commonality of separating businesses according to size or structure.

SMEs in the U.S.

In the U.S., the Small Business Administration (SBA) classifies small businesses according to its ownership structure, number of employees, earnings and industry. For example, in manufacturing, an SME is a firm with 500 or fewer employees. In contrast, businesses that mine copper ore and nickel ore can have up to 1,500 employees and still be identified as an SME. Like the EU, the U.S. distinctly classifies companies with fewer than 10 employees as a small office/home office (SOHO).

When it comes to tax reporting, the Internal Revenue Service (IRS) 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 as those with over $10 million in assets.

Image by Sabrina Jiang © Investopedia 2020

Special Considerations

Small and mid-size enterprises (SMEs) are often considered to be the heartbeat of both emerging and developed economies.

Jobs and GDP

Many people in emerging economies find work in small and mid-size enterprises (SMEs). SMEs contribute roughly 50% of total employment and 40% of GDP in these countries, according to the Organisation for Economic Co-operation and Development (OCED).

These companies are vastly important to the country's well-being, both in terms of creating jobs and generating tax revenues. The same is true in the U.S., where small businesses accounted for 62% of the net new jobs created between 1995 and 2020.

Government Incentives

Life as a small and mid-size enterprise (SME) isn’t always easy though. These businesses generally struggle to attract capital to fund their endeavors and often have difficulty paying taxes and meeting regulatory compliance obligations.

Governments recognize the importance of small and mid-size enterprises (SMEs) in the economy and regularly offer incentives, including favorable tax treatment and better access to loans, to help keep them in business.

They also offer education programs, coaching small and mid-size enterprise (SME) business owners on how to make their businesses grow and survive, as well as special audit programs to target high-risk areas and boost tax compliance.

How Many Employees Are Employed by Small- to Mid-Size Business?

As of 2019 (the latest data available), employer firms with less than 500 workers employed 46.4% of private sector payrolls, while companies with fewer than 100 employees accounted for 32.4%.

What Is the Definition of a Small- to Mid-Size Business?

There is no set definition of what a small- to mid-size business, varying by country. In the U.S., the definition can vary by industry. Note that Gartner describes small businesses as those with less than 100 employees, and mid-size as those with 100 to 999 employees.

What Is the Percentage of Small- to Mid-Size Businesses in the United States?

As of 2019 and of the 6.1 million employer firms in the U.S., firms with fewer than 500 employees made up 99.7% of those businesses. Companies with less than 100 employees made up 98.1%.

Article Sources

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  1. European Commission. "SME Definition."

  2. U.S. Small Business Administration. "Size Standards."

  3. Internal Revenue Service. "Small Business/Self-Employed Division At-a-Glance."

  4. Internal Revenue Service. "Large Business and International Tax Center."

  5. Internal Revenue Service. "Publication 334 (2021), Tax Guide for Small Business."

  6. The World Bank. "Small and Medium Enterprises (SMEs) Finance."

  7. Small Business Administration. "Frequently Asked Questions."

  8. United States Census Bureau. “2019 SUSB Annual Data Tables by Establishment Industry.”

  9. Gartner. “Small And Midsize Business (SMB).”

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