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.

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.

Understanding Small and Mid-size Enterprise (SME)

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. They are responsible for providing many jobs and in the U.S. contributed 46% of private non-farm gross domestic product (GDP) in 2008.

Jobs and GDP

Many people in emerging economies find work in small and mid-size enterprises (SMEs). SMEs contribute roughly 45% of total employment and 33% of GDP in these countries, according to the Organisation for Economic Co-operation and Development (OCED).

The importance of small and mid-size enterprises (SMEs) is not limited to emerging nations. Between 2002 and 2012, small and mid-size enterprises (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. The same is true in the U.S., where small businesses accounted for 64% of the net new jobs created between 1993 and 2011.

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.