The definition of an SME can differ based on individual countries for tax and accounting purposes. Below, you will find a guide on SME definitions by different countries around the world.
Often considered the heart of the economy, SMEs refer to small or medium-sized enterprises. Businesses that fit under these categories are defined based on several characteristics including annual revenue, balance sheet, assets, and the number of employees.
While it would be easy to assume that the definition of an SME is constant across the world, this is not the case. As you are about to discover, there are countless deviations between the definitions for countries like Canada, the US, and Australia.
Let’s explore some of these key differences.
In Canada, a small business is a company with more than 5 paid employees but less than 100. A medium-sized business will have at least 100 paid employees but less than 500.
According to the latest research, 98% of businesses in Canada are small. Just 1.5% of businesses are classed as medium-sized. Furthermore, 70% of the Canadian labor force work as part of small businesses. But only 20% are working for medium-sized companies.
Canadian Controlled private corporations may receive a 17% tax rate reduction on the taxable income for active businesses up to $500,000.
The small business deduction is significantly reduced for businesses with taxable capital that climbs over $15 million.
Interestingly, more than $2 trillion of Canadian SMEs are expected to come up for sale over the next decade. This is approximately the same value as the Canadian annual GDP, highlighting the massive contribution they make to the economy.
There is no revenue requirement in Canada for a business to be classified as an SME. However, research shows that on average Canadian SMEs make $131,000 annually.
In the US, small businesses are defined as those that have between 20 and 100 people. Anything less than this is considered a micro-business. Medium businesses will have between 100 and 500 employees on a permanent contract.
The SBA maintains a large list of SMB (small-medium business) size standards. Similar to other countries, these are designed to ensure that the right businesses are eligible for favorable contracts from the government as well as targeted funding.
The limits can be tied to revenue or they might be related to the number of employees, and this differs depending on the industry.
Different industries can also be sectioned based on the items being sold and produced. As an example, a wet corn milling company will be considered a small business if there are under 1,250 employees.
In contrast, a rice milling business will only be considered small if it has less than 500 employees. Whereas this industry depends on the number of employees to determine an SME, the farming sector SMEs are determined by revenue capped at $1 million.
There are even distinctions here as cattle feedlots SMEs can earn up to $8 million and still be classed as a small business.
The number of employees in certain industries can be quite low too. For instance, a company selling fresh fruit and vegetables wholesale can have no more than 100 employees to be legally classified as an SME in the US. In some cases, the employee number can be as high as 1500.
In the US, small and medium manufacturers will be referred to under the title of SMM. These companies must have gross annual sales under $100 million, no more than 500 employees, and annual energy bills that are more than $100,000 but can not exceed $2.5 million.
In the UK an SME is defined in the Companies Act 2006 through section 382 and 465. This is for accounting requirements. This document dictates that a small company must not have a turnover of more than £6.5 million. The balance sheet must be no more than £3.26 million and companies can have no more than 50 employees.
In contrast, a medium-sized company must have a turnover under £25.9 million, a balance sheet of no more than £12.9 million, and no more than 250 employees.
A company will be classed as an SME if it meets at least 2 out of 3 of these criteria.
It’s worth noting that the EU definition is quite similar. However, their system also includes a micro-business category with less than 10 employees, less than £1.7 million in turnover, and a less than £1.7 million balance sheet.
SMEs in the UK are considered vital to the economy. 99.9% of companies in the UK are legally classified as SMEs.
The definition of SMEs in Singapore differs greatly compared to the examples that we have discussed so far. SMEs are defined as companies that have at least 30% in local shareholding, less than 200 employees, or an annual sales turnover of less than $100 million.
99% of the country’s enterprises are classified as SMEs and these companies employ 70% of the business workforce. They also contribute to 50% of the country’s total economy.
In Singapore, 3 different types of SMEs are legally recognized by the government. These are:
- Autonomous enterprises
- Partner Enterprises
- Linked Enterprises
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In Australia, different government organizations define SMEs separately. For instance, the Australian Tax Office defines a small business be it a company, trust partnership, or individual as a business with a turnover of no more than $10 million. This was changed in 2016. Before then businesses were only classified as small if they had a turnover of less than $10 million.
The new threshold was announced to ensure that 90,000 additional businesses could be designed as an SME, thus enabling the government to boost the economy.
Similar to Singapore, the government recognized that SMEs contribute to 99% of the economy with a total of $380 billion in revenue.
However, the Australian Bureau of Statistics uses a different definition. According to the ABS, small businesses have between 5 and 19 employees. Medium businesses have between 20 and 199 people working there.
Australia also has a definition for micro-businesses that employ just 1 to 4 people and large businesses that have more than 200 employees.
SMEs cover 60% of the services exporters in Australia as well as 90% of all goods exporters.
The definition of an SME in South Africa is dictated by the National Small Business Amendment Act 2004. Micro-businesses will be defined as such if they have 5 or fewer permanent employees with a turnover of no more than R100,000 Zar.
Very small businesses can have between 6 and 20 employees while small businesses may have between 21 and 50.
The limit for the turnover for small businesses will differ depending on the sector. For instance, in the agricultural sector, it is R1 million. While in catering it can be R13 million and in the Wholesale Trade sector it can be up to R32 million.
Medium-sized businesses will typically employ no more than 200 people or 100 people in the agricultural sector. The maximum turnover can be anything between R5 and R64 million depending on the sector.
As such, a business can be defined as an SME in South Africa if it meets one of the following standards:
- Less than 200 employees
- An annual turnover of less than R64 million
- Capital assets of no more than R10 million
- Owners that directly manage the company
Similar to other countries, SMEs are vital to the local economy. In 2019 according to the AFS survey, small businesses generated a total annual turnover of R10,5 trillion.
Small businesses were also responsible for 22% of the annual turnover while medium-sized businesses were responsible for 10%. Small businesses in the country also play a more significant role in key industries such as construction.
The Importance Of Defining SMEs
SMES are vital to the economy in countries where they operate. The definition of these enterprises is also important. It ensures that they do get the support they need to thrive and grow on the market, providing significant boosts to the economy.
As noted, Australia, recently changed its definition of an SME to ensure that more companies could get the support required with the main aim of encouraging more growth.
However, the various criteria for defining an SME and differences between countries do pose a challenge. From an academic perspective, it makes it difficult to compare businesses across different countries in terms of success rates and general annual levels of performance.
It would be fantastic if someone could create a global definition for an SME. However due to the vast differences in the way they are defined this seems unlikely. Changing countries’ definitions of SMEs could also, with no exaggeration, cause drastic consequences for the economies of different countries and the global economy as a whole.