What is a NAICS Code?

what is a naics code, naics code explained

Small businesses in the United States comprise two main sectors: the goods-producing and service-providing sectors. Each of these sectors has a lengthy list of business industries. Let us use the marketing industry to explain this in more detail. There are close to 30 different marketing, public relations, and advertising industry classifications for businesses in the marketing industry. A marketing consulting company, for example, falls within the service-providing sector in the marketing consulting services industry.

Whether it produces goods or sells services, your small business also falls within a specific industry. The standard system for classifying small companies according to their industry is the North American Industry Classification System (NAICS). The NAICS has unique codes for all types of industries, even yours. In addition, NAICS is one of many business acronyms. So, you might be wondering, just what is a NAICS code? Well, this Balboa Capital blog article takes a good look at the NAICS and has all of the vital information you need.

How the NAICS started.

According to the United States Census Bureau®, The United States, Canada, and Mexico developed the NAICS, which rolled out in 1997. The goal was to create a system covering more industries than the Standard Industrial Classification (SIC) system and organize them into more applicable sectors. Codes can be used seamlessly throughout North America, a tremendous benefit. A comprehensive manual with up-to-date codes was published in 2017; it can be accessed on the United States Census Bureau website. In addition, the NAICS is updated as needed with codes for new and emerging industries such as biotechnology and e-commerce.

Although the federal government no longer maintains SIC codes, which were last updated in 1987, they are still widely used in the United States to categorize small businesses by their industry and specialty. In addition, SIC codes are still being used by some credit reporting agencies, government agencies, and marketing list providers.

NAICS code size standard.

As mentioned earlier, codes are assigned based on the industry. Additionally, a company size standard accompanies every NAICS code. This is determined by one of two size-related factors: average annual revenue or number of employees. For example, if you own a full-service restaurant, your NAICS code is 722110, and your size standard is $7 million in annual revenue. So, if your restaurant generates less than $7 million each year, it is categorized as a small business under code 722110. The complete NAICS code size standards list is available on the Small Business Administration (SBA) website.

How to get a NAICS code.

Many small businesses specialize in more than one type of product or service. For example, a coffee shop might have an in-house bakery and kitchen, allowing it to serve breakfast each morning. The coffee shop also sells baked goods to local restaurants and sells them online. In this case, the coffee shop can have more than one NAICS code because it has several revenue streams. This is a tremendous advantage that codes offer to business owners like you. Multiple codes can make your small business more competitive and open the door to new opportunities in markets outside of where you operate.

NAICS codes are assigned by you, not by a government entity or small business organization. You can get your code online or through a third party that helps business owners obtain them. However, the list of industries and their respective codes is lengthy and takes time to read, so do not pick a code until you have reviewed all of the options. You need to choose the code that best exemplifies what your company is all about and what products or services it provides.

Benefits of having a NAICS code.

Depending on the type of business, your code might present you with some excellent benefits. For example, many lenders use NAICS codes when reviewing loan applications, and having a code can boost your chances of getting your loan approved. The lender will see your code and know if they lend to businesses in your industry.

Next, you might be able to land contracts through government agencies and trade associations if you are an SBA-certified business with a valid code. Agencies and associations frequently award contracts to companies in various industries. Again, this helps drive business growth on Main Street USA.

Finally, having a NAICS code can come in handy when tax season rolls around. Your code will ensure that your company’s tax return is similar to other companies in your distinct industry. If you have the wrong code or never got one, the IRS might compare your tax return to companies’ returns in an industry unrelated to yours. This can result in an IRS audit, which is something you want to avoid at all costs.

Balboa Capital, a Division of Ameris Bank, is not affiliated with nor endorses the United States Census Bureau, Small Business Administration, North American Industry Classification System, or Standard Industrial Classification System. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.