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The qualified business income deduction is a federal tax provision that helps some small business owners and self-employed individuals reduce their taxable income. Find out how to qualify and what types of income are eligible for this deduction.

What Is the Qualified Business Income (QBI) Deduction?

The QBI deduction is a popular small business tax tip that may lower federal taxes for some business owners. It offers a tax break on pass-through income, which includes business earnings that are reported on an individual’s income tax return.

The deduction allows eligible business owners to deduct as much as 20% of their qualified business income, as well as 20% of qualified Real Estate Invest Trust (REIT) dividends and publicly traded partnership income. However, there are restrictions on who qualifies for the deduction and what types of income are eligible.

Recommended: Small Business Loans

How the QBI Deduction Works

The QBI deduction is used on individual tax returns, not business tax returns. Taxpayers who own certain types of businesses can claim the deduction regardless of whether they take the standard deduction or itemize deductions.

The qualified business income deduction doesn’t lower the amount you have to pay in self employment tax, but it does help reduce your taxable individual income.

Who Qualifies for the QBI Deduction?

Eligibility depends on the type of business you own as well as your income. The following business structures qualify for the QBI: sole proprietorships, partnerships, S corporations, some LLCs, and some trusts and estates.

You’re not eligible if you have C corporation income or income earned as an employee.

Recommended: Business Line of Credit

Income Limits and Phaseouts

The 20% QBI deduction reduces if your total taxable income exceeds certain thresholds and may eventually phase out completely, depending on your type of business.

Here are the phase-in ranges for 2026 based on tax filing status. Income levels under the lower threshold qualify for the full deduction. Those within the phase-in range could receive a partial deduction.

•   $403,500 to $553,500 for taxpayers married filing jointly

•   $201,775 to $276,750 for all other taxpayers

For taxpayers who exceed the phase-in limit, your deduction is capped to the larger of the following:

•   50% of W-2 wages paid to employees

•   25% of employee W-2 wages, plus 2.5% of the unadjusted basis of qualified property

Specified Service Trades or Businesses (SSTBs)

If your business is considered an SSTB, you could qualify for a partial deduction if your income exceeds the thresholds above. SSTBs are considered businesses related to the following industries:

•   Health

•   Law

•   Accounting

•   Actuarial science

•   Performing arts

•   Consulting

•   Athletics

•   Financial services

•   Investing and investment management

•   Trading or dealing in certain assets

•   Business where the principal asset is the reputation or skill of one or more of its employees or owners

What Counts as Qualified Business Income?

QBI includes the net amount of qualified business financials from partnerships, S corporations, sole proprietorships, and certain trusts. It does not include W-2 income, capital gains or losses, dividends, or interest.

Recommended: Small Business Credit Card

How to Calculate the QBI Deduction

Wondering how much tax your business will pay? Your QBI deduction plays a major part in the answer to this question. Follow these six steps to calculate your potential qualified business income deduction.

•   List out your eligible businesses and the qualified income or loss for each one

•   Add any business net or loss carryforward from the previous year

•   Multiply that number by 0.20 to find 20% of your qualified business income

•   Next, tally up any income or loss from REIT dividends and PTPs

•   Multiply that number by 0.20 to get 20%

•   Add the deduction from your QBI, REIT, and PTP income

The form also helps you calculate your total taxable income to determine if it’s over the limitation. Otherwise, you can claim the total deduction from above on your individual tax return.

Recommended: Startup Business Loans

How to Claim the QBI Deduction

The QBI deduction is claimed on your individual income tax return. Most taxpayers will use Form 8995 while those with higher incomes will use Form 8995-A.

Fill out the form with your other tax forms, such as Form 1040 (which reports your individual income) and Schedule C (which reports your business income and expenses).

Recommended: Equipment Financing

Benefits and Drawbacks of the QBI Deduction

Wondering if deducting part of your qualified business income is worth it? Here are the pros and cons to weigh.

Pros of the QBI deduction:

•   Potential to provide tax savings: The biggest benefit of the QBI deduction is that it can lower your taxable income. Instead of paying federal taxes on your full business income, you can reduce that line item by as much as 20%.

•   Works with the standard deduction: Most deductions require you to itemize your taxes, but even taxpayers who take the standard deduction can qualify for the full qualified business income deduction.

•   Keeps other deductions in place: Taking the QBI deduction doesn’t impact your ability to deduct retirement contributions, business expenses, or health insurance premiums (although, as you’ll see in the cons, those contributions can impact your total QBI).

Cons of the QBI deduction:

•   Income thresholds are complicated: Your income must fall into certain thresholds in order to qualify for the QBI deduction. High-earning business owners may not be eligible.

•   Other deductions could reduce QBI: Any deductible contributions made to a SEP IRA or Solo (401K), as well as health insurance deductions, could lower your qualified business income — and therefore your QBI deduction.

Recommended: Business Checking

The Future of the QBI Deduction

The QBI deduction began as a temporary deduction with the passage of the 2017 Tax Cuts and Jobs Act (TCJA). But instead of sunsetting after 2025, it was turned into a permanent part of the tax code with the passage of the One, Big, Beautiful Bill Act (OBBBA).

As mentioned above, the new tax law made some changes to the phase-in ranges. Otherwise, small business owners can continue to claim this deduction on their individual tax returns until any changes to the law are made in the future.

The Takeaway

Taking the QBI deduction can be complicated, but it’s a valuable tax resource for eligible business owners. From paying owed taxes to hiring a tax advisor, a small business loan can help this tax season.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What is the QBI deduction?

The QBI deduction offers up to a 20% deduction on qualified business income for eligible business owners.

Who qualifies for the QBI deduction?

In order to qualify for the QBI deduction, you must have business income from an eligible entity such as a sole proprietorship, partnership, S corporation, or qualifying trust or estate.

How do I calculate the QBI deduction?

Calculate your qualified business income. Then multiply it by 0.20 (20%) to see how much you can deduct from your taxable income.

What is considered qualified business income?

Qualified business income includes net income from an eligible business. It doesn’t include W-2 income, dividends, or interest.

Does the QBI deduction expire?

Not anymore. Previously, the QBI deduction was set to expire after 2025. But it became permanent with the passage of the One, Big, Beautiful Bill in 2025.

Photo credit: iStock/miniseries

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOSMB-Q425-035

There are several steps to prepare your business for sale, from organizing your finances to ensuring the right staffing is in place for a smooth transition. But one of the most important pieces of the puzzle can be choosing an accurate sales price.

That’s easier said than done with so many varying factors involved with a business. Learn how to price a business for sale in order to attract the right buyers and close a deal you feel good about.

What Does It Mean to Price a Business for Sale?

Pricing a business for sale is the same as calculating its value in order to advertise to potential buyers. Getting a third party valuation can be beneficial to make sure the price is realistic for you and attractive to someone buying a business.

Why Accurate Business Pricing Matters

Accurate pricing for your business can attract the right buyers and increases the chances of finalizing the sale. If you overprice the business at the start of the process, you run the risk of a potential buyer backing out after reviewing the business financials. Underpricing your business, of course, could lead to a quick sale but at the risk of missing out on additional money.

Key Factors That Influence Business Valuation

There are several components to consider when learning how to value a business before selling.

•   Industry trends: The business’s industry affects how much buyers are willing to pay. If the market is growing, you could be more aggressive in your pricing. But if there’s volatility in your industry, then buyers may expect a lower price.

•   Target buyer: There are several different types of buyers in the business arena, which could impact the details of the sale. A larger company, for instance, may want to acquire your company for growth but may not keep upper management employees. A private equity or family office buyer, however, may want a turnkey business to take over for cash flow.

•   Risk management: Many buyers want assurance that the business will continue to operate smoothly after the purchase. This usually means you need organized financial records, a low risk of legal issues, and employees who can continue to manage the business after the owner is gone.

•   Growth opportunities: Being able to communicate the strength of the company along with future growth potential can also justify a higher sales price.

Common Methods for Pricing a Business

Explore these business valuation formulas when considering a price for your company.

Asset-Based Valuation

This type of business valuation centers around the assets owned by the company after accounting for any outstanding liabilities such as equipment financing balances. Potential assets to consider include:

•   Land and real estate

•   Machinery

•   Equipment

•   Furniture

•   Technology

Calculate the current market value of each asset. Land and real estate, for instance, are likely to increase in value over time, while equipment or technology may depreciate.

Earnings-Based Valuation

This valuation option focuses on expected future income each year. Here’s a business valuation formula to start with:

Value = Benefit / Required Rate of Return

For the benefit, you could use annual net income, and then a rate of return that’s normal for your industry.

Let’s say your business cash flow is $200,000 annually after salaries and other operating expenses — that’s the benefit. Now let’s say a buyer will expect an annual rate of return of 20%.

You would find the business value by dividing $200,000 by 20% (or 0.20), which comes to $1 million.

Market-Based Valuation

A market-based valuation compares your business to recently sold comps, similar to how residential real estate is often priced. Using transaction data, you would calculate your business value based on how similar it is in size, operations, services and products, location, and more.

You may have difficulty finding comparable data for this method, but the number can be compelling if you do get real numbers on companies that have already sold.

Recommended: Startup Business Loans

How to Prepare Your Financials Before Pricing a Business

Before any potential buyer will make an offer, they’ll likely expect to look at your business financials for at least the three previous years.

Organize your bookkeeping, financial statements (including business checking account statements and outstanding business line of credit or loan balances), and tax returns for quick and easy access. Also include any information that showcases the health of your business, such as growth initiatives or customer retention data.

How to Determine an Asking Price

How do you value a business that’s fair to both parties involved? The valuation is a good starting point, but that doesn’t necessarily have to be your sales price. Other factors, like industry trends and growth opportunities specific to your business, may justify a higher or lower asking price.

Look at other recent sales in your industry to see how desirable the market is right now. It may be realistic to expect a sales price under the asking price, or you may discover you’re in an industry courting multiple bidders. This information gives you helpful context in how aggressive to be with your pricing strategy.

When to Hire a Professional Business Appraiser

Hiring a professional business appraiser can give your sales price more significance because it comes from a third party source. Plus, you’ll feel confident that you’re suggesting a realistic figure to avoid losing money on a potential deal or overpricing so much that you’ll drive away buyers.

Potential appraisers include:

•   Accounting companies

•   Business brokers

•   Investment banking firms

Mistakes to Avoid When Pricing a Business

A few common mistakes can impact the sales price of your business and how quickly it sells.

•   Guessing the value of your business: Take the emotion out of the valuation process and use an actual formula to justify the list price.

•   Leaving business financials in disarray: Buyers may be hesitant to purchase if your financial statements aren’t current, accurate, and organized. Strong record keeping can make it easier to ask for a higher sales price.

•   Forgetting soft assets: It’s easy to value hard assets, but don’t forget to include the value of intangible assets as well, such as your CRM and intellectual property.

•   Avoiding a plan for debt: Any outstanding debt from a small business credit card or other sources can be a sign of potential risk to buyers. Consider the business’s debt-to-equity ratio — the lower, the better in the eyes of a buyer — and consider paying down balances before you sell.

The Takeaway

Finding the right price for your business is an important part of the sales process. It sets the tone for the types of buyers you’ll attract and serves as a springboard for negotiations. If you need help financing a valuation or other business initiative before you sell, a small business loan can help.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

How do you determine the value of a small business?

There are several methods you can use to perform a small business valuation. The most common ones include: asset-based, earnings-based, and market-based valuations. The best option depends on the type of business you operate.

What documents do you need to price a business for sale?

You typically need the last few years of financial statements, tax returns, debt information, and any details to demonstrate the business’s growth opportunities.

What valuation method is most accurate for selling a business?

No valuation method is considered more accurate than another. Using an external appraiser can help you price your business accurately while also giving potential buyers confidence in a third-party opinion.

How far in advance should you prepare to sell your business?

You should start preparing to sell your business at least one to three years in advance. This gives you time to improve financial records, boost profitability, streamline operations, address legal issues, and position the business attractively for buyers, which can help maximize valuation and ensure a smoother sale process.

Do you need a business appraiser to price a business for sale?

It’s not necessary to use a business appraiser to price your business for sale, but you may get a more accurate number that can lead to a faster and better quality closing.

Photo credit: iStock/miniseries

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOSMB-Q425-038

A business continuity plan helps your business navigate unforeseen circumstances, whether it’s a natural disaster, a financial emergency, or other type of loss. Creating a plan in advance gives you a head start on how to keep your business up and running, instead of having to scramble in the wake of a major challenge.

Here’s what you need to know about business continuity planning, plus how to create a strategy for your company that prepares you for future surprises.

Why Business Continuity Planning Is Important

Most business owners know how to write a business plan that outlines the strategy of launching and managing your company.

As your organization becomes more seasoned, you probably create and update a three-year or five-year business plan on a regular basis to stay on top of industry and economic trends.

But what about preparing your company for external factors beyond growth goals?

Planning for business continuity can benefit your company in several ways. For starters, preparing in advance for unforeseen circumstances gives your business a better chance of survival.

Disruptions are difficult to avoid and impact half of all businesses, whether from natural or manmade causes. And after experiencing a disruption, 25% of businesses close their doors permanently.

Finally, not only does a business continuity plan reduce your overall risk, it may also be required when applying for a small business loan, business line of credit, or business insurance. Creating a strategy in advance can help you get ready to apply before you need a loan or insurance coverage.

Recommended: Prepare Your Business for a Recession

How a Business Continuity Plan Works

What is a business continuity plan? It’s a document that outlines how your company will respond in the event business is interrupted. Business continuity planning usually involves two sets of processes: preventing risk and mitigating damage that actually does occur.

Your team knows exactly how to respond when a disruption occurs, whether it’s navigating a data breach or remaining open even if a power outage occurs. The plan has assigned roles and responsibilities for different staff or departments, allowing everyone to respond quickly and efficiently.

Key Components of a Business Continuity Plan

Every business continuity plan should include the following information:

•   Emergency response: Immediate steps that must be taken to avoid additional damage

•   Public relations: Communications to customers or other affected parties

•   Resource management: An inventory of all the tools needed to execute the plan, as well as access to financial accounts, including your business checking and small business credit cards

•   Employee communications: Contact information to communicate updates to employees

Steps to Create a Business Continuity Plan

Start your business continuity plan by taking the seven following steps.

•   Perform a business impact analysis: This process helps you understand the critical business procedures that need to be addressed, plus the resources your business relies on to function.

•   Assess company risks: Common potential risks include natural disasters, data breaches, and employment issues (such as a strike or losing key personnel).

•   Identify how recovery looks: Define what recovery looks like and the maximum downtime it should take to achieve that objective.

•   Craft a communications strategy: Include a process for both employee notification and public relations.

•   Create backups: Have a plan to backup data, including physical locations as well as cloud servers.

•   Define staff roles: Identify which staff members are responsible for executing each portion of the business continuity plan.

•   Test and update your plan: Run drills annually so everyone can practice their roles and adjust the plan as needed.

Recommended: Business Loan Calculator

Business Continuity Plan vs. Disaster Recovery Plan

Both a business continuity plan and a disaster recovery plan can help your business during challenging times. But they’re two separate documents that plan for different scenarios.

•   Business continuity plan: Defines how to get your business back to regular levels of functioning during a disruption.

•   Disaster recovery plan: Focuses primarily on protecting data and IT systems during a disruption.

Recommended: Businesses that are Recession-Proof

Examples of Business Continuity Scenarios

There are a number of disruptions that can negatively impact your business, including environmental and humanmade causes. Here are some common scenarios that would benefit from a business continuity plan.

•   Natural disasters

•   Data breaches, cyber attack, or system failures

•   Power outages

•   Health emergencies

•   Unexpected staff shortgages

Testing and Maintaining a Business Continuity Plan

Creating a business continuity plan isn’t a set-it-and-forget-it exercise. It’s highly recommended to test, exercise, and improve your plan at least once a year and then update it based on new needs or changes that have occurred. In addition to an annual test, you may also want to review the plan anytime your business has changes in vendors, key personnel, or facilities.

So how do you actually test your plan? Create simulations or drills that walk your employees through different scenarios. This lets them practice their roles in a potential emergency, such as having the IT team back up data or having the PR team draft a press release.

Common Mistakes to Avoid in Business Continuity Planning

Whether you’re a startup business or a seasoned company, you can make the most of your business continuity plan by avoiding these three crucial mistakes.

•   Not prioritizing recovery efforts: It takes time to fully recover from a major business disruption. Your plan should prioritize specific actions to resume the most critical portions of your business.

•   Not testing and updating your plan: Things change constantly in business, from your latest vendors to your employees’ contact information. All components of your business continuity plan should be tested and updated regularly so you’re truly prepared for a real-life disaster.

•   Not knowing how to access your business continuity plan: Not only should your plan be up to date, it should also be accessible from any location, whether a natural disaster is preventing key employees from accessing your office or a cyber attack has disrupted your network access.

Who Is Responsible for Business Continuity Planning?

Ultimately, the responsibility for a business continuity plan falls with the company’s executive leadership. That may look different depending on the size of your organization. For a small business, it could be the owner. For larger companies, you may have an entire business continuity team that oversees the process.

Within your plan, you’ll also likely assign roles and responsibilities for specific steps. For instance, the IT department would oversee data backup procedures, while HR may be responsible for maintaining employee contact information.

Recommended: Equipment Financing

The Takeaway

Investing the time and resources in a business continuity plan can remove a lot of stress in the future when a disruption occurs. It takes some extra work, but you’ll feel confident knowing your business can weather any storm with the right processes and backups in place.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What is included in a business continuity plan?

A business continuity plan includes components such as a risk assessment, recovery process, employee roles and responsibilities, and a communications strategy.

How often should a business continuity plan be updated?

A business continuity plan should be updated at least once a year. But it should also be tested and reviewed any time your business experiences any major changes, such as new vendors, employees, or technology.

What’s the difference between a business continuity plan and risk management?

A business continuity plan is a specific type of risk management strategy. Risk management can involve broader assessments for operational, financial, and even legal threats. Business continuity focuses on how to get your business operating after a disruption occurs.

Who should be involved in creating a business continuity plan?

Business continuity planning should be the responsibility of executive leadership. But internal stakeholders involved in the plan’s execution should also be involved. This likely includes human resources, IT, legal, and communications.

What are examples of business continuity risks?

Power outage, data breach, cyber blackmail, supply chain disruption, epidemic, or a natural disaster such as a hurricane or earthquake.

Photo credit: iStock/adamkaz

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOSMB-Q425-032

Business banking is a financial service for business owners, one that allows them to keep their business transactions and finances separate from their personal transactions and finances. Business accounts often come with specific conditions and requirements, and they may offer special benefits.

How Business Banking Works

Banks, credit unions, fintech companies, and other institutions can provide services to owners for their business banking. There are a variety of services available to businesses of all sizes, such as checking and savings accounts, financing, cash management, payroll services, and fraud protection.

Types of Business Bank Accounts

There are several types of business bank accounts, including business checking accounts, business savings accounts, business certificates of deposit (CDs), merchant accounts, and business money market accounts.

Business checking accounts are used for everyday transactions, similar to a personal checking account. Business savings accounts are used for saving money that is not needed for everyday use, but is still accessible when needed. Business savings accounts usually earn interest, though interest on these accounts can be relatively low.

Recommended: Breaking Barriers: New SoFi Data Reveals the Truth About Today’s Female Entrepreneurs

Business Banking vs. Personal Banking

Business banking and personal banking function very similarly. Both business and personal banking accounts usually offer features like debit cards, checks, ATM access, ACH transfers and wire transfers.

However, business bank accounts usually let you withdraw more cash at ATMs or send larger ACH transfers than personal accounts because banks expect businesses to spend and receive more money than personal banking customers. Also, personal bank accounts tend to offer more competitive interest rates than business bank accounts.

Why Business Banking Is Important

If you are a business owner, it is important to separate your business and personal finances. While you can technically use a personal account for your business, it is not advisable, as there are tax implications and legal implications in using a personal account for a business.

A business bank account lets you separate your personal and business finances, which makes tax preparations easier. Having a separate business bank account can also protect personal assets for businesses that are structured as LLCs or corporations. Plus, having a business bank account can help build your business credit, making it easier to get approved for small business loans in the future.

Before applying for a business loan, try using a SBA Loan Calculator to estimate your monthly payments, total interest, and overall loan cost.

Common Business Banking Services

Banks provide services to businesses that bank with them as an incentive to start and continue doing business with the bank. Some common business banking services could include cash management tools for the business, fraud protection for the business account and payroll services for paying employees.

Many banks also offer one or several small business credit card options that businesses can apply for. These small business credit cards often come with benefits like the ability to earn and redeem points, purchase protection, and more. However, it is important to note that business credit cards have fewer consumer protections. Business credit cards aren’t required to provide some of the consumer protections that personal credit cards have to.

How to Open a Business Bank Account

How to open a business bank account? It is similar to opening a personal bank account.

Business bank accounts can be opened at many brick-and-mortar banks, credit unions, and online financial institutions. The process of opening a business bank account can be quick, as long as you have the necessary documents and information.

Documents Needed for Business Banking

When opening a business bank account, you will need to provide a variety of documents. You will likely need to provide your full legal name, address, a government-issued photo ID (like a driver’s license or passport) and a Social Security number. You will also likely need to provide the business name or name of the sole proprietor, the business address, the date that the business was established and any legal documents or business licenses that are required.

After applying, it can take several business days for final approval.

Choosing the Right Business Bank

Selecting the right business bank is a personal decision. Banks provide different services and have different fee structures. When comparing business banks, you should look at things like monthly fees, ATM fees, incidental fees, minimum balance requirements, online and mobile banking tools and transfer, wiring and payment capabilities.

Additional features, like bill pay, invoicing or integrations with other business tools like tax reporting software, or tools offering business financial projections, might be important for your business as well.

How Business Banking Supports Growth and Cash Flow

Business banking allows businesses to efficiently manage their cash flow and growth by providing services like automatic collection systems, invoicing, spending controls, tax-planning tools, separated bank statements for easier bookkeeping and accounting software integrations. If certain tools or benefits are important to your business, be sure to inquire about them while comparing business banking options.

Recommended: Business Loan Calculator

Online and Mobile Business Banking Options

Online-only banking options can be a good fit for virtual businesses or businesses that don’t handle daily cash transactions. Many online banks don’t require a monthly minimum balance, so these can be a good option for small startup businesses as well. Some may offer startup business loans, but you may need to apply for a startup business loan with a brick-and-mortar bank. Even many brick-and-mortar banks offer online and mobile services to their business banking customers. Many have mobile apps and most have websites for online services for their customers.

The Takeaway

Business banking can be useful for businesses who need to manage their finances, pay employees, have access to credit or loans, keep financial records or have fraud protection. While personal bank accounts and business bank accounts have a lot in common, it may be wise to open a separate bank account if you are operating a business. Plus, doing so can help build a relationship with the bank or financial institution in case you need a loan, like for equipment financing.

No matter how small your business is, opening a business bank account can be beneficial for your business, as long as you find the right one for you.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What is included in business banking?

Each business banking account offers different features, benefits, and fees. Many business banking accounts come with cash management services, payroll services and fraud protection.

Can I use a personal account for my business?

You can technically use a personal account for your business, but it may not be recommended. There are tax implications and legal implications in using a personal account for a business.

What are the benefits of a business bank account?

A business bank account can let you separate your personal and business finances, which makes tax preparations easier. Having a separate business bank account can also protect personal assets for businesses that are structured as LLCs or corporations. Plus, having a business bank account can help build your business credit, making it easier to get approved for small business loans or a business line of credit in the future.

How much money do you need to open a business bank account?

The amount of money that you often need to open a business bank account varies from $0 to up to $1,000. The initial deposit amount varies by bank and type of account (checking, savings, etc.).

Do business bank accounts have fees?

Some banks charge monthly maintenance fees for business accounts, though sometimes those fees are waived if you maintain a minimum balance in the account. Business banks and other institutions may also charge ATM fees, overdraft fees, or overdraft fees.

Photo credit: iStock/TrixiePhoto

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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Whether or not your business qualifies as “small” depends on a few factors. In general, it means a limited staff and an income that is modest in comparison with larger corporations.

In the U.S., the North American Industry Classification System (NAICS) is used to determine size standards for specific types of businesses, which, in turn, affects your company’s small business definition.

Wondering what defines a small business and whether or not you qualify? Keep reading to learn more.

How the SBA Defines a Small Business

What is considered a small business? Some people go down the wrong road in search of an answer. For example, it doesn’t have anything to do with sole proprietorship vs LLC. To be classified as small, there are various standards a business must meet.

The Small Business Administration (SBA) says the definition of a small business embraces:

•   Operations in the United States

•   Independently owned and operated

•   Organized for profit

•   Contribute to the U.S. economy

However, it doesn’t stop there. The SBA also requires that companies adhere to established size standards for each industry according to the NAICS. Depending on which industry your business is in, it’s possible your company may be too successful to qualify as a small business.

This categorization method is needed because there are many types of businesses, so a universal definition of small business won’t work. You must consider the type of business you’re in before distinguishing whether or not your company can be considered a small business.

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Small Business Size Standards by Industry

Because each industry is very different, the SBA requires small businesses to stay within certain thresholds based on their type of industry. That means either your annual revenue or the number of employees you can have will vary depending on your industry (but for some industries, the amount held in assets is the determining variable).

For example, a cookie and cracker manufacturing company (NAICS code: 311821) can have a maximum of 1,250 employees. It’s not limited in the amount of money it can make or assets it can have to qualify as a small business. This industry is only limited in the amount of employees it can have each year.

Why the Definition of a Small Business Matters

The definition of a small business matters because it establishes whether or not your company can qualify for things like:

•   Tax incentives

•   Small business loans, such as

◦   7A Small Business Loans

◦   Business Lines of Credit

•   Grants

•   Federal contracts

If you exceed the parameters established by the NAICS, you may not be able to take advantage of any of the above.

However, the SBA’s criteria is more about protecting small businesses from large corporations than it is anything else. By ensuring that large companies can’t capture benefits that were never intended for them, it provides a space in the market for smaller, newer companies to grow and thrive.

How to Determine if Your Business Qualifies as Small

To determine if your business qualifies as small, find out what industry you’re in and see what threshold has been established by the NAICS. It’s likely to either be annual revenue or number of employees.

When verifying, make sure you use the most up-to-date of the SBA’s Table of Small Business Size Standards.

Small Business vs. Medium-Sized Business

A small business has access to tax incentives and government funding opportunities that a medium-size company does not. Because they have not exceeded the size limits established by the NAICS, small businesses are considered more vulnerable and in need of capital.

Benefits of Being Classified as a Small Business

While a company wants to grow and thrive, there are some advantages to remaining a small business.

For example, a small business can advantage of:

•   Startup business loans

•   Small business credit cards

•   Equipment financing

Then there are business grants and federal contracts to consider, which are tailor made for small businesses. If your company has exceeded the size established by NAICS, then these opportunities are no longer available, but your company should be at a point by then that it no longer needs them.

Challenges Small Businesses Face

While there are various means to receive capital for small businesses, those programs can be difficult to qualify for. Plus, not only do small businesses have to compete with larger, more established companies with greater operational abilities and lower prices, but they have to survive the natural ebbs and flows in cash flow.

The hard truth of the matter is that it’s not uncommon for small businesses to fail. Being able to qualify for SBA loans and contracts is great. But, in the end, they’re still much more vulnerable to market fluctuations.

How Small Business Classification Affects Funding Eligibility

Small business classification affects whether you qualify for SBA-backed financing. While growth is always the goal, there are perks when you’re first starting off, such as the ability to obtain an SBA loan. Once your company grows beyond the established parameters, you’ll have to turn to non-SBA financing.

Regardless of size, however, being classified as small or medium does not affect your ability to get business checking.

How the Definition of a Small Business Has Changed Over Time

Because all industries change over time, the SBA now reviews size standards every five years. As manufacturing and advancements in technology change the market place, the definition of a small business also changes.

For example, feats that were once only possible by larger corporations (such as distributing software to millions of computers), are often quite possible by much smaller companies. Because of this, the definition of a small business must be adaptable to reflect current market conditions and abilities.

The Takeaway

The Small Business Administration uses the table of size standards to determine if a business qualifies as a small business. Depending on your company’s industry, one of these three will have a determining threshold: number of employees, annual revenue, or combined asset value.

If your company does qualify, then you’re eligible to take advantage of SBA loans, grants, government contracts, and tax incentives.

If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.

FAQ

What qualifies as a small business?

To qualify as a small business, your company must operate for profit, have operations in the U.S., contribute to the U.S. economy, and be independently owned and operated. Furthermore, your company must not surpass thresholds related to number of employees, annual income, or amount in assets depending on your industry.

How many employees make a business small?

It depends on which industry your business operates in. Each industry has different thresholds for the amount of employees it can have and still be considered a small business. For example, a glass container manufacturing company can have 1,250 employees, whereas a machine tool manufacturing company can only have 500 employees.

What revenue qualifies as a small business?

As with how many employees a company can have, the amount of annual revenue a company can make and still qualify as a small business depends on what industry the company operates in.

Why is the SBA definition important?

The SBA definition of a small business is important for many reasons, but one of the most significant reasons is that it influences your business’s ability to qualify and receive SBA loans and grants. SBA 7(a), and 504 loans, for example, offer extremely competitive loan terms.

Does the definition of a small business vary by industry?

While there are universal qualifications businesses must meet, there are also industry specific aspects a business must meet, too. Industry specific qualifications revolve around number of employees, annual revenue, or combined assets value. To see which variable will qualify or disqualify your company as a small business, refer to the Table of Small Business Size Standards.

Photo credit: iStock/rez-art

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External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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