There is no single definition of a small firm, mainly because of the wide diversity of businesses.

The best description of the key characteristics of a small firm remains that used by the Bolton Committee in its 1971 Report on Small Firms. This stated that a small firm is an independent business, managed by its owner or part-owners and having a small market share.

The Bolton Report also adopted a number of different statistical definitions. It recognised that size is relevant to sector- i.e. a firm of a given size could be small in relation to one sector where the market is large and there are many competitors; whereas a firm of similar proportions could be considered large in another sector with fewer players and/or generally smaller firms within it.

Similarly, it recognised that it may be more appropriate to define size by the number of employees in some sectors but more appropriate to use turnover in others. Across Government, it is most usual to measure size according to numbers of full-time employees or their equivalent.

Section 248 of the Companies Act of 1985 states that a company is "small" if it satisfies at least two of the following criteria:

• a turnover of not more than £2.8 million;
• a balance sheet total of not more than £1.4 million;
• not more than 50 employees

A medium sized company must satisfy at least two of the following criteria:

• a turnover of not more than £11.2 million;
• a balance sheet total of not more than £5.6 million;
• not more than 250 employees

For statistical purposes, the Department of Trade and Industry usually used the following definitions:

• micro firm: 0 - 9 employees
• small firm: 0 - 49 employees (includes micro)
• medium firm: 50 - 249 employees
• large firm: over 250 employees

However, in practice, schemes which are nominally targeted at small firms adopt a variety of working definition depending on their particular objectives.

In February 1996, the European Commission adopted a communication setting out a single definition of SMEs. The Commission will apply this across Community programmes and proposals. The communication also includes a (non-binding) recommendation to Member States, the European Investment Bank and the European Investment Fund encouraging them to adopt the same definitions for their programmes. The communication permits them to use lower threshold figures, if desired.

The communication explains that existing SME definitions in Community programmes may continue to be used until 31 December 1997. After that date, the single definition must be used. The single definition must be used if programmes are modified in the meantime.

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Last updated February 2001