How A NAICS Code Can Benefit Your Small Business
Since its debut in 1997, the North American Industrial Classification System (NAICS) has been the primary method for classifying businesses across a growing number of industries. Regardless of its size and nature, any enterprise based or doing business in North America (Canada, Mexico, and the United States) must have a NAICS code for various purposes.
Then again, there’s barely any reason not to have one. It doesn’t cost much to get one (if it even costs anything), and a business can lose out on lucrative opportunities if it doesn’t have one or gets the wrong one. Here are several ways this six-digit code can benefit even the small players of any industry.
Registration and incorporation
Registering and incorporating a business exist for various reasons, from enabling legal benefits and protections to building credibility among clients. Not all business entities need to register, such as those doing business under the owner’s name, but it’s a crucial first step for a venture to make it big—and a NAICS code is necessary in most cases. (1)
When Ontario began adopting the NAICS code in October last year, it mandated its use for the registration and incorporation of new and existing businesses in the province. Below are some services that require new enterprises to produce the code:
- Registration as a professional service (e.g., doctors, lawyers)
- Registration as a not-for-profit entity
- Approval of articles of amalgamation or continuation
- Securing a business or firm name
Meanwhile, the services that require existing enterprises to have a NAICS code are primarily for amending or renewing their business structure. The only instance when the code isn’t needed is the dissolution of an enterprise.
NAICS is a joint development between three representative agencies: the US Economic Classification Policy Committee, Mexico’s Instituto Nacional de Estadistica y Geografia, and Statistics Canada. While it was developed for standardizing economic data gathering and analysis, it doesn’t stop there.
Except for the last digit (specific to a country), the six-digit NAICS code is standardized across North American countries. Businesses that want to expand their reach beyond their country of origin will find the advantage of having a NAICS code helpful.
Here’s an example: a small business in Canada wants to secure a federal contract in the US. While US laws prohibit non-US small businesses from participating in federal contracting, they can still join in subcontracting, according to the Trade Commissioner Service. While not as lucrative as contracts, subcontracts in the US still award millions. (2)
For a small business to be eligible in this case, it must qualify as a small business, as defined by the US Small Business Administration. This federal agency uses NAICS codes to determine if the enterprise is considered small in its industry. (3)
Tax credits and incentives
Whether a tax break or deduction, businesses can qualify for various tax incentives if they have a NAICS code to present to their taxation agency. The money they save on taxes will be a boon for small businesses and their limited capital.
Sometimes, these tax relief programs require a NAICS code as some only cater to a handful of industries. For example, Quebec’s information technology industry development program features tax credits of 30% for salary expenditures. However, to prove eligibility, 75% of a business’s activities should be covered under specific NAICS codes. (4)
However, not all localities have a tax relief program in place, so it’s best to check with the local government first. Regardless, a NAICS code can still be handy for other purposes, let alone if the locality decides to offer tax incentives in the future.
Focused B2B marketing
Perhaps the most important advantage NAICS codes offer is allowing businesses to direct their marketing efforts more accurately. It especially applies to a business-to-business (B2B) setting.
One reason NAICS codes work in such transactions is the intention for which it was designed. The system divided the 10 broad industries from the older Standard Industrial Classification (SIC) system into 20, some of them more specific than their parent categories. For instance, the service sector from SIC was divided into seven categories in NAICS.
In this context, by identifying a potential client’s NAICS code, a business can determine if it’s a target for its marketing efforts. More focused marketing also means more consistent marketing pitches and methods, leading to higher chances of nailing transactions.
A NAICS code is more than just a six-digit industry identifier for businesses. While it had been initially designed for better economic data gathering, the code has become just as beneficial to stores and offices in various ways. Getting one is as easy as coordinating with the government agency overseeing NAICS.
- “Facts About Starting a Business in Canada”, Source: https://www.thebalancesmb.com/business-startup-facts-2948563
- “Barriers – Other Considerations”, Source: https://www.tradecommissioner.gc.ca/sell2usgov-vendreaugouvusa/procurement-marches/barriers_other-obstacles_autres.aspx?lang=eng
- “Small Business Certifications”, Source: https://www.sba.gov/sites/default/files/articles/Small%20Business%20Certifications.pdf
- “SMBs and Large Corporations Tax Credits”, Source: https://www.investquebec.com/quebec/en/financial-products/smbs-and-large-corporations/tax-credits/development-of-e-business.html