A Helpful Guide To NAICS Code For First-Time Business Owners

For decades, the Standard Industrial Classification (SIC) system has classified businesses big and small according to their industries. Every business possesses this four-digit code to let overseeing agencies and other businesses know to which sector it belongs. It serves as a convenient way of gathering and analyzing data about economic activity.

However, by the late 1980s, rapid economic growth revealed the limitations of the SIC system as new industries came into play. So in 1997, Canada, Mexico, and the United States. introduced the North American Industry Classification System (NAICS) as the SIC’s successor. While it didn’t phase out SIC codes entirely, NAICS codes have more or less become the standard since.

First-time business owners should take some time to understand how a NAICS code works for them and other parties and why having one is essential.

Double the broad sectors

Understanding the changes that NAICS has brought to economic activity requires understanding the limitations of its predecessor. Since its inception in 1937, the SIC has categorized businesses into eleven broad industry sectors:

  1. Agriculture, forestry, and fishing
  2. Mining
  3. Construction
  4. Manufacturing
  5. Transportation and public utilities
  6. Wholesale trade
  7. Retail trade
  8. Finance, insurance, and real estate
  9. Services
  10. Public administration
  11. Non-classifiable establishments (1)

Although these classifications proved sufficient for their time, technological advances and other growth factors soon became too broad to manage. For instance, the services sector can house an assortment of categories that would be more manageable if they were their respective sectors.

NAICS doubled the number of industry sectors by further breaking down some SIC divisions. Below is the current list of recognized broad sectors and the SIC division where they originated:

  • Code 11: Agriculture, forestry, fishing, and hunting
  • Code 21: Mining
  • Code 23: Construction
  • Code 31–33: Manufacturing
  • Code 22: Utilities (from Transportation and Public Utilities)
  • Code 48–49: Transportation and warehousing (from Transportation and Public Utilities)
  • Code 42: Wholesale trade
  • Code 44–45: Retail trade (from Retail Trade)
  • Code 72: Accommodation and food services (from Retail Trade)
  • Code 52: Finance and insurance (from Finance, Insurance, and Real Estate)
  • Code 53: Real estate, rental, and leasing (from Finance, Insurance, and Real Estate)
  • Code 51: Information (from Services)
  • Code 54: Professional, scientific, and technical services (from Services)
  • Code 56: Administrative, support, waste management, and remediation (from Services)
  • Code 61: Education services (from Services)
  • Code 62: Healthcare and social assistance (from Services)
  • Code 71: Arts, entertainment, and recreation (from Services)
  • Code 81: Other services except for public administration (from Services)
  • Code 92: Public administration
  • Code 55: Management of companies and enterprises (from all SIC divisions) (2)

From four digits to six

The NAICS also overhauled the coding system to accommodate the growth of new industries, standardizing the six-digit NAICS code in place of the SIC’s four. However, it’s important to remember that the NAICS only standardizes five of the six digits in the code:

  • The first two digits indicate the broad industry sector (refer to the list above)
  • The third digit refers to the industry subsector
  • The fourth digit refers to the industry group
  • The fifth digit refers to the specific industry (2)

The sixth digit denotes industry divisions distinct to Canada, Mexico, or the United States. Its addition provides extra details to a business that might not necessarily apply to other countries, ideal for doing business within a country. The focus is usually on the first five digits for doing business between countries.

Business benefits

Applying for a NAICS code should come with establishing a new business. As a self-assigned system, the business owner is responsible for picking the correct codes for their business. (Yes, a business can have more than one code.) There are several good reasons to do so:

  • Tax incentives:As businesses reel from the economic impact of the COVID-19 pandemic, taking advantage of tax incentives is in their best interests. For instance, a Canadian-controlled private company in Ontario can reduce its small business tax rate by 3.2% if it can provide a NAICS code for confirmation.
  • Classifying clients:Companies can search for potential clients (consumers or other companies) and study the competition more efficiently with a NAICS code. Marketing and other business planning activities heavily rely on such information to help remain competitive, if not stay one step ahead. (3)
  • Business loan application:The lending industry utilizes NAICS codes to gauge an industry’s credit risk to mitigate losses. In most cases, lending agencies require businesses to provide their NAICS codes before processing their loan applications. (3)

Conclusion

As the successor to the SIC system, NAICS codes better organize economic activities for various purposes, ranging from data collection to loan application. First-time business owners must have one to reap the benefits of doing business in today’s bustling economy.

References

  1. “Standard Industrial Classification (SIC Code)”, Source: https://www.investopedia.com/terms/s/sic_code.asp
  2. “HISTORY OF THE NAICS CODE”, Source: https://www.naics.com/history-naics-code/
  3. “What is a NAICS Code and Why Do I Need One?” Source: https://www.ibisworld.com/classifications/resources/what-is-a-naics-code-and-why-do-i-need-one/
Dragan Sutevski

Posted by Dragan Sutevski

Dragan Sutevski is a founder and CEO of Sutevski Consulting, creating business excellence through innovative thinking. Get more from Dragan on Twitter. Contact Dragan