Published By Nikeya Williams at July 13, 2017
When you first start your business, you’ll need to describe the type of business activity of your company, and you’ll need to make sure that you know what industry type and industry group that your business will be associated with. Once you have decided on your industry and Industry group for your company, you’ll then pick the SIC code that will be assigned to your company.
SIC Code (Standard Industrial Classification) is a part of a business classification system. The SIC code is a four digit numerical code that is assigned by the U.S. government to businesses, to make it easier to identify the primary activity of the business. The SIC code’s digits are grouped to identify the industry and industry group. The first two digits in the SIC code identify the major industry group, the third digit identifies the industry group and the fourth digit identifies the industry.
The second business classification code that you’ll use is the North American Industry Classification System (NAICS), this classifies business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. economy. NAICS industry codes define establishments based on the activities in which they are primarily engaged.
Moreover, lenders, banks, insurance companies and business credit bureaus use the two business classification systems to determine if your business is a high-risk industry classification, which means that you could get denied for a loan or a business credit card based on your business classification. Some SIC codes can trigger an automatic turn-downs, higher premiums, reducing credit limits for your business.
You have to be careful when you choosing an SIC code for your company. Internal Revenue will use the SIC code that you pick, to determine whether or not your business tax returns are comparable to other businesses within your industry. If your tax deductions don’t resemble the other businesses in your industry, then you could be audited.
In addition, some businesses are labeled high-risk when they don’t choose the correct SIC codes to classify their business. But if you understand how the business classification system works, you can select the proper code on your first try.
Here’s an example on how you can select the right SIC code for your business. As you see in the example below, the first two digits of the SIC code identify the major industry group, the third digit identifies the industry group and the fourth digit identifies the industry.
Here’s how you will select the right SIC code for your business:
(36) ELECTRONIC & OTHER ELECTRIC EQUIPMENT (This code identifies the major industry group)
(367) ELECTRONIC COMPONENTS & ACCESSORIES (This code identifies the industry group)
(3672) PRINTED CIRCUIT BOARDS (This code identifies the industry)
There are also SIC codes that will get you denied if you select them as the business classification. Before you select your SIC code and NAICS code make sure that you look over this list before you start building your SIC codes. Here are a few high-risk codes that you’ll need to be aware of:
Real estate investing or anything else regarding investing of any type
Let’s say that you’re planning to start a real estate business, but you’re not going to want to classify your business as “real estate investing” company. Most banks will automatically turn you down because of the high-risk factor in the business classification name. If you want to have your real estate investing company, you need to develop a business code that has business development, business management, business consulting, or marketing & advertising written in the actual business code. That way, you can still operate your real business of “real estate investing” without being considered a risk factor.
Selecting the wrong SIC code could cost your business and get you labeled as a high-risk, which could directly impact your financing ability, insurance premiums, and credit limit recommendations. This small mistake of picking the wrong SIC code could cost your business in the future, make sure that you’re doing research before you pick out an SIC code for your business.