The world of business comes complete with its own unique collection of terms, concepts and procedures, and both new and seasoned business owners may find that their knowledge is tested from time to time. Two of the terms and concepts that are often shrouded in a bit of mystery are SIC codes and NAICS codes. Though these two terms and the digits that define them are frequently at work in the background, they may get lost among the more overt terms that drive your business and its day-to-day existence.
So what is an SIC code? What is an NAICS number? And what do they mean to you? Quite simply, they are used to help add standard classification to businesses throughout North America and sometimes even further into the international space. However, to really solidify their role in your business, let’s take a look at their existence from creation to current day.
What Is an SIC Code?
Aside from adding structure and clarity to an otherwise vast and multifaceted economy, SIC codes can function in the following ways:
- Allow for tracking for government statistical purposes by federal or state agencies.
- Segment markets for professional use or to identify key competitors in both public and private markets.
- Identify businesses or determine eligibility for government contracts
- Provide a clean cut way to collect, analyze and report economic metrics
- Used to successfully complete relevant forms and applications
The History of SIC Codes
In the early 1900s, the United States economy was growing and standardizing. Industries were no longer composed of a few establishments scattered across the United States; instead, multiple businesses were opening and operating under the umbrella of their main source of industrial income.
Originally, various government agencies across the United States would collect and analyze economic activity data using their own reporting systems. This lack of standardization would leave one agency’s work and analysis fairly useless to other parties that may be interested in or benefit from the same information. As one could imagine, this lack of uniformity would eventually create a bit of an analytical nightmare.
In the 1930’s, a solution came to fruition with the development of the Standard Industrial Classification code (SIC) system which divided the economy into different industries. These SIC codes were then used to help classify companies under the proper industry code and to help agencies nationwide successfully collect and analyze company data in a uniform manner.
How to Read SIC Codes
Each four-digit SIC code follows a specific designation formula in which the first two digits identify the major industry under which the business earns the majority of their revenue (primary line of business). The third digit is used to further refine the classification by identifying the industry subgroup under which the company falls. Finally, the fourth digit is used to identify the specific industry sector in which the establishment operates.
Take, for example, the common breakfast staple, cereal.
Cereal is a manufactured good which falls under the major industrial group 20 for Food and Kindred Products. Within that major group, nine other food related groups exist including:
- Meat Packing (201)
- Dairy Products (202)
- Grain Mill Products (204)
The Grain Mill Products subgroup includes a variety of more specific industry sectors including our example, Cereal Breakfast Foods (2043), as well as Dog and Cat Food (2047), and Flour and Other Grain Mill Products (2041).
Major Group: 20 – Food and Kindred Products
Industry Group: 204 – Grain Mill Products
Industry Sector: 2043 – Cereal Breakfast Foods.
What Is a NAICS Code?
You may have noticed that the invention and use of SIC codes was focused on use in the United States. However, as the economy continued to grow, SIC codes faced several challenges. First and foremost, trade and economic expansion made it important to extend data collection and analysis into Mexico and Canada. Furthermore, as time went on, the amount and types of businesses changed, and overtime, not every specific segment was properly classified.
In response to these deficiencies present due to continued growth, the North American Industry Classification System (NAICS or NAICS system) was introduced in 1997. NAICS codes were then used to classify business establishments within the United States as well as Canada and Mexico.
NAICS vs. SIC
Today, these 6-digit NAICS codes have largely replaced SIC codes due to their more flexible nature and their ability to expand and include additional major industry groups sectors. However, SIC codes are still used by some organizations and agencies, and you can still review the directory to find out which one best describes the primary business activity of your company. (There is also a North American Product Classification System (NAPCS) used to classify “products”. A business establishment will have one NAICS code but could have multiple NAPCS codes for the products or services provided.)
Similar to the formula for SICS codes, the first two digits of a NAICS code signifies the economic sector of an establishment. The third number is then used to determine the subsector of the major group, followed by the fourth digit which is used to determine the industry group. The fifth digit identifies the specific industry type, and the sixth, or final number, is used to determine the industry by nation.
Using the breakfast cereal as an example, the NAICS code would be built as following:
Major group or sector: 31 – Manufacturing
Subsector: 331 – Food Manufacturing
Industry: 3112 Grain and Oilseed Milling
Specific Industry Type: 31123 – Breakfast Cereal Manufacturing
National Industry Type: 311230 – Breakfast Cereal Manufacturing in the United States
How Are NAICS Codes Used Today?
NAICS codes are used in many of the same ways SIC codes can be used. However, because they are the official code of the federal government and referred to on an international scale, you may find NAICS codes to be more common in your business life. Here are a few ways you can expect these classification system codes to be used:
- To assist the Department of Revenue for legislative purposes
- Extend government offered tax incentives
- Keep taxpayers within a specific industry sector informed of various changes to laws and other relevant changes or updates
- Utilized by the IRS for administrative purposes.
- The SBA uses these codes to categorize your business and identify a size standard to qualify you for SBA loans or other government programs (e.g. government contracts)
Why It’s Important to Check Your SIC Code or NAICS Code
Some similar industries have wildly different size standards as determined by the SBA. For example, if you are classified as an insurance agency, you are only considered small if your annual receipts do not exceed $7.5M. If you are in fact a reinsurance carrier, you should be classified under a different code, for which the size standard is $38.5M. This could alter government contracts and programs for which you qualify.
Additionally, your NAICS or SIC code could help determine whether or not a lender will consider you for small business financing. Some lenders will not consider your loan application if your business is classified under a very high risk industry. Or they may simply choose to lend to businesses in certain classification codes, but not others. When you apply for a loan, make sure your existing NAICS code is accurate. Learn how to check your NAICS codes here.
How to Obtain an SIC Code or NAICS Code
Though the differences between SIC and NAICS classification codes may seem slight, they do represent a definitive shift that weighs heavily in favor of NAICS codes. However, even if this is the case, you may find that you need to utilize both at one point or another.
Nav Prime members can identify their NAICS code or SIC code associated with your business in any of the full business credit reports. Double check that the SIC or NAICS code associated with your business is correct by researching classification codes at Census.gov. (You can also download the latest NAICS/SIC manual there.)
If you’re starting a business, you will likely need to identify your primary SIC code or NAICS code when you incorporate your business, or you may be asked to provide it when you apply for credit.
This article was originally written on December 7, 2015 and updated on November 15, 2023.
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