Unlocking the Mystery of your NAICS Code
The world is filled with Acronyms. One that you will hear of often when you own your own business is the NAICS Code.
NAICS stands for North American Industry Classification System. A NAICS (pronounced NAKES) Code is a classification within the North American Industry Classification System. The NAICS System was developed for use by Federal Statistical Agencies for the collection, analysis and publication of statistical data related to the US Economy. It is currently used by the United States, Canada, and Mexico to classify businesses by Industry. Every business, upon formation, must be classified into a six (6) digit NAICS code based upon the majority of business conducted. This is an essential element of your legal formation and you will need it at various times throughout the life of your business.
Upon formation of your company, unless you are a sole proprietor not electing to use a DBA, you will need to self-classify your business’s NAICS Code as it will be needed to obtain your EIN. You can find the list of over 1,000 NAICS codes online at www.naics.com. Choose the one that most closely resembles your primary service or product. If you have questions about the best fit, your attorney or CPA can be consulted for assistance. Since the IRS requires the NAICS code for Federal Tax Submissions, it is always preferable to clear your choice with your CPA before you apply for the EIN.
You may wonder, why is this important? Well, there are a number of reasons why a correct NAICS is important for a business. First, the IRS requires it for your Federal Tax Retun. Second, it is used by Banks for assessing risk tolerance. There are many high risk and prohibited NAICS codes identified by Banks for commercial underwriting purposes. Some examples may be adult video stores, cannabis stores or manufacturers, spec building, money service businesses, collection agencies, and investment real estate, just to name a few. This list will vary by Bank so make sure before you assume your Bank is interested in your business, whether it be deposits or deposits & loans, you clear your assigned NAICS with them. There is a detailed list of commonly considered High Risk NAICS codes on the website mentioned above.
If you seek financing for your company, rest assured the Bank will be asking for your NAICS code. A particular bank may not have a current appetite for your code as their portfolio may be weighted too heavily in that industry. Or, it may require a special credit group within the bank who has the knowledge and experience of that industry and you may not be able to work with the local representative. Oil & Gas is a great example. Certain industries are so specific that Banks hire and train personnel to understand and work with those businesses within those NAICS codes only. In theory, this should assist you as the Bank Specialist should truly understand the nuances of your industry.
NAICS codes will also be required if you are applying for any time of government contract work or if you apply for a Women/Minority/Small Business/Disadvantaged/Veteran Certification. Certain contracts require firms only in specific NAICS codes. You will also be required to register with the various government agencies in their bidding systems and the NAICS code is required to even be a part of that database. For Corporate Members of WBENC, they may search the database by NAICS code for vendors needed on projects. So, it is important you self-classify correctly. Otherwise, you could presumably not be included in potential vendor searches.
Besides your actual EIN (Employer Identification Number, akin to an individual’s SSN), the NAICS code is an important number to keep handy. It is also a good research locator if you are trying to access specific industry information online. You will be surprised how much information you can acquire on your chosen NAICS code.
So, be informed, be aware, and unlock the mystery of your particular code. Information is power here and you will want to access as much as possible to help your business grow and thrive.
