Business Tips

What Are NAICS and SIC Codes?

files demonstrating NAICS code system

NAICS codes and SIC codes both refer to classification systems used to categorize private and public sector businesses. Primarily used by the government and the public sector, the NAICS code is the more advanced system of the two. The SIC code, though not as popular, still has its uses. Below explores both these systems in more detail.

What is a NAICS Code?

The North American Industry Classification System (NAICS) was introduced in 1997 by the Federal Statistical Agencies of the United States, Canada, and Mexico. The objective was to replace the then SIC code with a new, better version to classify businesses. The NAICS six-digit codes serve a variety of purposes, including utilization in legislative processes, tax incentives, administration by the Internal Revenue Service, and the Small Business Administration’s evaluation of qualified companies for grants, business loans, and government contracts.

What does NAICS stand for?

NAICS stands for the North American Industry Classification System. “North American” refers to the countries of origin—the United States, Canada, and Mexico. “Industry Classification System” describes what the system sets out to classify: industries.

How do NAICS codes work?

It’s important to remember that every digit of a NAICS code is a meaningful unit.

The first two digits indicate the business sector. For example, if the code begins with 11, it refers to a business in the agriculture, forestry, fishing, and hunting sectors. The third digit indicates the subsector, which, in the case of code 111, is the crop production subsector. The fourth digit highlights the industry group. For example, code 1111 refers to oilseed and grain farming. The fifth digit typically determines the specific industry. So, code 11111 refers to the soybean farming industry. Finally, the last digit is the country code. In the case of code 111110, the last digit is the country code for the United States.

Through the above example, you can see how a six-digit NAICS code communicates the business’s section, subsector, industry group, specific industry, and country.

What is a SIC Code?

Senate House of the United States of America where they determine NAICS codes

The Standard Industrial Classification (SIC) system was introduced in the 1930s. The aim was to classify United States business establishments so that it’d be easier for the United States government to obtain an overview of the economy in comparison to Canada’s economy. A four-digit code system, the United States government stopped updating the SIC system in 1987 because, over the years, it’d proved to be unreliable. Thus, the NAICS codes were introduced in 1997 to replace the SIC system.

Though this system is now much less relevant than that of the NAICS codes, many businesses within the private sector still use them. Businesses may utilize the SIC codes to analyze the economy, segment markets for marketing purposes, and identify potential competitors. Government agencies may also employ the SIC codes when determining eligibility for contracts.

What does SIC stand for?

SIC stands for the Standard Industrial Classification system.

How do SIC codes work?

Much like the NAICS codes, each unit of a SIC code has its own importance. The first unit of a SIC code is a letter indicating the sector of a business. For example, division A refers to the agriculture, forestry, and fishing industries. The next two units, the first two digits of the code, indicate the major industry of the business’s mainline. For example, code 01 refers to the agricultural production of crops. The third digit indicates the subgroup, which, in the case code 011, refers to cash grains. The last digit indicates the specific industry sector. Regarding code 0111, the last digit indicates that it’s part of the wheat industry which helps identify the primary business activity.

NAICS vs SIC: What’s the Difference?

Now that you know what a NAICS code and a SIC code are, we’ll review the differences between the two systems.

The SIC system has gone through several decades of improvements and updates. However, businesses today needing modern solutions prefer NAICS codes because they’re more standardized, comprehensive, and up-to-date.

Another difference is that the SIC system is missing many classifications that are otherwise accounted for in NAICS codes. While there are around 1,000 industries recognized by the SIC, there are 1,200 industries recognized by the NAICS. This makes the SIC system less reliable today.

Why Does My Business Need NAICS and SIC Codes?

When conducting business research it’s crucial to use both SIC codes and NAICS codes, as many resources use only one or the other. Some federal agencies, state and local governments, credit score agencies, and other businesses still use SIC codes. However, if you cannot use SIC codes due to the industry of your business being overlooked in the SIC system, that’s perfectly fine.

How Do I Find Out What My NAICS Code Is?

Obtaining a NAICS code for your business is your responsibility. When doing so, every business should choose a code that best describes their business activity. If your business has more than one unique line of work, you may need to use more than one code.

If you’re interested in looking up codes, you have two options. The first is to visit the NAICS search page, where you can search for your line of business via their lookup tool. If you can’t find your code there, you can visit the Census Bureau’s website and contact them for further details.

How Do I Find a Company’s SIC Code?

The same process employed to look up a NAICS code applies to SIC codes, only the Census Bureau doesn’t manage SIC codes. Thus, the Census Bureau can’t be of much help. When searching for SIC codes, a reliable resource is the Department of Labor’s Occupational Safety and Health Administration (OSHA).

Final Thoughts

Many people may enter business ownership for the thrill of accepting payments for the goods or services they’re providing to the market. But while running a business and accepting those payments, there are many acronyms with which most business owners become familiar, like LLC, MCC, and EIN. Now, you can add NAICS and SIC to that list.

To conclude, these codes are both classification systems implemented to determine a business’s industry, sector, and other defining business elements through unique units of a standardized code. Of the two, NAICS codes are more standardized, but there are still many entities referring to SIC codes. The main difference between the two systems is that NAICS codes cover more industries, whereas SIC codes are missing some modern industries.

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