WHAT EXACTLY ARE NAICS AND SIC CODES?

By: Allen T. May, C.E.O. of Westwood Associates, LLC

NAICS codes are one of those areas of business we seldom see come across our radars and oftentimes, know absolutely nothing about them or why they exist. The IRS wants us to choose one when apply for an EIN number and we need them when filing annual tax returns for Schedule C and other business tax forms. There is a reason for all of this of course and its good policy to have a clear understanding of what they are. Here’s a quick overview for you to get your feet wet. I’ll discuss this matter over several blog posts as to not bore you to death in one setting. Here’s what my research as found:

The Standard Industrial Classification (SIC) system was originally developed in the 1930s to classify establishments by the type of activity in which they are primarily engaged. The purpose of this task was to promote the comparability of establishment data to describe the U.S. and Canadian economies. The SIC has not been updated since 1987, however, the SIC system is still widely used. Some companies, such as Dunn & Bradstreet have created their own 4-digit extension to the original SIC system as a means to update and expand the system so their customers can more precisely define their business classification.

The North American Industry Classification System (NAICS) (pronounced “nakes”) was established in 1997 to replace the no longer sufficient SIC system. Developed in cooperation with the statistical agencies of Canada and Mexico, NAICS establishes a North American Standard that allows for a high level of comparability in business statistics among the three countries. It is the first economic classification system to be constructed based on a single economic concept.

The NAICS code was developed to eliminate the inconsistent logic utilized in the SIC system and to increase specificity from the 4-digit SIC system by creating a 6-digit NAICS code. While the NAICS system utilizes a purely production-oriented structure identifying businesses only by their primary economic activity, the SIC system moves from production-oriented logic to market-oriented logic throughout its structure. This inconsistency is like attributable to the many revisions made throughout the years to a system whose founding documents are lost to history.

I’ll be blogging much more on NAICS codes over the next few weeks. There is some important information regarding the actual NAICS selected by entrepreneurs you will want to know about. I will also share a list of high-risk NAICS codes you will want to avoid if possible. When starting a new business venture, you will want to select an appropriate NAICS code. Worth noting, none of our aged entities have NAICS codes assigned to them. That is a process we can discuss when you acquire one of our shelf corps or shelf LLCs. More on NAICS to come.

Please feel free to reach out to me as follows:

Allen T. May
cell: 214-893-2623
email: allentmay@gmail.com