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What is NAICS and How is it Used?

When it comes to starting a business, there are probably a few checklist items that you’ve never even thought about. One of those things is probably identifying your business’s NAICS code.

While it’s not the be-all end-all of starting a business, identifying this code could come in handy when performing competitor research for your business plan. It can also play an important role if you’re looking for government financial assistance.

But what exactly is NAICS and why does it matter? Here’s what you need to know:

What does NAICS stand for?

NAICS stands for North American Industry Classification System. The codes used within this system were co-developed and maintained by a cooperation between Canada, Mexico, and the United States as part of the North American Free Trade Agreement (NAFTA).

What is a NAICS code?

Created to work within NAFTA, NAICS (which is pronounced “nakes”) codes identify the primary income-earning activity of a business, and the same codes are used within Canada, the United States, and Mexico.

Each six-digit code is used to identify the primary type of work a business performs. The entire system is built to be comprehensive, covering pretty much any business activity under the sun. These codes use a hierarchical structure with the highest level (the first two digits) identifying one of 20 sectors, and the lower levels further establishing the primary business activity. 

The NAICS code system was built to aid in the compilation of production statistics. These codes were created as a cooperative effort among Statistics Canada, the United States Economic Classification Policy Committee, and Mexico’s Instituto Nacional de Estadistica y Geografia (INEGI). And while there might be some slight differences, they generally cover comparable sectors, subsectors, and industry groups between the three countries.

A NAICS number can be used to search for things like industry and trade statistics, competitor information, and financial details within different business activities. The statistics are compiled by each of the different government agencies independently. However, each country uses the same identifying codes for comparable industries to make the overall statistical information more accessible.

While NAICS codes can also be used to classify companies, it’s important to point out that they were not created with large, complex companies in mind. This means large business establishments that have more than one primary earning activity could be misrepresented when identified by only a single NAICS code. 

It should be noted that NAICS codes are not the same as Standard Industrial Classification (SIC) codes. While both are used to identify a company’s primary business, SIC codes vary from country-to-country—the United States and Canada each maintain a separate set of codes. SIC codes are also up to four digits, whereas NAIC codes use six.

How to read a NAICS code 

A NAICS code is simply a series of six digits that identify the primary income-earning activity of a business. Each digit (or pair of digits) points to a specific set of information, which is used as business classification according to the following rules:

  • The first two digits indicate the sector
  • The third digit indicates the subsector
  • The fourth digit indicates the industry group
  • The fifth digit indicates the industry 
  • The sixth digit is used to designate a national industry (where applicable)

For example, the following codes share the same sector, subsector, and industry group, but they deviate from the industry number:

  • 511110 = newspaper publisher
  • 511130 = book publisher

The following two codes share the same sector as the above codes but are within different subsectors and industry groups:

  • 512110 = Motion picture and video production
  • 512120 = Motion picture and video distribution

Why do I need a NAICS code?

In Canada, NAICS codes are primarily used by statistical agencies to gather data and information, but it plays a role come tax time.

Unlike in the United States, where NAICS codes provide tax incentives, here the Canada Revenue Agency (CRA) uses these industry codes to compare similar businesses in the same industry. The CRA is looking for deviations and anomalies from the industry standard, and where they exist, they often follow up with a review or audit to find out why. 

How do businesses use NAICS codes?

Determining the NAICS code for your business can help when it comes to researching competitor companies by industry, such as when you’re compiling a market analysis.

The primary advantage in Canada comes to play in competitive research. But you’ll want to make sure that your NAICS code is correct so that you don’t accidentally get audited by the CRA because your business shows a discrepancy!

How do I get a NAICS code?

NAICS codes are not like business numbers. If you run a business, your activity already falls within a predetermined code. It’s simply up to you to self-identify what your primary (and secondary, where applicable) income-producing line of business is, and find the code that matches it. Even if you’re a sole proprietor, it’s important to know what your NAICS code is.

Codes are updated every five years and were last updated in 2017. You can search all the codes available on the NAICS website

Getting started 

Your NAICS code doesn’t determine your business activities, the income-earning work you do determines your code. But finding the code that fits your business or the closest matching industry can go a long way in identifying across industry standards, and determining your short- and long-term goals.

If you’re just starting out, taking a look at the statistics within the industry you want to operate in can help you figure out what you can expect. And when it’s time to register your business and make it official, Ownr can help!

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