What is a NAICS Code & Why Does Your LLC Need One?

Picture this: You’ve already formed an LLC in your chosen state, and it’s ready to serve customers or clients. One day, you get asked for a NAICS (North American Industry Classification System) code. You wonder what this code is and how you can get one.

A NAICS code is a six-digit classification code assigned to businesses in specific industries. It plays a crucial role in how federal agencies and other organizations categorize your LLC and engage with it. So, whether you’re starting an LLC in Nevada or another state, you must choose the correct NAICS code for your new business.

Today, we discuss this business classification code and why your LLC needs it.

Key Takeaways

• NAICS codes help statistical agencies organize and analyze economic data more effectively.
• These codes contain six digits arranged in a hierarchical order. For example, two-digit NAICS codes describe a specific sector.
• Your LLC needs a NAICS code for statistical analysis, government contracts, and tax incentives.
• NAICS codes are self-assigned. When choosing one for your LLC, make sure it best describes the venture’s primary business activity.
• You can update your LLC’s current code as its operations change. Then, use that new code whenever you’re asked for it.

How Do NAICS Codes Work?

NAICS codes are unique identifiers under the North American Industry Classification System. They were created to keep data related to the U.S. economy well-organized and thoroughly examined.

With NAICS codes, federal agencies can collect and examine data more effectively. The U.S., Canada, and Mexico developed this system as a standardized way to classify industries. Furthermore, NAICS makes business statistics comparable across these countries. It’s helpful for conducting statistical analysis, obtaining government contracts, and getting tax incentives.

This system replaced the older Standard Industrial Classification (SIC) system in 1997 and has undergone several updates to stay relevant. It was last updated in 2022, with changes to certain industries that show how the economy has evolved over time.

What Do NAICS Codes Look Like?

NAICS codes are six-digit numbers that use a hierarchical structure (grouping one item under a specific category). Here’s how these codes look like.

With a hierarchical structure, NAICS codes classify industries correctly and systematically. Overall, they ensure that accurate economic analysis is conducted.

Note: Some NAICS codes may have more than six digits. They’re assigned to identify more specific industries, leading to more detailed classifications.

Common Examples of Six-Digit NAICS Codes

If you’re looking for a six-digit NAICS code, here are some examples to check.

Why Does Your LLC Need a NAICS Code?

Your LLC needs a NAICS code for the following reasons.

Statistical Analysis

With NAICS codes, federal statistical agencies classify businesses to gather, examine, and publish their data. The system ensures that these sources collect and circulate accurate economic data. After all, it’s needed to analyze industry performance and trends.

If your LLC knows its NAICS code, it can identify the sector they’re under and make data-driven decisions.

Government Contracts

To secure federal contracts, an LLC must use its NAICS code to categorize its bids under its industry. In turn, government agencies can assess the company’s bids and compare them to those of other businesses. This makes procurement fair and transparent.

On the corporate level, LLCs with the right NAICS code can obtain government contracts. It starts with understanding and determining their primary business activities. Ultimately, LLCs are more likely to obtain profitable federal contracts and expand their operations.

Tax Credits

Finally, your LLC needs a NAICS code to obtain applicable tax credits. Tax authorities use these codes to assess these incentives and determine whether your business qualifies for them.

The more accurate your LLC’s NAICS code is, the higher its chances of getting tax incentives becomes. Hence, your venture’s specific code should match its primary business activities. It’s especially important if you want to reduce your LLC’s tax burden and keep the business profitable.

Related Resource: Find out how tax credits can give you significant savings.

How to Choose Your LLC’s NAICS Code

Sometimes, federal agencies and independent organizations assign unique identifiers to businesses. But when it comes to NAICS codes, your LLC must choose one that best describes its primary activity. The business then provides its chosen code when required.

To select the correct NAICS code for your LLC, follow these helpful steps

Identify Your LLC’s Primary Business Activity

Again, your LLC’s NAICS code must describe how it operates. The term “primary business activity” refers to what earns your LLC its revenue.

Suppose you’ve formed a consulting business that also sells online courses. If your company earns more from offering consulting services, its NAICS code should classify the business as a consulting company.

Look Up NAICS Codes

Once you’ve identified your LLC’s primary business activity, you can find the right NAICS code for it.

The NAICS Association offers several tools to help you choose your LLC’s specific code, including:

• The Powerful Search Tool – When you enter a keyword related to your business in this tool, you’ll get a list of primary business activities with that keyword and their corresponding codes.
• NAICS Codes and Titles – This page contains all categories of businesses and their corresponding NAICS codes. Choose the appropriate category for your LLC and check each of the subcategories to find its corresponding code.

When researching codes, pay attention to the detailed descriptions and exclusions. This can keep you from choosing the wrong NAICS code.

Bonus Tip

Learn how to avoid classifying your business as a hobby from NCH’s Small Business Tax Tip series.

When are NAICS Codes Updated?

As the economy in North American countries changes, NAICS codes need to be updated. They’re reviewed every five years for relevancy and freshness, with the most recent review conducted in 2022. By 2027, the NAICS system will be reviewed again. The U.S. Census Bureau takes suggestions from the public, including new codes for emerging sectors, to revise NAICS codes.

Some notable additions to the current set of NAICS codes include:

• Fertilizer manufacturing
• Vendors of tobacco, electronic cigarettes, and other smoking supplies
• Streaming services
• Other media networks and content providers

If your LLC operates in a newly established industry, you may need to choose a NAICS code closest to it until new classifications are created. Document why you’ve selected the code to justify it to auditors or regulators if questioned.

When to Change Your LLC’s NAICS Code

If your LLC changes its primary business activity, it must update its NAICS code. Scenarios such as operating with a new business model require NAICS code changes.

Once you’ve chosen a new code, you can use it for future tax filings and updates to your business bank account, government registrations, and insurance policies. By providing the correct code, you avoid confusing your partners and fulfill the requirements applicable to your LLC.

Frequently Asked Questions

What happens if I choose the wrong NAICS code for my LLC?

If you choose the wrong NAICS code for your LLC, you may face compliance issues or get fewer benefits and opportunities. Make sure to correct the error by updating your documentation and notifying relevant organizations about the problem.

Can my LLC have more than one NAICS code?

Yes, your LLC can have more than one NAICS code. However, only a few agencies assign multiple NAICS codes to businesses. These agencies should share more information about their policies related to multiple NAICS codes with you.

But if you don’t want to create confusion, consider choosing just one code for your LLC.

Do I need to register my NAICS code with the government?

No, you don’t need to register your NAICS code with the government. You just use it when applying for government contracts, tax incentives, or completing other applications that need the code. NAICS codes serve as a classification tool rather than a registered designation for your LLC.

How often should I review my LLC’s NAICS code?

You should review your LLC’s NAICS code periodically. At the very least, it must be changed once your business activities change.

The NAICS system is updated every five years, so check for new codes that best describe your business during this period. Consistency is important, so only change your code when truly necessary.

Do single-member LLCs need NAICS codes?

Yes, even single-member LLCs need NAICS codes. Their chosen codes must reflect their main business activities.

If a single-member LLC sells clothes, it should choose the appropriate NAICS code under the Electronic Shopping and Mail-Order Houses category. The code 458110 is usually assigned to clothing retailers.

Can my NAICS code affect my business insurance rates?

Yes, your NAICS code can affect your business insurance rates.

There are insurers who use NAICS codes to assess an LLC’s risk level and determine its total premium. Many banks and lenders do the same as well, potentially reducing your chances of getting financing or funding. It’s why selecting the correct NAICS code is important.

How do I choose a NAICS code if my LLC offers different services?

In this case, start by listing all of your LLC’s services. Then, choose the one that drives your revenue the most 

Once you’ve identified your LLC’s primary business activity, use the NAICS Association’s Powerful Search Tool. Enter keywords related to that service into the tool and choose the appropriate code from the descriptions listed.

What’s the difference between NAICS & SIC codes?

SIC codes are four-digit identifiers used to categorize businesses by their primary activities. Their system uses inconsistent logic, which is why NAICS codes are widely used instead of SIC codes.

Also, NAICS is more detailed with six-digit codes. It’s updated every five years to reflect economic developments, so your LLC should use NAICS.

Does a NAICS code permanently group my LLC into one type of business activity?

No, a NAICS code doesn’t permanently group your LLC into one type of business activity. Your code should describe what the business does, but it can be updated if your business model changes or another service drives your revenue.

Do note that changing NAICS codes without changing your LLC’s operations isn’t advisable.

Can my NAICS code impact my eligibility for small business programs & certifications?

Yes, your NAICS code can impact your eligibility for small business programs and certifications.

For instance, the U.S. Small Business Administration (SBA) uses NAICS codes for “size standards.” These requirements define what’s considered a small business in each industry (based on business size and employee count). Your chosen code can determine whether your LLC qualifies for certain programs or certifications.

Expert Tips From NCH

1. 1. Consider the SBA’s size standards when choosing a NAICS code. The agency assigns one to each specific code.
   2. Keep documents that explain why you selected your NAICS code. Auditors and lenders can reference your documentation if they need clarification about your LLC’s classification.
   3. Think about your venture’s future plans. You can change your LLC’s current NAICS code once its operations or business model change.
   4. Consult a tax advisor to identify the tax incentives available to your business. They can help you understand these benefits and apply for them.
   5. Check whether your state requires you to provide NAICS codes for compliance. Some states may have additional business classification requirements or use NAICS codes for state tax purposes.

Choose the Right NAICS Code for Your LLC

Beyond compliance, giving your LLC the correct NAICS code can help it secure government contracts, tax incentives, or even adequate funding. Look at your company’s set of activities before you make your choice; otherwise, you may face significant problems.

Are you planning to launch an LLC in your chosen state? Let NCH register your business for you.

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DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.