Codes and the IRS
As a business owner, you select a SIC code to report to the IRS. They will use it to determine if your business tax returns are comparable to other businesses in your industry. If your deductions are not reasonable when compared to other businesses in your industry by SIC code, you could be audited.
Codes and Risk
Certain codes are associated with industries that pose more risk than others. If you happen to choose one of these high-risk codes unnecessarily, you may be denied funding. If you understand how the system works, you can choose the best code the first time to avoid denials. Some examples of high-risk industries include casinos, pawn shops, liquor stores, automotive dealers, and restaurants. As with any business aspect, risk must be taken into consideration. Each industry code has its own inherent issues. Still, some industries are thought to be riskier than others by their very nature. An industry may be seen as risky if there is a high chance of injury, either to workers or customers. It also may be considered risky if there is a high chance of theft. This is true despite how the business is doing and its safety record or security system. Even if a business is doing great, it could be seen as risky simply due to the nature of the industry.
Risk and Funding
If your SIC code or NAICS code indicates your business is part of a risky industry, what does that mean? The main issue is that it could make it difficult to get funding for your business. There are several industries that lenders are hesitant to lend to. Some of these industries are subject to stricter underwriting guidelines. In these cases, the business must seek out other funding options. These options could include angel investors, venture capital, crowdfunding, building business credit, and more.