You want to use the Erase tool. The larger polygons will be the 'Input' and the smaller the 'Erase Feature'.
Scott
I have it in the toolbox of ArcCatalog: Analysis Tools>Overlay>Erase. If you don't have erase (if you have a limited license) you can Union (same location as Erase) the two feature classes and then delete the inner polygons by selecting them based on a unique identying field that existed in the inner polygons before the Union. You may need to create that unique field firstly and populate it with identifying data.
Scott