Differences Between a Startup vs. Small Business

startup vs small business
Contents hide
1 What Is a Startup?
2 What Is a Small Business?
3 Differences Between a Startup and Small Business
4 Examples of Startups vs. Small Businesses
5 In-Summary: Startups vs. Small Businesses
6 Opening a Startup or Small Business and Exploring Funding? Check Out These Resources

Last Updated September 13, 2024

When starting your own company, one question you might be wondering is whether your new endeavor will be considered a startup or a small business. While startups and small businesses have several similarities, there are also key differences that distinguish them from each other. By understanding what constitutes a startup or small business, you can plan accordingly as you start and grow your own company.

What Is a Startup?

Companies that are in their early stages with high upfront costs and limited revenue, which often requires founders to seek outside funding, can be considered startups. In many cases, it will be several years before a startup is able to turn a profit. This is partly because the company’s business model may not yet be fully developed and will likely be subject to change. Outside funding is crucial to startups, which are heavily concentrated in the tech industry.

Generally speaking, startups are often considered to have a higher risk of failure than other types of businesses due to these factors. Because startups have fewer employees than established businesses, workers may be required to take on a broader range of responsibilities. The workplace is also usually more flexible in terms of hours, the adaptability of its practices and procedures, its ability to offer remote work, and so on.

Startups seek rapid growth and will expand and change their operating model as they gain customers and become profitable. During this process, they are accountable to their investors, who gain equity in the business in exchange for their funding.

What Is a Small Business?

Small businesses make up 99.9% of all businesses in the United States. These are generally defined as businesses with fewer than 500 employees that are independently operated and not nationally dominant.

Small businesses typically serve a smaller geographic area or, for online businesses, a relatively small number of clients. While small business KPIs are similar to those of larger businesses, their revenue and growth goals are typically smaller because of the company’s more limited operational structure.

While small businesses may wish to expand and grow their operations over time, they will typically do so at a slower pace and smaller scale. The operating model and overall vision for the company is less likely to undergo drastic changes. Owners have total control over the direction of their business.

Differences Between a Startup and Small Business

Here’s a closer look at the startup vs. small business breakdown. These are some of the main areas where startups and small businesses differ.

The Vision of the Company

Startups typically want to disrupt their market or industry. They ultimately want to achieve rapid growth so they can become the dominant force in their particular niche. Currently, startups are often based in the tech industry or feature a heavy tech focus in an effort to disrupt an existing market.

Small businesses, on the other hand, aren’t concerned with market domination. Instead, the vision of a small business is to serve the local community and generate consistent cash flow. The goal is consistency and stability, making regular budget analysis an important part of their back-end operations.

Business Model

Startups emphasize fast growth for their business model. Rather than achieving profitability during their first years in business, they instead rely on external investors to fund their operations. They strive to create rapid growth that provides quick returns. Because of this, outside investors often have heavier involvement in company decision-making. The organization starts relatively small, with team members taking on various roles, but the number of team members expands in line with sales growth.

Small businesses are usually more independent, led by a single proprietor or a small set of partners. These individuals oversee the direction of the business and hire additional employees as needed to run their day-to-day operations. The size of the business remains relatively steady since small businesses focus on consistency rather than rapid growth.

Legal Structure

Due to their growth plans, startups usually incorporate as a C-Corp. Legally, C-Corps are separate entities from the founders. They are required to pay corporate taxes, issue annual reports, and appoint a board of directors. Incorporation protects startup founders from personal financial liability while also enabling them to leverage funding from outside investors.

Small businesses may use a variety of legal structures based on their size and business model. Sole proprietorships are common for freelancers or other solo business owners. Other small businesses (particularly partnerships) will form an LLC or S-Corp. These forms of incorporation protect the business owners from their company’s debts and legal obligations but are less investor-friendly. For small businesses, this isn’t a concern since they aren’t seeking investors in the first place.

Reliance on Funding

Startups tend to be heavily reliant on outside investors, particularly in the form of venture capital. Founders will often pitch directly to investors and hold multiple rounds of funding to finance their initial operations and growth. These investors take on financial risk in return for equity in the company. Startup founders don’t need to repay these investments but give up equity and total control over their business.

Traditional lending usually isn’t attainable for startups due to a lack of revenue, business credit, or hard assets. Instead, alternative lending is quite popular. Startup owners often have to get creative with funding solutions to grow their business.

Small business founders commonly fund their businesses using personal savings, alternative financing, or traditional funding options such as bank loans or a business credit account. Typically, small businesses have a better chance of qualifying for these traditional bank loans than small businesses, though alternative financing solutions are still very much relied upon.

Regardless of how it’s obtained, funding is a common challenge for small businesses and startups alike.

Marketing Tactics

Startups are often very aggressive in their marketing strategy since they want to disrupt an existing market (or create a new one) and increase their market share quickly. In addition to social media and traditional ad buys, startups will often focus heavily on content marketing and earned media, such as by using press releases to gain journalistic coverage. This marketing is often conducted on a national scale.

Small businesses tend to have a smaller marketing budget and focus their marketing efforts on their geographic area. In addition to local media buys and maintaining a social media presence, small businesses often sponsor local events or organizations to build brand awareness in their community. Word-of-mouth recommendations are often a major driver for small businesses.

Size and Scalability

Startups may begin with relatively few employees, but they are designed to scale rapidly. As the startup grows its operations, it will aggressively seek to increase its number of employees. Depending on the growth trajectory of the startup, it may eclipse the 500-employee threshold for a “small business” after just a few years.

Small businesses, on the other hand, are designed to remain mostly consistent in size. While some scaling of their operations is likely to occur over time, it will occur at a much slower pace. New hires are often only made when absolutely necessary to help keep operating costs low and maintain a simplified structure.

Exit Plan

Startup founders often begin their business with an exit plan—a goal to sell their company when it achieves a certain level of growth or profitability. The founders aim to enrich themselves by selling the company, merging with another company, or going public and selling shares in the company.

Small business founders typically don’t have an exit plan. They usually want to continue operating the company themselves to generate a continuous source of income rather than going public or selling to another company.

Examples of Startups vs. Small Businesses

While they may have different operating models and business goals, many of today’s largest companies began as either a startup or small business.

On the startup side, it’s easy to see examples of startups that grew into massive, industry-dominating companies. Google began as a startup in the 1990s when its founders wanted to build a better search engine. YouTube began as a startup with the focus of easily sharing videos online. Tech giants Amazon and Apple both started in garages. These companies underwent rapid growth to become dominant players in their fields.

Several small businesses have also completed the transformation into larger companies. For example, Ben & Jerry’s began as a single ice cream parlor in Burlington, Vermont. However, after a few years, they began producing their own pints of ice cream for mass market distribution and have now become one of the country’s biggest ice cream brands.

Regardless of whether a company begins life as a startup or small business, founders with a strong vision and sound financial management practices can turn their company into something much bigger than its humble origins.

In-Summary: Startups vs. Small Businesses

By breaking down the differences between entrepreneurship vs. small business, you can have a better idea of where your business idea fits—and which option best matches your goals, financial situation, and even your personality. By building your business model, funding, and vision around the type of company you plan to start, you can put yourself on the path to success.

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Opening a Startup or Small Business and Exploring Funding? Check Out These Resources