It’s common for people to confuse startups and small businesses, sometimes even using the two terms interchangeably. However, these two forms of businesses have different structures, goals, and approaches to doing business. To help create a more clear distinction, we’ve outlined the main differences between the two below.
Overview
Startups and small businesses have very different approaches to business. To get a basic understanding of how the two businesses differ, we’ve outlined a quick definition of the two forms of business:
Startups
Some of the most well-known companies on the market began as startups. Facebook, Amazon, Apple, Netflix, Google— even companies like WeWork, Peloton, and Beyond Meat are all considered to be startups. Forbes Magazine defines startups as “young companies founded to develop a unique product or service, bring it to market and make it irresistible and irreplaceable for customers.” Startups are all about innovation and the creation of something entirely new, and founders believe their product or service is in high demand, and therefore have a lot of potential to disrupt the market.
A startup is defined mostly by its desire to quickly grow, and they constantly experiment with different models to determine what works best for them on their journey to a successful future. Most startups intend to expand at a rapid rate, evolving into something much larger and more profitable in a short period of time.
Small Businesses
As you can probably guess, a small business is commonly defined by its size. According to the Small Business Association (SBA), defining a small business can be done “either in terms of the average number of employees over the past 12 months, or average annual receipts over the past three years.” Most manufacturing companies with 500 employees or fewer, and most non-manufacturing businesses with average annual receipts under $7.5 million, will qualify as a small business, though the SBA makes some exceptions by industry.
A small business can be a privately held company, partnership, or sole proprietorship. Unlike startups, small businesses are not looking to dominate their market. They are independently owned and operated, often selling locally, and their main focus is to maintain a stable income. Because of this, small businesses can often be more sustainable in the long run due to having much less risk of failure.
Breaking Down the Difference
When distinguishing between small businesses and startups, there are ten main noticeable differences:
1. Business Model
Startups typically have a business model that seeks to break against the status quo. The innovation of their business models are meant to disrupt their market and introduce something entirely new. Small businesses, on the other hand, tend to take a more traditional approach to their business model. Instead of trying to disrupt their market, they strive to cater directly to it, providing products and services to a specific local consumer base.
2. Size
While there’s no size requirement to be labeled as a small business or a startup, startups do tend to be smaller in terms of team size. Since their business is typically focused on developing new technologies or creating innovative products, they often require a small, but highly skilled team. Small businesses typically can have a larger team of employees working for them.
3. Growth
Since startups are often focused on developing a product or service that scales quickly, they have a much higher growth potential. Small businesses have a limited growth potential since they are often focused on a specific local market.
4. Legal Structure
The legal structure of startups and small businesses can differ depending on the products or services they are providing. Small businesses are often structured as sole proprietorships or partnerships, whereas startups often structure themselves as LLCs or corporations in an attempt to attract funding and provide liability protection.
5. Taxes
Because of their differences in legal structure, startups and small businesses can also differ in the taxes they have to pay. Additionally, startups may be eligible for tax incentives or credits that encourage their growth and development. Because of this, small businesses may have a simpler tax structure.
6. Funding
Another key difference between startups and small businesses is the way they get their funding. Small businesses are typically funded by the owner’s personal savings or through loans. Startups require much more capital to fund their development, so they often seek funding from sources such as venture capitalists, angel investors, and other large funding sources.
7. Innovation
Innovation is a key aspect to any startup, since the products and services they introduce into the market are meant to be new and world-changing. A small business tends to be more limited when it comes to innovation, since they usually work within a specific, local market.
8. Risk
Due to their desire for innovation and disrupting the market, startups are usually more willing to take risks with their business. Small businesses tend to be more weary of taking risks, commonly opting to focus on more stable products or services.
9. Time to profitability
Small businesses are usually quicker to reach profitability. Since startups are focused on developing something completely new, their products can take longer to market and scale. Small businesses will typically become profitable sooner because they are working with pre-established products or services that can generate revenue quickly.
10. Exit Strategy
Exit strategies can be an important difference between startups and small businesses. The business plan of a startup typically has the end goal of selling the company for a large profit or to going public through an IPO. Small businesses owners are often are more focused on building a sustainable business that can be sold for a smaller profit or passed down to future generations.
Which is better?
Should you start a small business or a startup? Neither is necessarily better than the other. It all depends on your goals for the business. If you have an innovative idea with a disruptive business model and the potential for rapid growth, then a startup is likely the best choice for you. If your business is more traditional and you find yourself focusing on a specific, local market, then you should consider creating a small business instead.
In Conclusion
While startups are looking to quickly expand, small businesses are focused on maintaining a constant and stable revenue stream. As it grows, a startup may eventually go on to become a publicly traded company, whereas a small business will remain privately held, sometimes being passed down through families for generations. Small businesses are all about stability. Startups are all about revolutionizing the market. Both have the opportunity to become successful businesses when operated correctly.
No matter what kind of business model works best for you, Grasshopper can help make sure your finances are in check. With both Small Business and Startup offerings, Grasshopper Bank understands what each business model needs from the vast experience of its teams. Apply for a checking account in as little as 5 minutes today.
By Michaela Lenahan in Small BusinessStartups
