Reading time: 5 minutes

One of the ways that people change their careers is by starting their own business. Starting a business allows you to work for yourself whilst growing an idea, product or service. In addition, it enables you to have equity in something that can increase over time. Most businesses start as a small business. However, you may hear the term startup being thrown around. Many people do not understand the difference between a small business and a startup. This article will explain each of these and the difference between them. 

What Is a Startup?

Usually, a startup is an idea or product that an entrepreneur develops into a scalable business model. A startup generally relies on a small team and is regularly associated with an idea relating to tech. The specific trait of a startup is that it revolves around a particular idea that is the make or break of the business. If the idea fails to take off, the startup can fail.

What Is a Small Business?

A small business is a type of business that aims to serve goods or services. Unlike a startup, they do not specifically revolve around a specific idea. Likewise, they are more flexible if you intend to change your business plan. Small businesses may have employees, and they generally adopt already established industries. 

What Are the Differences?

Innovation

The main difference between startups and small businesses is that startups usually have a point of difference through innovation. A startup will have innovated to create an idea or product that makes them stand out from the competition. This idea will usually be a solution to a pre-existing problem that many people face. On the other hand, a small business will usually enter a pre-existing market and try to take advantage of any competitive advantage they might have.

Scalability

A further difference between a startup and a small business is the scalability of each. You can generally scale a startup as it is an idea that you can take to a broader audience. A startup aims for rapid growth and endeavours to be the leader in its field. 

On the other hand, a small business usually has its scope pre-determined by labour or capital limits. Likewise, they generally follow the classic business growth cycle. This does not mean that small businesses cannot scale quickly. However, given its lack of innovation, it is usually more challenging for them to grow as quickly. 

Financing

Another difference between a startup and a small business is that the process for obtaining finance is entirely different. It is common for a startup to get seed funding from investors such as venture capitalists. This means that they are answerable to the investors and must usually have a unique idea or product that the investors believe in. 

Conversely, business owners usually fund small businesses from their own capital. They may also receive a loan from the bank to purchase any property, plant, or equipment needed in the business. Since there are usually no external investors in a small business, they are not answerable to anyone but themselves. Likewise, their only obligation is to service any debts they have. Consequently, this gives small business owners more control over their business.

End Goal

Finally, a startup and a small business will have different end goals. A startup may try to grow their business to a point where they can either publicly list or sell. This position allows the entrepreneur to cash up and try and create another idea. The idea of looking for a sale means that startups are not primarily concerned with whether they make profits but are more worried about revenue and finding customers. However, a small business owner usually wants to outlast a startup and build a business that can run for years. They may end up selling in the future, but their main goal is to create a profitable business. 

Key Takeaways

If you are starting a business, you need to decide its goals. These goals will determine whether you are running a startup or a small business. Startups are usually centred around a specific innovative idea that entrepreneur endeavours to scale to a global audience. This idea is the company itself. Likewise, if the idea fails, the startup fails as well. Startups will typically grow so that they can be sold or publicly traded. 

On the other hand, individuals with experience in a particular industry usually decide to start a small business. Generally, small businesses are not centred around a specific idea and are more flexible to adapt to different market conditions. Further, business owners aim to build a long-lasting business, wherein their end goal is not typically to sell or go public. 

For any legal assistance with starting your small business or startup, contact LegalVision’s business lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Do I have to classify my business as either a startup or small business?

There is no legal requirement to classify your business. Still, it may determine the culture within your business and the trajectory that your business is looking to move towards.

Do I have to sell or publicly list a startup business?

No, you can continue to grow your business if that is your goal. However, many startups are sold or publicly listed once they are large enough.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

The majority of our clients are LVConnect members. By becoming a member, you can stay ahead of legal issues while staying on top of costs. From just $119 per week, get all your contracts sorted, trade marks registered and questions answered by experienced business lawyers.

Learn more about LVConnect

Need Legal Help? Get a Free Fixed-Fee Quote

If you would like to receive a free fixed-fee quote or get in touch with our team, fill out the form below.

Our Awards

  • 2019 Top 25 Startups - LinkedIn
  • 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Winner – Australasian Lawyer
  • 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2021 Law Firm of the Year - Australasian Law Awards
  • 2020 Law Firm of the Year Finalist - Australasian Law Awards