4 Differences Between a Startup and a Small Business

Becoming an entrepreneur is an exciting journey filled with new ideas and opportunities. However, deciding between a small business and a startup can be challenging, but don’t worry–today, we’ll break down the key differences, guiding you to an informed decision as you begin your business journey.

Startup vs. Small business: A Quick Overview

While both startups and small businesses require hard work and dedication, their approaches to funding, risk, and scalability differ significantly, yet both require precise business structuring to ensure success; let’s explore the differences:  

What is a startup?  

A startup is a young company designed to introduce a new product, service, or business model with high growth potential. They focus on solving large-scale problems, often tech-driven and scalable, aiming for rapid expansion and market disruption.

What counts as a small business?

On the other hand, a small business is an independently owned and operated company that provides goods or services within an established market, aiming to generate consistent revenue while building strong customer relationships.  

Now that we have a general understanding of the basic definition, let’s explore the 4 key differences between startups vs small businesses. 

1. Goals and Vision

Startups:

Startup goals are all about big ideas and fast execution. Their goal is to bring a fresh, innovative solution to the market, often in hopes of being acquired by a larger company or becoming a dominant player in their industry. Their goals include:

• aiming to disrupt industries with new ideas;
• prioritising rapid expansion;
• pivoting strategies to find a scalable model; and 
• often viewing the company as temporary, planning for acquisition or Initial Public Offering (IPO).

Small businesses: 

They are designed to last. Their main goal is to build a stable company that provides consistent revenue and long-term value. Typically, small business goals include:

• establish a positive revenue stream;
• grow steadily over time;
• maintain long-term customer relationships; and
• create a strong presence within their community.

2. Funding Sources

Because startups aim for rapid growth, they often operate at a loss initially, reinvesting funds into scaling their business rather than focusing on immediate profitability. On the contrary, small businesses prioritise financial stability, and they often seek funding options that minimise debt and allow for sustainable growth.

Startups require significant capital to fuel their growth. Most rely on external investments from:

• Venture capitalists
• Angel investors
• Equity financing
• Crowdfunding

Small businesses usually rely on more traditional funding methods, such as:

• Personal savings
• Bank loans
• Asset-based lending
• Business partnerships

3. Business Model: Startup vs Small Business

Startup:

The business model for a startup is often unclear at the beginning. They may pivot several times before finding a strategy that works. Key traits include:

• focus on scalability and rapid expansion;
• experimentation with various revenue streams;
• often operating at a loss initially to capture market share; 
• prioritising innovation over immediate profitability; and 
• plan for an exit strategy, in case of being acquired by a larger company or going public.

Small business: 

Small businesses generally have a clear business model from the start, focusing on providing products or services to a defined customer base. Common features include:

• operating within a specific local or niche market;
• relying on direct sales, service fees, or commissions;
• prioritising profitability from the outset; 
• maintaining steady growth rather than rapid expansion; and
• build strong relationships, ensuring consistent revenue over time.

4. Risk and Stability

Startups are high-risk ventures with no guaranteed success. They aim for rapid growth but face challenges like uncertain market demand, reliance on investors, and pressure to scale quickly, leading to high failure rates.

Small businesses, while not without risks, are generally more stable. Their success depends on operating in established markets, managing costs effectively, maintaining steady operations, and building a loyal customer base, giving them a higher chance of long-term survival.

Why It Matters to Know the Difference 

By understanding the differences, entrepreneurs can make informed decisions. If you have an innovative idea and want to scale quickly, a startup may be the right path, but if you prefer stability and steady growth, a small business is likely a better fit.

In any case, both will have legal implications. Startups may require legal advice on intellectual property, investor agreements, or compliance with tech regulations. Small businesses, on the other hand, must choose the right business structure (sole trader, company, partnership, or trust) and consider business agreements and tax obligations.

Read about 3 Reasons why your Sydney startup needs a small business lawyer. 

Final Tips for Entrepreneurs

Finally, if you are still concerned about deciding between launching a startup or a small business. Here are some tips to help you out: 

• Define your goals: 
  Do you want to build something scalable or focus on long-term stability?

• Assess your risk tolerance: 
  Are you comfortable with uncertainty and rapid change?

• Explore funding options: 
  Do you have access to venture capital, or will you rely on personal savings?

• Protect your intellectual property: 
  From product development, logos, software, innovations and more, always prioritise protecting your assets, ideas and creations.

• Choose the best business structure: 
  Small businesses need to select a structure that aligns with their operations.

• Build a strong network: 
  Connect with mentors, investors, and industry experts for guidance.

Read about how building a business is like building a home.

No matter your path, we recommend stepping out of your comfort zone while carefully assessing potential outcomes. Stay focused on why you started your business and let that drive you through challenges.

Why Choose H+A Legal as Your Business Structuring Lawyer?

If you’re starting a high-growth startup or a long-term small business, having the right entrepreneurial strategy and legal support is essential. At H+A Legal, we help entrepreneurs navigate business structuring, contracts, and compliance. Our team provides tailored legal solutions to protect your business and support your growth from day one.

Let’s discuss your business vision and ensure you’re on the right path. Contact our team today!