You’ve got a great idea that will appeal to the masses and have been thinking of owning your own business for a while. You’ve even done the industry research homework and started a business plan. Your family and friends may or may not see the vision but you do. In fact, you already have a name for your business and mapped out the expenses and costs. That’s just the beginning.
In terms of making decisions on your business structure, you’re stuck. There are so many avenues a small business owner can take from forming an LLC, sole proprietorship, or forming a small corporation. The opportunities are endless but the challenges are distinct. The stories of the college dropout that eventually started a multi-million dollar business are well known. However, that avenue is not for everyone.
When discussing the business formation, there is often confusion understanding the difference between a startup and a small business. These terms are used to describe business goals which are very different. Generally, a startup is focused on revenue and growth potential, while small businesses are concerned with profitability and long term stability. So, which one are you building? Let’s take a closer look at a startup vs. small business in detail.
What is a small business?
The U.S. Small Business Administration defines a small business in terms of “size standards” by industry. Every business type from agriculture to nonprofits is listed and defined. To check what your business falls under, you can access the SBA’s table of standards.
Interestingly, small businesses with fewer than 20 employees make up 89.6% of all businesses in the U.S. Furthermore, 23 million businesses have no employees. Other important qualifiers are defined by the SBA including:
- Headquartered in the U.S.
- Operates primarily in the U.S.
- For-profit business
- Independently owned & operated
- Minority company within a larger company
These qualifiers are primarily to protect and promote small businesses in the U. S. larger economy. Doing so provides assistance for small business owners to secure loans and contracts from the government, as well as access to general tools that allow them to compete with the big fish.
What is a startup?
The term “startup” brings up thoughts of wildly successful Facebook and Microsoft owners Mark Zuckerberg and Bill Gates. Both owners dropped out of college with a revolutionary idea that turned into a multimillion-dollar enterprise in a matter of a few short years. Still, technically it is a business created to solve a specific problem in which success is not guaranteed. In this type of business, the solution is not obvious so having a “startup” is a mindset and a willingness to forego stability for huge growth potential.
The term can also be used to define the beginning stages of a business. After a certain amount of years, a business ceases to be a startup and enters more advanced stages of growth and profitability. It’s the ability to grow that is a major determining factor.
Startup vs. small business
Now that we’ve defined the main characteristics of a startup and small business, let’s go into more detail about the differences between the two. Knowing your end goal will help you choose your direction. Depending on your risk tolerance, you may decide that neither avenue is the right fit for you. Whichever direction you choose, it’s best to be informed about the main differences between the two to make an informed decision.
Developing an idea from scratch is very challenging but is typical of a startup. That’s what makes the company unique and a possible high growth business. The innovation can be anything from new technology to an improved business model. Small businesses have plenty of blueprints to reference for success.
While technology is typically required to run a startup, it is not so for a small business. Many wildly successful startups use technology as their product or service that differentiates them from other businesses in their industry. If not, they utilize technology to help their business grow rapidly.
This is one of the most difficult aspects of creating a business. Small business owners generally rely on friends, family, bank loans, and investors. Many owners fund the business themselves, starting a business as self-sustainable and debt free. However, this is not always possible depending on how much of your personal savings you are willing to risk.
Although startups can be funded in the same way, they are usually funded by crowdfunding campaigns, investors, and venture capitalists. Since you are looking to achieve explosive growth in a startup, you will need additional funding and will experience increased pressure for a return on investment.
As a small business owner, you expect to generate revenue from the day you start. The amount of profit you bring in depends on how much you plan to pocket and how much you are looking to expand. In contrast, a startup may not make a profit for months or even years. The focus is to build a great product that is loved by the masses with a huge financial return.
Small businesses have fixed growth boundaries, intentionally limiting the business scale and hyper-focusing on a certain customer base. Startups place no limits on growth and attempt to be as big as possible. The idea is to be as disruptive as possible.
The business cycle
It’s no surprise that most businesses fail within the first 3 years. However, did you know that 92% of startups fail? The odds are much better for small businesses at 32%.
Every business should begin with the end in mind by defining an exit strategy. Having a solid idea about what you want to do with your business is part of the planning process. Small business owners may choose to pass on the business to their children or family members. Selling the company is usually not at the top of the list but is an option.
Startups, on the other hand, are looking for a significant outcome that brings the most profit. Selling the company to a larger business or an IPO is at the very top of the list of exit strategies that will generate the most profit.
What are your motives for developing a business?
Are you developing the next big idea? Are you improving on an existing business model? Are you looking for long term growth? Getting clarity around what it is you are looking to do in your business is crucial to determining whether you have a small business or startup. If your awesome idea is revolutionary and meant to solve a world problem, you may have a startup. Your ability to build a team around your great idea will be the key to your success and rapid growth.
However, if you are looking for a long term nest egg with restrictive growth, you have a small business. Can one turn into the other? While the answer is yes, it is a personal decision an owner makes or an external trigger brought on by the market or customer demand. Where do you see yourself in the next 5 years? This question can help you make a definitive decision on the direction you’d like to take your business.
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Are you ready or do you still have questions? Give us a call today to see how we can help.