Small Business versus Start-Up business: Which is a better choice?

By - King Stubb & Kasiva on October 27, 2022

As soon as an entrepreneur thinks of starting a business in any industry, the first step is to choose the structure of the organization. There are two ways by which one can begin his or her business journey. One can set up a small business or a start-up as a new business in the industry. With the increased interest in start-ups among individuals today, the phrase has risen dramatically. An entrepreneur may have a distinct perspective on start-ups versus small enterprises when they first launch their company.

Despite the many parallels between these two types of organisations, there are a few key differences that need to be understood before launching a start-up business in order to avoid costly blunders. Both start-ups and small businesses are gaining popularity in the legal field as well. Various start-up legal services are being operated by fresh law graduates who wish to grow as an entrepreneur. For a deeper grasp of the issues involved, it is crucial to understand the distinction between a start-up and a small business.

Table of Contents

Definition of small business and start-up business

  • What is a small business?

As per Indian law, any business is a small business if its paid-up capital is less than Rs. 2 crores and its annual turnover are not more than Rs. 20 crores. Small business is determined by the size of the business and low capital investment, sales, and revenue among other factors. These businesses are crucial for any nation’s economy. They are crucially important for industrial growth in the manufacturing and service sectors, lavish economic growth, a lot of potential employment, and a lot of exports. As a result, small business laws are unquestionably crucial and significant. A few examples of small businesses are home bakeries, women's clothing, paintings etc.

  • What is a start-up?

A start-up is a business that is in the early stages of development and offers a good/ product or service that is currently not available elsewhere in the market or that the founders believe they can deliver more affordably to challenge the existing businesses that provide the same good or service.

Further, the government of India recognises a company as a start-up if the company is not operative for more than 10 years and has an annual turnover of less than Rs. 100 crores [1]. Usually, start-ups are founded by one or two persons as a part of creating value in the market thereby giving higher demand to the consumers of their good or service. A few examples of Indian start-ups are Ola cabs, PayTM, Dream 11, Swiggy, and Razorpay.

Why is it important to differentiate between small businesses and start-ups?

It's crucial to consider whether one can opt for a start-up or a small business when planning how to carry out your new business idea. Why? You may establish the direction future of the business by making the distinction early in the process. Business owners can determine what needs to be done in order to make the business successful. Further, even though there are no significant distinctions between the both, identifying some key differences can help in the success of your business. The such difference will help in setting growth goals, investigating funding options, and building a business plan. Here are some key differences between small businesses and start-ups:

  1. Innovation- Start-ups are made to bring new features or improvements to an existing product to the market. They are prepared for rapid and faultless expansion to encourage investors and investments at various stages of development. Small businesses focus on enabling constant revenue by maintaining low costs, while simultaneously focusing on fast and desirable growth in diverse ways.
  2. Growth: After a few years of operation, start-ups are on the road to success. While small businesses develop quickly, they can only do so if they start to see success over time.
  3. Business Objective: In the case of small business owners, when they are ready to retire, they might sell the business or transfer it to a family member. The long-term objective of a small business is to continue operating while making a profit. Unlike start-ups, IPOs are not frequently a small business's exit plan choice. In contrast, start-up founders often adopt a distinct business model that involves market disruption, shared ownership with numerous investors for fundraising purposes, and an exit strategy that results in an IPO.
  4. Profit: A start-up needs time to develop and gain a large customer base that can use its product. If it is, the start-up thrives while small enterprises place a strong emphasis on generating income and profit from the very beginning of the company.
  5. Funding: Start-ups are frequently backed by venture capital firms, and in order to obtain funding, entrepreneurs must outline growth projections and demonstrate how the proposed investment will increase the start-up's value. Small enterprises, on the other hand, do not interact with large venture capitalists whose goal is to grow investment wealth without providing strong revenue estimates. As a result, banks and other lenders as well as small business loans account for a sizable portion of the funding.
  6. Level of Risk: Start-ups are riskier than small firms since creating a new product takes a lot of time and effort, whereas small enterprises don't seek out growth and innovation. They try their current strategy, and dealing with it is frequently difficult.
  7. Team and Management: A small business typically hires as many employees as necessary to operate within the predetermined growth constraints. Since the goal of a company is to grow as quickly as possible, the manager of that start-up should acquire leadership and management skills from the very beginning. You will collaborate with more employees, investors, directors, and other interested parties as the business grow.
  8. Exit Strategy: Small businesses often make it a family business or sell it for profit. However, a start-up usually moves towards the next stage via a large deal on sale or IPO.

Conclusion

Start-ups and Small businesses are an initial step for any business owner. Both of the ways to start a business can be favourable if chosen wisely. There are various factors as mentioned above that can guide your decision to choose what type of business you own. For instance, a business owner has to first identify the objective of the business based on which if they wish to keep the business in the family small business is the right choice to start with.

However, if they want to innovate and sell the business for profit, Start-up is the right choice. Another important factor that needs to be considered is the funding for the business. These small decisions can decide the success and growth of a business in the long run. Failure to recognize the difference between a small business and a start-up can lead to losses or even the closure of the business. Therefore, it is advised to identify the type of business you own and take decisions accordingly.  

FAQs

How do you qualify as a start-up in India? 

There are certain criteria which need to be fulfilled to qualify as a start-up in India like the company should not be operative for more than 10 years, annual turnover be less than Rs. 100 crores, etc.

What type of company is a start-up? 

Any company that is incorporated as a Private Limited Company, a Registered Partnership Firm or a Limited Liability Partnership can call itself a start-up among other fulfilled conditions.

What are the main differences between start-ups and traditional businesses?

In traditional business, a company's postulates are enormous and are approved to make significant gains and support. While a start-up may be described as a progeny that is raised and introduced to the market by a creative and aspirational mind to make a name for oneself as an entrepreneur.

[1] https://www.startupindia.gov.in/content/sih/en/startup-scheme.html


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