Entrepreneurship and small businesses might seem like interchangeable terms, but they’re really not. There are some differences which make these two terms separate when it comes to details, and this is exactly what we will be dealing with today: entrepreneurship vs small business; what are the key differences and how can you classify and categories yours. The question being: are you a small business owner or an entrepreneur with the potential to go for a billion-dollar evaluation and the blessings of high-rep investors? And is your trade classified as an entrepreneurship or a small business? Let’s get into it.
One might argue that at some point in their journey, an entrepreneur will be considered a small business owner. Because, unless you have the cure for cancer and you’re doing it out dollar for a vial, every business starts at a small business, every billion-dollar company, at one stage, was just a garage or a small shop. So, while this may be the pragmatic truth, that at a certain stage, the difference between entrepreneurship and small business ownership fades away, that is still not the case. For legal reasons, the two are still kept apart in terms of definition, and that legal reason is, of course, taxation.
Most of the time, the difference boils down to this legal reason: incorporation, which makes it easier for states to collect tax out of. For instance, if you are a small business owner, or even a side business hustler, its very difficult for the IRS to narrow in on the business you’re running and tax it. On the other hand, if you’re incorporated and have a proper setup, tax numbers and the whole shebang, the IRS can easily spot you, your earnings and then come in for some tax money.
So, the legal difference stands for itself: entrepreneurships are more likely to be registered and incorporated and are included in the GDP of a country or a state and thus can be taxed. You selling your aunt’s recipe of buttered pancakes out of the back of a truck is not an incorporated business, rather a small business, which does not have any officiated address and tax number. So, yes, there is a difference between the two, and we will begin by explaining both the concepts to you.
Entrepreneurship Vs Small Business
As explained beforehand, while entrepreneurs require incorporation and other registrations to get themselves recognized as such, small businesses have no such need, considering their status as a small business, which will only pursue incorporation on the off chance that it blows up and progresses into a much larger company. Otherwise, save for a few other differences, it does get hard to differentiate between the two, especially if the small business is in the tech sector and not elsewhere. However, let’s first understand both of them as separate entities.
What is Entrepreneurship?
An entrepreneurship is a business, or a start-up that focuses on a new product in a market, or a new idea, and seeks to use it as a product or service to introduce in the society and carve out a market for it. As it is a new product or service, there is a possibility of facing resistance before success, as lifestyle changes and product changes are something not widely acceptable and easily acceptable, considering people and the market, of all, resists change. Moreover, while an entrepreneurship focusses on new products, it also suffers from (usually) a lack of operating capital, which requires it to go on extensive funding drives, or offer an IPO to gather investors.
Also Read: How to Sell a Business Idea to A Big Company?
With the advent of the internet and newer funding platforms, like GoFundMe and Kickstarter, these crowdfunding platforms have all but solved the woes of a typical start up or entrepreneurship; if the idea is well-received by the market, and has a growth potential, funding will not be any problem. Even seemingly outrageous ideas can gather millions, so entrepreneurship is more and more becoming a good and feasible option for people with great ideas and revolutionary ideas.
What is a Small Business?
A small business, as denoted by the adjective in its name, is a business that operates with far less margin and capacity as you would expect from a business of their stature. It could be mistaken for a small shop or a home-run establishment, and that is actually what most small business owners project themselves as. However, a small business is characterized by a small workforce, a small operating capital and as such, a small profit margin and a small location.
A small business may or may not be in a new niche of the market; or may or may not introduce a new product or service. The quintessential small business is a business working in an already established market with a limited customer base, like a food truck, a small family-owned and operated grocery store or a mom-and-pop souvenir shop. These are images that come to mind when one thinks of a small business, and this is exactly what a small business is.
Entrepreneurship vs Small Business/Differences
As explained beforehand, one of the primary differences is the fact that an entrepreneurship follows a specific guideline, be it a tech start-up or STEM-related entrepreneurship, they all follow a specific code of conduct and are incorporated, which means that they are registered to practice business by the government and as such, will pay taxes and will eligible for corporate bailouts and tax returns.
On the other hand, small businesses, like the ones described in the salient description beforehand, don’t actually have that kind of business volume to go for incorporation, so they just forgot it. Plus, since they aren’t incorporated and the government essentially does not know that they are conducting business, which keeps them out of the tax loop and therefore does not make them eligible for tax bailouts or tax breaks and returns.
The second major difference between the two is the market or niche they operate in. For entrepreneurships to be defined as such, their product or service needs to be ground-breaking in the sense that it is a completely new product or service. In other words, their product should be something new and something that could create an entire market or a niche out of it.
On the other side of the spectrum, small businesses are in already established markets and niches, one where big players also exist and serve as the direction where the small businesses and the market itself will go. So, to paraphrase, an entrepreneurship needs to be in a new market niche with a new product or service, whereas a small business is usually a small player in a market with big players and other establishments already working.
The third and final difference is related to capital. Entrepreneurships routinely seek out investors and post on crowdfunding platforms to keep the interest in their idea alive, so they are more likely to advertise and do the necessary to secure funding. Whereas for small businesses, capital is applied in the initial stages and the small business from thereon only runs on operating profits and others from the running expenditure, so fundraising for them is a one-time process, usually funded by a single individual in the early stages just to establish the business.
The Key Takeaways
Yes, the two terms might seem interchangeable and kind of similar, but the fact is that these two are entirely different and separate entities and require separate classification as such. For one, the key difference is in the business size and the market reach. Small businesses are, well, small, whereas an entrepreneurship might raise millions just to get to the initial stages of business. Then comes the market where the two operate: a small business could be a taco stand in front of a McDonalds, whereas an entrepreneurship will always be a new product in an entirely new market or niche.
