As an entrepreneur who’s looking to turn their ideas into actual business ventures, you need a lot more beyond motivation and dedication to the project. Knowledge of the industry and proper setup is essential. You might’ve heard words like startups, small businesses, and even microbusinesses thrown around.
While they might seem like synonyms, they are quite different, and identifying your business as one instead of the other could afford you certain opportunities while depriving you of others. What are the differences between the three terms, and which label should you adopt for your upcoming business venture?
Setting the Record Straight on Startups
Startups are business ventures that focus on a single goal, whether it’s selling services—software or in-person—or selling a physical or digital product. What makes startups unique is that they’re in the early stages of business and don’t have a fully-developed business model. They often have general expectations of the future rather than solid predictions.
Small Business Definition
A small business is a privately-owned business operation with few employees and garners revenue below medium-sized businesses and corporations. The definition of a small business varies by its location’s laws and regulations. In the U.S., there’s no clear-cut way to differentiate a small from a medium-sized business. However, a small business is generally a business with less than 50 employees, while medium-sized businesses can have anywhere from 50 to 250 employees.
What Makes a Business a Microbusiness?
Microbusinesses, sometimes referred to as micro-enterprises, are businesses that employ fewer than 10 workers at a time. The difference between microbusinesses and small businesses is the number of workers and the average annual revenue compared to the country’s economy.
Alternatively, the differences between microbusinesses and startups are capital and future plans. Microbusinesses often have sufficient funding—whether from third-party investors or revenue—and have no immediate plans of growing or upscaling operations.
When Does Business Size Matter?
Determining the current size of your business does more than categorizing you among your peers and competitors. Knowing your business’s size allows you to figure out the logistics regarding business plans, marketing plans, revenue, insurance, tax, licensing, and the ability to apply for and receive grants and funding. However, some aspects are more pressing than others, such as:
- Insurance Needs and Requirements– Most states require employers to have workers’ compensation insurance. However, the laws differ regarding the type of employment and the number of employees you have. Some states don’t require it when you have few workers or businesses where the only workers are you and the business’s co-owner. Aside from legality, the number of employees you have and the extent of your liability exposure determine the cost of various business insurance policies. So, before scaling up, make sure to research business insurance costs for startups and small businesses and plan financially.
- Taxation– Most small businesses, microbusinesses, and startups pay taxes as pass-through entities. Their tax rates are set according to personal tax brackets, not corporate tax brackets. But the small percentage of non-corporate businesses that pay taxes as businesses are measured according to their annual revenue, number of employees, and business structure—stakeholders, co-founders, and co-owners.
- The Affordable Care Act (ACA)– The Affordable Care Act, also known as the Patient Protection and Affordable Care Act or Obamacare, is a federal statute that ensures affordable and comprehensive healthcare coverage to individuals who meet certain criteria. The ACA only applies to businesses with more than 50 full-time employees. In that scenario, offering your employees healthcare insurance isn’t required to qualify, but if you do, the insurance policy needs to meet the minimum standards as outlined by the ACA.
- Loans, Grants, and Other Resources– There are countless funding opportunities available to entrepreneurs and business ventures from federal and private sources. But to qualify, your business needs to meet certain criteria regarding business size and the number of employees. The number of employees to qualify depends on your industry and varies from 100 to 1,500 employees, according to U.S. Small Business Association (SBA) standards.
It’s Inevitable to Change Labels
Just because you end up classifying your business venture as one entity doesn’t mean you can’t change its category later on. This could happen because you grew out of it or your aspirations changed. The important thing is knowing the details of each category before registering your business. While it might be beneficial to push and motivate yourself by registering as a category where you barely qualify, remember to reap the benefits of being a small business before growing.