4 Reasons Why Forming a Small Business Isn’t the Same as Forming a Startup
Written By Adam Yohanan and Haley Kopp
Are you treating your small business formation like a startup formation?
Too many business owners make this critical mistake. While the two might seem similar, they’re playing entirely different games.
Here are four ways that SMB formations differ from startup formations.
SMBS WANT STABILITY. STARTUPS WANT SCALE
What does success look like when you think about your business’s future?
For SMBs, success typically means steady growth, profitability, and long-term stability. Owners might envision running their business for decades, building a reliable customer base, and maintaining manageable operations.
Startups, on the other hand, are engineered for aggressive growth. They’re built to scale fast and aim for high-value exits through acquisition or IPO. From day one, startups have eyes on expansion, driven by investor funding and rapid scaling goals.
The Legal Impact: These contrasting goals affect your choice of entity. Many SMBs lean towards an LLC for flexibility, whereas startups often go for a C-Corp to accommodate future fundraising rounds and investor interests. Understanding how your long-term vision influences your formation decisions is key.
STARTUPS RAISE MONEY FROM INSTITUTIONS. SMBS USUALLY DO NOT
How you finance a business also reveals much about what type of business you’re forming.
SMBs typically rely on personal savings, family and friends, or small business loans—not only at the beginning but throughout the life cycle. The SMB owner’s focus is on achieving profitability with minimal outside ownership. Institutional investors are rarely involved.
Startups, however, need external funding to fuel rapid growth. They rely on venture capital, angel investors, or even crowdfunding. This comes with a more complex capital structure involving multiple stockholders outside investors and additional classes of capital stock.
The Legal Impact: Startups require more intricate legal frameworks to manage funding rounds, investor rights, and equity structures. SMBs, by contrast, benefit from simpler ownership and financing structures.
CORPORATE GOVERNANCE MATTERS FOR STARTUPS. SIMPLICITY IS KEY FOR SMBS
Governance is another key area where SMBs and startups diverge.
Most SMBs are owner-managed, with a streamlined decision-making process. There’s usually little need for formal governance systems like a board of directors, and owners retain full control over the company.
However, startups tend to have entity structures that require more formal governance by their nature. Because of this, when startups start looking for outside investors, those investors are going to ensure that all the proper governance procedures have been followed. Once an investor is involved, they also start to require various types of stockholder agreements and multiple layers of decision-making to protect investors’ interests and keep the business moving forward.
The Legal Impact: A well-drafted operating agreement might be all an SMB needs. Startups will require more complex corporate documents and procedures to satisfy their legal requirements and eventually, their investors' demands.
BOTH SMBS AND STARTUPS NEED IP FOR CRITICAL REASONS, BUT STARTUPS ALSO NEED IP FOR VALUE
Here’s where things get particularly interesting—intellectual property (IP).
For SMBs, IP is all about practical impact. A strong trademark, a proprietary product, or original content can be the foundation of your business’s day-to-day operations. IP matters to SMBs because it directly affects your bottom line and protects your competitive edge.
While startups also benefit from the practical utility of IP, they face additional pressure: how that IP provides value to investors. A well-developed IP portfolio can dramatically increase a startup’s perceived value in the eyes of venture capitalists and potential buyers. It’s not just about protecting the business; it’s about signaling innovation and future potential.
The Legal Impact: Startups need to balance IP utility with investor appeal. SMBs prioritize the immediate, practical benefits of IP. Both require protection, but the strategic approach depends on whether you aim to scale or sustain your business.
Adam Yohanan is a transactional business lawyer with extensive experience representing companies, investors, and entrepreneurs in a wide range of high stakes business transactions.
Adam handles the small and large transactions in the life of a businesses, including mergers & acquisitions, entity formations, partnerships and joint ventures, investing and fundraising, commercial contracts, and dissolutions. His office can be reached at 212-859-5041.
Haley Kopp is a corporate lawyer focused on representing start-ups and small companies in formations, venture capital, angel investor financings, mergers and acquisitions, and general corporate matters.
Haley's diverse experience gives her a practical approach to solving complex business issues, whether guiding companies through financing rounds or corporate transactions. Her office can be reached at (619) 512-3652.
This guide is meant for educational and informational purposes only and should not be considered legal advice. It is essential to consult with an attorney or other advisors regarding all legal and other important matters.
