What Is a Startup, and How Is It Different From a Small Business?

What is a startup, and what makes it unique? A startup is a new company that is created to test an unproven, innovative business model. In comparison, a traditional business is built to handle steady operations. While people often call any new business a startup, the term applies specifically to businesses pursuing rapid growth in uncertain conditions.

Before you launch a startup company, you should understand how a startup works, its common characteristics, and how it differs from a traditional company or small business. To maintain your company’s compliance, you’ll also need to learn how to verify your startup’s legal status.

What Is a Startup? 

A startup is an early-stage company, often under five years old. Its goal is to pursue a scalable, unproven idea rather than rely on existing business models. Founders can test market assumptions, refine their offerings, and work toward more predictable operations.

Being a startup is not a permanent label for businesses. It is simply a term for a business in its earliest stages. Later, the startup will graduate from its “startup” status once the company has proven its business model and transitioned to more sustainable growth.

Key Characteristics of a Startup

So, what is a startup company? To see how this business model works in practice, let’s look at some of the most common traits that make up a startup. While no single trait defines a startup, these businesses tend to share a few common traits.

Innovation and Disruption

Startups create a culture of innovation and try to disrupt existing marketplaces. Rather than copying an existing product, service, or business model, they create their own. Their innovations may involve the actual business model or the technology involved. For example, a startup may release an app that allows people to rent backyard playgrounds in their neighborhood.

Scalability

When trying to answer “What is a startup?”, it also helps to consider scalability. A startup often grows rapidly, but its costs do not rise at the same pace. In a traditional, local business, growth usually means adding space and staff at a rate proportionate to the organization's growth.

High Risk and Uncertainty

A startup faces unproven demand and an unpredictable revenue stream, especially at the start. Failure isn’t a side effect; it’s a known part of this business model.

Reliance on External Funding

While an entire mythology has been built around startups that bootstrap their way to success, many get seed money from venture capitalists and angel investors. Bootstrapping still occurs, but this model is generally built to eventually seek outside capital.

Small, Agile Team Structure

Startups operate lean with a flat organizational structure. Each team member wears multiple hats in the early stages. By removing the layers of corporate hierarchy associated with established businesses, scrappy startups can make fast decisions with small teams and low costs. When they need to change direction, they can pivot quickly. 

Startup vs. Small Business: What's the Real Difference?

Startups differ from small businesses due to their growth intent, funding, risk level, and end goal. Typically, a startup prioritizes disruptive growth and seeks equity investments. It follows a high-risk, high-reward model that is more prone to failure. In most cases, the end goal is an acquisition or initial public offering (IPO) exit.

In comparison, a small business is normally started with a mixture of savings and traditional loans. These businesses use a proven business model, so they typically face lower risk. Unlike a startup, most small businesses aim for long-term ownership.

The United States has 36.2 million small businesses. While many of these small businesses are not startups, every startup is technically a small business when it is formed.

Startup vs. Traditional Company: What Changes as a Startup Matures?

A startup is simply a stage in a company’s development and not a permanent status. Once a startup has proven its business model, stabilized its growth, and built consistent demand, it is considered an established business. Even though it becomes a standard business, some of its early startup culture can remain.

To better understand how companies differ between the startup and established stages, see the comparison below.

Is Every New Limited Liability Company (LLC) a Startup?

While an LLC can be a startup, it isn’t automatically one. LLCs are legal entities, and their tax structures can vary based on how the business elects to be taxed. By contrast, a company is considered a startup because of its business model and growth ambitions. A mom-and-pop shop and a fast-scaling SaaS company can both be registered as LLCs, but only one of these two options may be counted as a startup.

How To Check a Startup's Actual Legal and Registration Status

Before you join, invest in, or work with a startup, verify that it's a registered business in good standing. Fortunately, you can easily do this with EntityCheck’s Secretary of State (SOS) Business Search tool. You can quickly check the startup’s filing information and status. Meanwhile, the EIN Lookup tool makes it easy to confirm the business’s tax ID.

These checks are essential for verifying that the business exists and that the information you have matches the organization’s public records. Checks like these can help you uncover warning signs, such as a revoked status or inactive registration, before you commit time or money to the business.

Frequently Asked Questions

What is the simplest definition of a startup?

A startup is an early-stage business that tests an unproven business idea to scale rapidly and reach a broad market.

Do all startups fail?

Some fail, but others succeed. About 75% of venture-backed startups fail. This high failure rate reflects the risks of testing new business strategies and bringing unproven ideas to market.

By learning how to start a startup effectively, you can increase the likelihood that your business will succeed. Startups that secure sufficient funding, build a stable revenue stream, and generate consistent demand are more likely to last long term.

Can a startup be a small, one-person company?

Absolutely. Many startups begin with just the founder and no employees. However, startups can also operate with a larger team. 

The size of the employee base doesn’t determine whether something is a startup. To be a startup, a business must pursue an innovative, unproven strategy and scale quickly under uncertainty. Once a startup grows enough, it will normally build a larger workforce.

What's the difference between a startup and an entrepreneur?

A startup is an early-stage business, while an entrepreneur is a person who creates or runs a business. An entrepreneur can begin a startup, run multiple ventures, or operate a small business. Meanwhile, an entrepreneur or a team can run a startup.

At what point does a startup stop being a startup?

There is no set moment where a startup stops being a startup. Instead, consider the level of risk involved, how decisions are made, the company’s scalability, and revenue. Once a company has consistent demand, a predictable revenue stream, standardized operations, and a proven business model, it will generally stop being considered a startup.

How can I confirm a startup I'm considering joining or investing in is legitimate?

Before investing in or joining a startup, it’s always a good idea to check with the Secretary of State in the entity’s formation state or any state where it is registered to do business. To determine if a startup is legitimate, you can use EntityCheck’s SOS Business Search to see its official name, registration status, filing information, and formation state. The EIN Lookup tool can also help you verify that it has an EIN