Hotel industry is a specific economic activity affected by numerous changes both locally and globally. When compared with other activities, the situation is even more complex. People are traveling on trips only after all other needs have been met, and that is why investment in hotels represents a risky investment, especially in the wake of the crisis that affects the entire world. On the other hand, due to its business characteristics, constant changes in tourist demand provide opportunities for the growth and development of small and family hotels. In Croatia small and family hotels have emerged as a specific and relatively new product on the tourist market and as hotels of special and unique characteristics, they contain many advantages in the business concept of hotel industry. Since small and family hotels represent a segment of hotel industry that is characterized by personal approach and contact with the guest, and the service itself is individualized and unique, this paper will emphasize the importance of small and family hotels to improve the overall supply in hotel industry in the Republic of Croatia. Given the strong demand for this type of capacity and their services, the number of small and family hotels is increasing significantly each year, which will be shown in the paper. A very important role in the development of small and family hotels has the National Association of Family and Small Hotels, which classifies its members according to the product clubs, thus highlighting the different characteristics of each hotel. For this reason, an example of good practice will be presented in the paper, which shows how great the role of small and family entrepreneurship in hotel industry is, given the overall hotel industry in Croatia.