Business registration
47. In keeping with its discussion in paragraphs 42 to 46 above, the Working
Group was of the view that emphasis should be given in its work to the importance
of business registration. It was noted that business registration was key as it was
required of enterprises of all sizes wishing to formalize, and that there was no need
to treat registration of micro-businesses differently, provided that registration of
enterprises could be accomplished quickly and at a low cost. It was also observed
that business registration was not a goal unto itself, but that it was intended to
provide transparency and a means to establish recognition for a business to enter
into a formal environment. While this information would be shared among the
relevant authorities for the purposes of taxation and other regulatory measures, it
was noted that registration would also assist micro-businesses to obtain financing
and access to government assistance programmes such as subsidies and
reduced-cost services. However, it was also observed that registration would not
necessarily be available to or desirable for all micro-businesses and single person
entrepreneurs and that the Working Group should continue to consider additional
measures that could help these businesses to formalize.
48. One delegation related its successful experience with recent and significant
changes to its business registration system, which other delegations referred to as
the most sophisticated in the region. The system was modernized to permit both
electronic and manual registration, and procedures were greatly simplified as well
as being provided quickly and at no cost. Another delegation described its more
formal model of business registration, which was accomplished through a notary
who carefully verified the information, which could then be relied upon to provide
transparency for all third parties in their dealings with the business. Moreover,
despite its formal nature, business registration could be accomplished in a few days.
49. The Working Group agreed to request the Secretariat to prepare a document
for its next session in which best practices in respect of business registration would
be examined for further discussion by the Working Group. The following issues
were highlighted as being relevant to that future consideration:
(a) Identification of the minimum information necessary to register;
(b) Establishment of a unique identification number for businesses, which
would not conflict with global initiatives in this regard;
(c) Data protection and confidentiality;
(d) Ability to search for a unique business name;
(e) Easily-updated information;
(f) Identification of who would have access to the information, including
credit institutions and the public;
(g) Consider interconnectivity among relevant authorities, including that
information need only be provided once by the user;
(h) Low or no cost;
(i) Quickly accomplished;
(j) Minimal and simple procedures to follow;
(k) A record of the history of the business should be maintained;
(l) A standard model form should be provided electronically to the user and
could possibly be used for the creation of company by-laws;
(m) Provide the user with the necessary means to conduct business, such as
providing a tax identification number; and
(n) Provide proof of existence of the business.
50. In addition, in respect of anti-money-laundering, anti-terrorism and the
prevention of other illicit activity, it was agreed that other international guidelines
and recommendations should be taken into account.
Capital requirements for incorporation
51. It was observed that the requirement of minimum capital for incorporation was
an issue on which there was not agreement in all quarters. Although it was
acknowledged that too high a capital requirement could be considered too harsh, the
view was reiterated that minimum capital requirements were necessary and
reasonable in order to offset the provision of limited liability to an enterprise and to
signal its commitment to the sustainability of the business. It was further noted that
even in States where incorporation with no capital requirement was possible, an
enterprise nonetheless required assets in order to function. Another view questioned
the need for limited liability, observing that a business owner in that State would
obtain access to credit most easily by agreeing to unlimited personal liability.
52. However, there was support in the Working Group for the opposite view that
the requirement of minimum capitalization of an enterprise was not an appropriate
method of protecting third parties dealing with the business, and could both increase
costs and unnecessarily keep businesses out of the formal economy. Other means
that did not impose significant costs on businesses were suggested as better able to
protect creditors, such as the creation of standards of conduct including good faith,
transparency of business information, fiduciary responsibilities and the ability to
pierce the corporate veil. One particular problem related to establishing minimum
capital requirements was said to be the difficulty of quantifying an appropriate
amount, and the rigidity inherent in making such a choice. There was broad
agreement with the view that the modern trend was to move away from minimum
capital requirements. One delegation quoted World Bank research indicating that
minimum capital requirements hindered business development and growth, as well
as failing to fulfil the regulatory functions for which they were intended.
53. It was observed that in keeping with the modern trend away from strict
minimum capital requirements for incorporation, certain legal regimes had been
established that took into account the difficulty of smaller enterprises to meet those
requirements early in their life cycle, and had adopted a system of progressive
capital requirements. Several States reported having as one of their incorporation
models a system whereby an enterprise could incorporate with no or a nominal
capital requirement, but that each year it operated, the company was required to set
aside a certain percentage of its profit, or a set amount each year, until its reserves
reached a certain amount such that it could be said to be, or to amount to, a fully
capitalized corporation. Another State reported a variation on the progressive
capitalization approach, which adopted a limited liability partnership model that
used a similar transitional phase to allow the business to grow over the course of
several years until it reached a minimum reserve level, during which time there
were restrictions on the distribution of dividends and sharing of profits. Reasons for
creating additional flexibility in terms of minimum capital requirements included
the fact that in deciding whether to deal with the company, creditors were more
likely to focus on the assets of the company than its liabilities, and that
forum-shopping was taking place by companies wishing to operate in a State, but
not wishing to incorporate in that State and meet its minimum capital requirements.
54. A concern was raised that even progressive capital requirements could
negatively impact small enterprises starting up, since the first three years of their
life cycle were the most critical, yet the enterprises would be required to
progressively build up their reserves during that period in spite of their possible
financial fragility. It was reiterated that the Working Group should continue to be
mindful of the fact that different sizes of businesses, from micro to small to
medium, could require different solutions in terms of the issue of minimum capital
requirements.
55. Additional possible alternatives to a minimum or progressive capitalization
requirement to protect third parties dealing with such enterprises were also
suggested. For example, accounting rules that require certain transparency could be
used, as could specific rules relating to the distribution of the profits of the
company. Another solution used by a State was to require no minimum capital, but
to require public disclosure, possibly by way of a registry, by the business of any
decision it took in respect of its capital, including setting aside certain amounts or
having variable capital reserves. In addition, it was said that the issue of
transparency in accounting and the auditing of financial statements could assist in
the protection of third parties, as could the establishment of credit bureaus, be they
established by the State or by private interests. Other elements that could be used to
protect third parties were said to be the establishment of a supervisory role by
company registries; the establishment of specialized agencies to supervise
businesses; monitoring corporate governance; setting interest rates; and ensuring
that secured transactions and insolvency laws permitted negotiated contractual
protections.
56. It was noted that a State with progressive capitalization requirements for
one of its types of incorporation provided notice to third parties by requiring such
corporations to use a specific suffix in its legal name. Another possible method of
protecting third parties that was under consideration by a State was to allow a
corporation to have limited liability without capitalization requirements, provided
that it was limited to a maximum turnover — an approach that would again
differentiate on the basis of the size of the business.