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Building the legal framework to help business succeed
About ACCA
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© The Association of Chartered Certified Accountants
July 2019Building the legal
framework to help
business succeed
About this report
Business activities are an essential part of every society.
Their success, especially when first starting up, depends on
many social and economic variables, but one of the most
important (but perhaps frequently overlooked) factors is the
legal form the business adopts. Government has several roles
to play, the most fundamental of which is to make the forms
available, although educating people about them is every
bit as vital to effective exploitation of those opportunities,
as is ensuring that the support mechanisms are available to
help make the most of them.Introduction
Although doing business is a fundamental part of society,
getting started can often be very risky for entrepreneurs.
The challenges facing the entrepreneur are not just about
choosing the right form, but about exploiting it properly
and making the most of its characteristics.
Government has several roles to play in helping new business get off the
ground. Most fundamentally, and uniquely, it is part of government’s role to
make the legal forms available through legislation. Government alone can
set the boundaries of permissible activities under the law, and adjust the
rights and obligations of businesses and their stakeholders.
But beyond this, there can be a role for government in educating people
about the available options, and helping them to make the most of them.
Many jurisdictions offer community interest vehicles or structures designed
to promote employee ownership and engagement, but take-up of them
can often be low. This may be because entrepreneurs and their advisers are
unaware of them, or the latter are unfamiliar with the benefits and so
unwilling to promote them (Nuttall 2012: para 3.6). Once businesses are
aware of the options, the availability of mentoring schemes, trade networks
and grants can significantly improve the chances of a long and successful
life for the venture.
4Building the legal framework to help business succeed | Introduction
Ensuring that appropriate models and diversify investments, commission
Another aspect of support are available can drive a more expensive marketing campaigns or
business success successful and sustainable society for all. undertake speculative research and
For instance, improving the environment design work. Accordingly, the membership
that governments are for businesses has a clear direct benefit to will not need complex mechanisms for
uniquely positioned government, which is a significant buyer reviewing or reversing management
to create is building of services from private business. The decisions to the same extent applicable
more successful businesses there are in for a general trading company which
the trust relationship the marketplace then the greater the might pursue any of those activities.
environment in choice that government will have.
Businesses that are run efficiently and Another aspect of business success that
which business and governments are uniquely positioned to
effectively through the appropriate
commerce can flourish. structure will be able to supply services to create is building the trust relationship
government at a lower price to the environment in which business and
taxpayer. Furthermore, there is a benefit commerce can flourish. Business is
from cooperatives and society-driven basically about trust. Every transaction,
enterprises because they reduce the need every contract, is about promises made
for direct government funding to the between individuals. Sometimes
extent that they complement or replace performance is instant, but at other times
public interest activities that would the performance will be at some point in
otherwise either not exist or have to be the future. The parties need to believe
supplied by public bodies. In addition to and understand that the promises will be
the benefit to the immediate recipients of kept, or that if one side does try to
such business’s activities, society as a default then that there will be some way
whole benefits from the reduced need for of enforcing the performance or being
direct government funding. compensated for the failure.
It is vital for governments to consider the Government is responsible for developing
local context when looking at the and maintaining much of the infrastructure,
availability of legal forms for businesses. such as the courts and central public
In many jurisdictions, what is really needed registers of business information, that
is not so much a vehicle for entrepreneurs supports those trust mechanisms. As with
as a mechanism for equalising bargaining every other area of business,
power in the marketplace. Where this is developments in technology present both
the case, the important design features threats and opportunities in this sector.
will not be those governing distribution Electronic transmission and recording of
of the profits (indeed in many cases such information reduces the costs of both
organisations are designed not to return business and regulators. Online registers
profits at all) but rather the regulation of can be searched quickly from anywhere in
external relationships with customers and the world, but of course require initial
suppliers. Close behind that in set-up and creation. It is vital that
importance comes the regulation of policymakers consider the environment
internal relationships, although if the within which businesses operate as well as
powers of the body are limited then this the way in which they are allowed to do so.
also becomes less important. For
The rest of this report looks in more detail
example, a farming cooperative whose
at the specific features of legal business
sole function is to purchase seed, fertiliser
forms and explores the elements that
and machinery, then to sell the output at
policymakers should consider.
market, will not have the discretion to
FIGURE 1: Five enabling strategies for governments to consider as it approaches each theme
Enabling business Maintaining Supporting an Providing Dispute resolution
to be the driver of stability and ethical approach encouragement for mechanisms
society’s prosperity confidence to business business enterprise for business
5A framework for
designing business forms
In order to help structure this analysis,
the characteristics of business forms
have been split into four broad
categories, considering in turn:
Realising the returns
Investing into the business
Legal characteristics
Administrative requirements.
There is inevitably some overlap and interaction
between those broad headings, and a number
of further considerations must be taken into
account. Aspects such as transparency and
accountability are increasingly important to
stakeholders, while the regulatory mechanisms
enabling businesses to operate, and perhaps as
importantly, imposing sanctions on those who
would seek to operate outside the rules, are a
vital component of the functioning system.
6Realising
the returns
Most businesses are run with a view to creating a profit for the
investors (whether owners, managers or lenders), but there can be other
motivations, such as providing community services or wider public
benefits, existing alongside or to the exclusion of the profit motive.
The purpose of the business might contrast, deliver their value entirely in the
restrict the range of business vehicles form of returns to society or indirectly to
available. The long-term goal might be the members, and do not allow for any
financial security for the founder and their cumulative return to members on capital
family or partners, or it could be to invested. A system of business forms that
maximise profitability with a view to sale. responds to these various aims is essential.
Designing it will depend on understanding
Establishing what form ‘value’ takes for the needs of founders and determining
the business, and then deciding how best how the outcomes desired can best be
to ensure that the value ends up where it reflected by the forms available.
is supposed to be, is perhaps the most
important consideration for the founders. Government policy, as expressed in
The choice they make from the available legislative and regulatory regimes, may
forms will be driven by their approach reflect an implicit assumption that
to achieving their goals, and any businesses, especially incorporated ones,
compromises they may be prepared exist for commercial gain. This would be
to make along the way. It is the job of evidenced by the emphasis on
policymakers to ensure that the range maintenance of capital, and the
of forms available minimises the widespread existence of specific rules to
compromises required across the enhance directors’ and owners’ personal
population as a whole, without incurring liability when close to insolvency (Gerner-
avoidable administrative costs. Beuerle et al. 2013). It will be worth
bearing in mind that over two-thirds of
Some structures favour regular extraction respondents to an ACCA survey believe
of accrued profits; others allow for the that business legal forms should exist that
sale of a share, and future returns on that explicitly recognise that non-financial
share, to a third party. A number of aims are part of measuring the success
cooperative and charitable forms, by of a small business (see Sources and
7Building the legal framework to help business succeed | A framework for designing business forms
68%
Methodology at the end of this report). markets surveyed as part of the initial
Nearly 80% of respondents rejected the desktop research for this series of reports,
idea that such entities should be more farming and business cooperatives exist
tightly regulated than others, although as a significant and important part of the
they were evenly split between regulation economic infrastructure. While the
being the same (39%) or less strict (37%) adoption of the cooperative form is
than for purely commercial enterprises. driven by financial imperatives, the goal
of aspiring is not so much a financial profit as simply
It will be important to address the clear allowing access to marketplaces in the
entrepreneurs want
appetite of entrepreneurs for pursuing first instance. The collective bargaining
Non-Financial Goals more than simple financial gain through power of the cooperatives enables those
to be recognised their businesses. Policymakers should involved to negotiate commercial deals
investigate whether existing vehicles offer with counterparties on terms that would
sufficient flexibility within a single not otherwise be possible, and while a
template, or if there are alternatives direct individual financial return on the
designed for specifically commercial or membership share is typically not
non-commercial aims. If neither is the available, the members benefit indirectly
case, then government should consult through being able to deal on those terms
with the relevant stakeholders to develop in respect of their own transactions (Sabir
the most appropriate local models. et al. 2012; Trebbin and Hassler 2012).
The domestic social and economic Whenever money is realised there are likely
environment can play a significant role in to be tax consequences. While it is rarely,
shaping the vehicles needed to enable if ever, a good idea to allow the choice of
economic activity. In several of the business form to be driven exclusively by
FIGURE 2: Business Forms should exist which explicitly recognise non-financial goals
n Strongly disagree, 5%
n Disagree, 6%
n Neither agree nor disagree, 21%
n Agree, 47%
n Strongly agree, 21%
FIGURE 3: Relative importance attached to startup vs ongoing costs
100% 10%
SOLID LINE:
important and
very important
75% 7.5%
50% 5%
25% 2.5%
DOTTED LINE:
of little or no
importance
0% 0%
Ongoing Startup
Aspiring entrepreneurs
Advisers who have also set up and run their own business
8Building the legal framework to help business succeed | A framework for designing business forms
tax, it is nonetheless a factor which must governing withdrawal of profits and funds
It is notable that every be considered. As shown below, there will be dealt with by each individual firm’s
group considered that was a strong preference across all groups in-house partnership agreement.
surveyed for governments to use the tax
some tax incentives system to support small businesses, Where the business is a separate legal
should be offered, through mechanisms such as reduced tax entity, and its assets belong to it and not
burdens on profits, or exemption from to its individual members, there are likely
with only a handful of to be, at the very least, legal restrictions
specific charges.
respondents actually on how funds may be distributed back
classing them as The group looking to set up their first to investors. In practice these may well
business were most in favour of tax be a mere formality, especially in the
‘unimportant’. incentives, with 45% believing that tax case of a single shareholder-director
measures should be the primary incentive company (where these are allowed
for small businesses, compared with just under local legislation) but otherwise
30% of those who have already set up a companies are restricted in the ways in
business, and only 18% of advisers who which they may distribute funds to their
have set up their own business. While not directors and shareholders.
directly explored in the survey, it is quite
possible that the comparatively low As noted above, many cooperatives and
importance attached to tax incentives by charitable structures impose significant
those who have run their own business is restrictions on the distribution of cash
just relative: they simply give other factors from the enterprise. It is common for the
more weight, rather than regarding tax as statutory provisions setting up farming
unimportant. In fact, it is notable that cooperatives and the like to have
every group considered that some tax conditions that not only restrict the
incentives should be offered, with only a venture’s scope for making cash returns
handful of respondents actually classing to members, but also require it build up
them as ‘unimportant’. cash reserves out of each year’s operating
surplus in order to fund future capital
But, however much importance investment by the cooperative, for example
entrepreneurs attach to tax incentives as in improved machinery or storage facilities.1
a concept, their actual importance is
more open to question. The vast majority Similarly, the constitution of a charitable
of business taxes suffered by small and enterprise, in addition to restrictions on
medium-sized enterprises (SMEs) are levied distributing returns during the life of the
only on profits, and typically after some enterprise, will often include a stipulation
considerable time lag, as the business will that any funds held by the body on a
not make a tax return until some time winding-up may only be distributed to
after a profits period or local fiscal another charitable body pursuing similar
deadline has passed. Welcome though aims to its own.2
the reduced liability will be at that time, if
the business has not yet made a profit at When considering the integration of such
all then the question of taxes is unlikely restrictions into domestic business form
even to arise, making other incentives and design, policymakers will need to balance
aids to business success more important the strictness of the rule with the burden
in the earliest days of the venture. of operating it. An exclusively charitable
organisation will have no need to return
How easy is it to withdraw money from capital to its investors, and will be suitably
the business? served by a simple rule requiring any profits
A sole trader is typically free to use the to be retained in the business and spent in
funds of the business as he or she sees fit. pursuance of the charity’s ends. A farming
There are no restrictions on how much of cooperative, on the other hand, existing
the firm’s profits can be taken, or how for the benefit of its own membership,
often withdrawals may be made. The might be better served with a more
proprietor will be restricted only by the complex rule that allows for distributions
practical need to ensure that the business above a certain level of profit, after a
retains enough money to keep operating. suitable amount has been reinvested into
In the case of a partnership, the rules the business to ensure its sustainability.
1 For example, Indian Cooperatives and Nidhi and Producer Companies. For general information see , accessed 25 February 2019.
2 For example, the Singapore Public Company Limited by Guarantee, Indian cooperatives, Irish Guarantee Companies and the UK CIO/SCIO models.
9Investing into
the business
One of the most fundamental considerations is whether or not the
owners will need access to money beyond their own resources to
develop the business.
Policymakers will need to consider which Corporations are perceived as having a
funding mechanisms to encourage, and degree of stability and permanence which
whether government funds should be unincorporated businesses do not –
made directly available to certain forms although for many small businesses the
of business, and if so on what basis. owners will have to give a personal
guarantee anyway, diluting any potential
The simplest way of introducing money benefits of the separate legal personality
to a business is often to borrow it, which (OECD 2015; ACCA 2013).
will involve paying interest. Typically, the
cost will be based on how much is There may be other sources of funding,
borrowed, regardless of the predicted such as government grants, which are
proportional return on that sum. often targeted at smaller firms, and again,
as with realising returns, it is important to
For a corporate body, however, there is understand the tax impacts of different
also often scope for raising money as funding models. For all groups of ACCA’s
equity, so that the investor receives a survey respondents, the attractiveness of
return only if the business actually grants was lower than that of tax
returns a profit on the investment. incentives, with a clear majority (62%)
Furthermore, whether a company raises seeing them as part of a balanced
money as debt or equity, lenders/investors package of measures to assist small
are typically more ready to put funds into business. Nevertheless, it will be
a company than into a sole trader or important for advisers to be aware of the
partnership – either lending more, or at grants available, and of the sources of
lower rates of return (OECD 2015). information that should be consulted to
stay up to date on sector-specific and
local incentives.
10Building the legal framework to help business succeed | A framework for designing business forms
One aspect of investing to develop the While access to business exchanges and
For all groups of ACCA’s business that can be hard to assess is the support networks is rarely dependent on
survey respondents, time and effort needed to establish the legal form of the enterprise, it can
networks of customers and suppliers. nevertheless be an absolutely crucial
the attractiveness of The difficulties faced were captured by factor in the success of a new business
grants was lower than a comment from one survey respondent: (ACCA 2019). Policymakers should
that of tax incentives, ‘Two of the biggest problems for any new consider the active creation and support
SME are: 1) where to find clients; 2) where of local initiatives and groupings that can
with a clear majority to find capital. Hence, if government help entrepreneurs achieve their business
(62%) seeing them as wants to engage in meaningful support aims. Such networks can increasingly be
part of a balanced activities, I would see them concentrate found online, and the power of social
efforts on promoting TRULY WORKING media and an internet presence should
package of measures to [capitals original] business exchanges, not be underestimated. The investment
assist small business. trade associations’ membership support, of time required to curate an online brand
making government contracts more will initially need to come from within the
accessible, etc. and supporting funding business. In certain sectors and particular
efforts through some sort of [government] markets this will be more important to
guarantees for qualifying business long-term success than cash investment
projects that would allow the owners to and should be given the appropriate level
draw credit from commercial banks.’ of prominence in the business plan
(OECD 2018).
FIGURE 4: Grants vs Taxes
HOW MUCH SHOULD GOVERNMENT USE THE HOW MUCH SHOULD THE GOVERNMENT USE PUBLICLY-FUNDED
TAX SYSTEM TO SUPPORT SMALL BUSINESSES? GRANTS TO ENCOURAGE SMALL BUSINESSES?
FOR
FOR
AGAINST
AGAINST
Owner
Owner (aspiring)
Owner
(current)
Adviser Adviser
Note: Owner Adviser
Owner (aspiring)
Owner (current) – Small business owner (current)
(current) Owner
Owner (aspiring) – Small business owner (aspiring)
Adviser – Professional adviser Adviser
Owner Adviser – Professional adviser with direct experience of ownership
n Tax measures should be the primary incentive n Grants should be the primary route for support
n Tax incentives should be a significant factor n Grants should be a significant factor
n It should be one of a balanced group of measures n Grants should be part of a balanced group of measures
n Limited use of tax incentives n Limited use of grants
n There should be no tax incentives n Grants should not be used to directly support private business
11Legal
characteristics
The defining legal characteristic of a business form will be whether
the business has a separate legal identity from its owner(s).
Deciding whether the enterprise will need its own identity, and the
capacity to own things in its own right, or can simply exist as an
extension of the legal name(s) of the owner(s), goes to the heart of
its relationships with the outside world, and determines where
liability will fall for any issues that arise.
Companies and other ‘bodies corporate’ Nonetheless, while it is understandable
exist as independent legal entities, able that the direct risk to the founders’
to enter into contracts and enforce (or be personal financial security ranks highly as
subject to) rights and liabilities. That a consideration, what complicates the
contrasts with the sole trader’s position, situation is that, where a business enjoys
where everything is done directly in the limited liability status, the individuals
name of the individual responsible. In behind that business are generally able
addition, use of a separate legal personality to take shelter from the consequences in
can greatly simplify selling, or transferring, the event of their own poor or reckless
part or all of the business. At the same decisions and initiatives, while those third
time, it will impose restrictions on the legal parties who deal with them, including
power of the owners and/or managers to trade creditors, employees and
deal with the assets of the business, or government departments, are left to
enter into contracts on its behalf. count the cost. Invariably, jurisdictions will
impose conditions on the conduct of
Respondents across the whole survey business by limited liability companies so
population viewed separate legal as to deter abuse of the system and to
personality as an important factor when compensate third parties for the risk they
choosing a business form, with 75% rating run in doing business with companies
it as an important or very important (ACCA 2013).
consideration. Closely linked to the issue
of separate legal personality is the matter Policymakers will need to consider
of liability for the debts of the business. carefully the balance between
Respondents considered this an even encouraging innovation and risking abuse
more significant factor, with fully 80% of the limited liability protections. Limited
classing it as important or very important. liability has been characterised as
12Building the legal framework to help business succeed | A framework for designing business forms
socialising risk, by sharing the potential financial interests of their stakeholders
First, from the moment costs of the failed investment across the are addressed by requirements that
of incorporation, the whole of society. directors make an annual declaration of
solvency and that decisions on
company is treated as It is worth bearing in mind that courts distributions take stakeholders’ interests
an entity separate from might sometimes look behind the expressly into account.
company identity (sometimes known as
both the individuals who piercing the ‘corporate veil’) to hold In countries that have more extensive and
own the company as its owners or directors personally liable, standardised requirements governing
shareholders and those usually where there has been criminal accounting and public disclosure, such as
activity. On the other hand, in many the UK, those measures may be seen as a
who manage it as its jurisdictions there are personal bankruptcy substitute for the more stringent rules on
directors. safeguards that protect the entrepreneur personal liability that exist in other
from total ruin in the event that company law regimes. The particular
unexpected liabilities arise (ACCA 2013). contribution that accounting and
Again, a balance is needed between disclosure can make to the goal of
offering protection to any individual in protecting stakeholder interests and the
bankruptcy or offering protection only to public interest in any individual company
those who operate a business through a law regime will accordingly be a function
particular (limited liability) format. of the wider regulatory framework within
which companies exist.
In addition to the above, the law will
typically lay down a large number of Determining where the optimal balance
criminal offences for breach of statutory lies in any given jurisdiction will invariably
responsibilities, which can be viewed as involve an assessment not only of the costs
highly persuasive incentives for and benefits of meeting standardised
companies to respect the interests of their accounting and disclosure practices, but
shareholders, in particular, and in some also of how those obligations coexist and
cases their creditors as well. For example, interact with other measures that provide
directors may commit criminal offences if necessary protections for stakeholder
they approve annual accounts that do not interests. Policymakers should also
comply with legal requirements, make consider the costs of operating the
solvency statements that are not regulatory bodies and registers needed
supportable, fail to keep minutes of their to give effect to the obligations imposed
meetings, or fail to provide information to on business in return for limited liability.
a company auditor on request. In some
circumstances, a company’s shareholders The practical consequences of
may be able to bring legal proceedings, separate legal personality
in the name of the company, against its The assumption of a business form with
directors (Gerner-Beuerle et al. 2013; its own separate legal personality has
Cheffins and Black 2006). three important practical consequences
for its owner.
Any regulatory regime for limited
companies is likely to include a system of First, from the moment of incorporation,
interrelated checks and balances. Where the company is treated as an entity
rules on accounting and disclosures exist, separate from both the individuals who
they will form part of such a system, and own the company as its shareholders and
where they do not, compensating those who manage it as its directors.
measures are likely to be present (ACCA Although the position varies between and
2013). The optimum regime for a given within jurisdictions, any legal action by an
enterprise cannot therefore be aggrieved customer or client of the
considered in isolation from consideration company, or a third party, will typically
of how the regulatory framework overall need to be taken against the company
provides appropriate safeguards for rather than against its shareholders or
investors, creditors and the public directors, unless there is a clear breach of
interest. While small companies in specific personal duties by an individual,
Australia, for example, are not bound to such as knowingly criminal behaviour by a
prepare or publish annual accounts, the director (Gerner-Beuerle et al. 2013).
13Building the legal framework to help business succeed | A framework for designing business forms
The second main consequence of Against this, shareholders bear the
The shareholders in a incorporation is that the company’s ultimate risk in a company, in the sense
limited company enjoy existence continues independently of the that, if their company fails, they stand to
identity of its shareholders and directors. lose whatever amounts they have
limited personal liability Shareholders are usually free to sell their invested in their company. In any winding
for the debts of their shares if they wish to do so. Even when up, shareholders will see a return only if
company. Shareholders, there is a complete change of ownership, there are still assets available after all the
for example where the company is taken creditors have been paid. Accordingly, if a
as such, have no personal over by another business or where a sole company is wound up on an insolvent
responsibility for the shareholder dies and his interest is basis, shareholders can expect to lose the
debts incurred by their passed on, the company survives and entire value of their investment.
continues in existence. Therefore, the
company in the normal company format allows a business to be A company’s directors, on the other hand,
course of trading. planned for the long term. are entrusted with controlling the affairs
of their company. The law will require
The third main consequence of them to do this in a disciplined way that
incorporation is that the law invariably takes account of the need to protect the
treats shareholders and directors interests not only of the company’s
differently. If one individual is involved as shareholders but also of some third
both a shareholder and a director then parties. In the case of small companies,
there will be different rules (and the shareholders and directors are usually
potentially liabilities) to be considered, the same people. There is nothing
depending on whether the individual is untoward in this but individuals in this
acting as a director or as a shareholder. situation need to remember the technical
distinction that exists between the
The shareholders in a limited company ownership rights that they have as
enjoy limited personal liability for the shareholders and the management
debts of their company. Shareholders, as responsibilities they have as directors.
such, have no personal responsibility for
the debts incurred by their company in the This distinction is very often
normal course of trading. In the case of a demonstrated, in the case of small
company limited by shares, the liability of companies in particular, by the fact that
each member is limited to the amount of banks and other lenders of finance will
share capital subscribed. Where, as will usually insist, as a condition of agreeing
often be the case, the full value of the to lend funds to a small company, that its
shares has been paid into the company, director or directors give personal
then there is no further liability to meet. If guarantees that the loan will be repaid
a company goes into liquidation because (ACCA 2013). Thus, while as shareholders
it cannot pay its debts, its shareholders they have limited personal liability for
will be required, at most, to pay to the their company’s debts, as directors they
liquidator any amounts remaining unpaid may take on personal responsibilities for
on their shares – where shares are ‘fully those same debts.
paid’, that amount will be nil.
14Administrative
requirements
These are often driven by the legal characteristics of the business and
tend to fall into two categories – occasional requirements, such as the
formalities governing the initial start-up or major transactions such
as a sale of the business, and regular requirements such as preparing
and filing or publishing accounting information, or observing certain
formalities for transactions, for example dealings between the
investors and other stakeholders, such as managers or employees.
There is often a trade-off between the by no means universal. Around the world,
level of administrative requirements and the time taken to incorporate a business
the degree of autonomy that the business has fallen on average from 47 days in
can have, linked with the related fields of 2006 to 20 days in 2018, but this masks a
transparency and accountability. wide variation, from 2.5 days in Australia
to 40 in South Africa and 70 in Somalia
Starting the business is something that (World Bank 2019: 202).
happens only once. The legal form
adopted by the business should be based While the convenience of online filing and
on long-term factors, not just the ease of information sharing offers real productivity
the start-up process. It is important, gains for both the administrators and
nonetheless, to understand what needs users of business information and
to be done, how long it will take and what records, the ease of online incorporation
it might cost. This is particularly the case and business transactions has also been
in those jurisdictions where the formalities linked to a shift in patterns of criminal
of the incorporation process are more behaviour (ICLEG 2016). National
burdensome. Policymakers should, as a registries are faced with a trade-off
rule, try to minimise those burdens, between ease of business registration
retaining formality only where there is a and the need to combat criminal and
good policy reason for doing so. fraudulent behaviour. Although the digital
exchange of business information
Although there is a widespread shift to between authorities, regulators and crime
adopting modern technological methods, fighting agencies can aid them in the
with central registers maintained in digital fight to protect the public, the usefulness
format and registration processes of the exchange will depend on the
accordingly moving online, the change is reliability of the information contained in
15Building the legal framework to help business succeed | A framework for designing business forms
61%
their registers, so it is increasingly area requiring additional regulation.
important that steps are taken to ensure Similarly, while most respondents
confidence in the accuracy and considered that the size of the business
completeness of that information. was a factor which should be taken into
account, with additional regulation
The initial registration of the business is desirable above a certain (unspecified)
often the moment that offers the best size, the degree of importance was again
opportunity for the authorities to assess subject to differing opinions. Advisers who
of respondents rated
the good standing and good faith of had set up their own business were only
crowdfunding a high-risk those behind it. The greater the powers of half as likely to consider it a high-risk area
area, justifying additional the business to contract with third parties (21%) as those advisers who had not set
regulation such as third- and create liabilities on its own behalf, the up a business themselves (42%), although
more important it is that the authorities 50% of owner-advisers did consider some
party oversight
are able to maintain confidence in the additional regulation desirable (against
business form that justifies those powers. 30% of ‘non-owner-advisers’). Whichever
option policymakers choose to pursue,
Just under 70% of all survey respondents
they should be prepared to justify the
considered that all new businesses should
scope and design of regulation for new
be subject to compulsory registration or
businesses by reference to the risks
regulation, with only a slight variance
identified and the proportionate nature
between groups. Professional advisers
of the safeguards.
who do not run their own business were
the most likely to advocate compulsory Turning to the newer challenges facing
formalities, at 73%, while those who were policymakers, when asked about
considering a new venture were least crowdfunding, 61% of respondents rated
likely to support such a measure. this a high-risk area, justifying additional
Nonetheless, nearly two-thirds (64%) of regulation such as third-party oversight.
the latter agreed that all new businesses Just one respondent considered direct
should be subject to some degree of calls on public funds to be a low risk factor
official monitoring. requiring no regulation at all. Those
looking to set up a business were the
There was, however, considerable variation
most concerned about this area, with 83%
between the populations over the factors
seeing it as an activity justifying additional
that they argued should trigger regulation.
regulation, indicating a widespread
Some 40% of aspiring business owners,
recognition of the possible risks, and an
nearly twice the proportion of non-
acceptance of the corresponding
business-owning advisers, stated that the
administrative burdens to be expected.
limitation of owners’ liability was a high-risk
FIGURE 5: Crowdfunding is seen as the highest risk area both by respondents who believe all startups should be regulated
(left hand side) and those who believe regulation should be targeted based on specific factors (right hand side)
RESPONDENTS WHO BELIEVE ALL RESPONDENTS WHO BELIEVE REGULATION SHOULD
STARTUPS SHOULD BE REGULATED BE TARGETED BASED ON SPECIFIC FACTORS
Multiple owners
Limited liability
Size of business
Crowdfunding
100% 80% 60% 40% 20% 0% 20% 40% 60% 80% 100%
n High risk area; specific regulation essential
n Moderately high risk
n Some regulation required
n Reduced risk area
n Low risk; no regulation required Note: “Other” factors not shown
16Building the legal framework to help business succeed | A framework for designing business forms
The majority of aspiring business Such changes often reflect the very
Overall, though, there is owners recognise the need for some widespread reality that, in small private
a general pattern across regulation and appear comfortable with companies, directors and shareholders
the concept that limited liability will are often one and the same. For example,
jurisdictions that the come with additional administrative since the Companies Act 2006 came into
formalities with which responsibilities, so policymakers can force, private companies in the UK no
directors have to comply approach the topic accordingly. longer have to hold an annual general
meeting (AGM) or to present their
to keep shareholders Overall, though, there is a general pattern accounts for review by shareholders at a
informed have fallen across jurisdictions that the formalities with general meeting. They can also pass
which directors have to comply to keep company resolutions in writing, rather
since the year 2000. shareholders informed have fallen since than going to the trouble of holding a
the year 2000. At the same time, the ease general meeting to do so. Given pressures
with which those obligations that survive on regulator funding and resources since
can be discharged has in many cases the global financial crisis of 2008–9 and
been enhanced through the availability of resultant incentives for focusing
digital communications. For instance, compliance resources on identified risks
many jurisdictions now allow electronic rather than blanket monitoring, it seems
communications and share transfers, and likely that this trend in favour of the
even the holding of general meetings lighter routine administrative regulation
online or through video-conferencing of private companies in the UK will
(ICLEG 2016; Collis et al. 2018). continue, although some trade-off in the
form of enhanced monitoring of high-risk
events, such as large individual
transactions and initial registrations,
might reasonably be expected.
17Some broader
considerations
TRANSPARENCY AND ACCOUNTABILITY
There is often a trade-off between the level of rights or freedoms a
business vehicle has and the amount of information about itself that it
has to make public (ACCA 2013). The link is sensible – for example,
where companies can raise money from the general public through
‘listed’ securities they have to publish considerable amounts of legal and
financial information so that investors can make an informed decision
and, as noted above, this is a risk recognised by all those surveyed.
Likewise, entities that enjoy limited liability are usually required to report
or publish financial information so that potential creditors can
understand what limits there might be to recovery if they do enter into a
financial relationship with the business. The disadvantage is that there
can be concerns about divulging commercially sensitive information, or
even personal details about owners or managers.
The rationale for imposing accounting and disclosure requirements on
companies has always been that it is in the public interest for companies
to be subject to standardised regulation in these matters to balance the
special legal privileges that flow from the award of limited personal
liability to company owners.
18Building the legal framework to help business succeed | Some broader considerations
The rationale can be explained in turn acts as an indirect safeguard for
Studies have found that these terms: companies’ shareholders and creditors.
avoidance of public • a company should be required to Deadlines imposed for filing a set of
manage its financial affairs in specified accounts or making a public solvency
disclosure of potentially declaration are seen as another strong
ways that respect and reinforce its
sensitive business separate legal personality incentive for ensuring correct financial
information is one of management in that they act as a spur to
• given the separation, under company companies to prepare their accounts in
the principal reasons law, of ownership and management, good time: failure to file annual accounts
why SMEs choose rules are needed to protect the or prepare solvency statements on time is
interests of the former and to clarify often seen as a warning sign of internal
where possible to file the responsibilities of the latter problems, in particular that the company
abbreviated accounts. has not been able to agree its accounts
• since the persons who own and control
a company will not be personally (ACCA 2013).
responsible for their company’s debts,
rules are necessary to reduce the risk Were companies to be freed from any
that third parties assume when doing obligation to report on their financial
business with them. affairs on a regular basis, there could
be a risk that those companies would
Studies have found that avoidance of find it more difficult to win and retain
public disclosure of potentially sensitive business and to access finance, because
business information is one of the the risks associated with doing business
principal reasons why SMEs choose where with them would increase. It may also
possible to file abbreviated accounts be that poor behaviour on the part of
(Collis 2012; Allee and Yohn 2007). Many some small companies would translate
companies that file abbreviated accounts into a reduction in confidence in
are likely to do so in order to avoid smaller companies more generally,
disclosing information that might be used to the detriment of the wider business
to their disadvantage: for example, they community and, in the long run, society
may fear that suppliers might raise prices, as a whole.
employees might seek higher salaries and
customers might seek discounts if they The rights that a business has, for
believed that the company was successful. example to protect its name or enter into
contracts, are usually reflected in the
The consequence of filing modified responsibilities it has for filing accounts or
information, however, is that there is a maintaining reserves for its creditors.
reduction of transparency on the public Such responsibilities will be reflected in
record. Where only abbreviated information running costs and earning opportunities,
is made available, prospective lenders may as well as the obligations the business
act more cautiously, and be encouraged has for paying taxes.
to require additional information before
making a decision on a loan, credit rating The mechanisms that society has for
or insurance policy (ACCA 2013: 28). This holding a business to account for its
is an indirect argument for making actions, whether in respect of investors,
available the full financial statements creditors, employees or customers, may
rather than a modified version. vary depending on the business form.
The culpability of the decision maker may
Another argument that is frequently influence whether remedies are based on
presented to justify mandatory civil law or criminal sanctions, while
accounting rules (and associated legal holders of formal defined offices, such as
requirements for keeping adequate director, may benefit from legal
accounting records) is that they protections or even indemnity (Gerner-
encourage financial discipline, which in Beuerle et al. 2013; Zurich 2017).
19Building the legal framework to help business succeed | Some broader considerations
ABUSE OF FORMS – CONTROLS The ownership of business assets
Under-resourcing the AND SAFEGUARDS? through trusts is often used in employee
safeguards that protect The flipside to having choice of forms and ownership models, widely held to be a
the alternatives they offer is that the sustainable model with a number of
the integrity of business specific advantages (Nuttall 2012)
flexibility may be misused or even
systems is a false deliberately abused. Innovations such as including the well-being of employees
economy that would bearer shares, limitation of liability and (McQuaid et al. 2012). Nonetheless, the
ownership of business assets through trust mechanism is also widely used to
devalue all the effort and disguise beneficial ownership, and in this
trusts all have valid uses but can also be
expense put into creating subject to abuse. way can be used to avoid or evade taxes
the regulatory framework or hide the source of money (FATF and
Over time, aspects of the business form Egmont Group 2018). The implementation
in the first place. of effective and proportionate safeguards
regime that previously played a useful
role can be superseded by technological against the risk of deliberate abuse needs
advances. The benefit they provide can to be a feature of the regulatory
be achieved through other means without framework, and should be designed with
the weaknesses that enable abuse. For the same care and attention to detail as
example, bearer shares originally played the underlying enabling structures.
a useful role in promoting liquidity in a
paper-based records system. Advances The costs of maintaining controls and
in digital communication have overtaken safeguards should not be underestimated.
that benefit while concerns about Measuring the costs and benefits of
transparency of ownership, and offences regulatory frameworks is challenging
such as money laundering and terrorist (Revesz 2016) but just as businesses are
financing, have led to a perception that accountable to their stakeholders, so
bearer shares no longer serve a sufficiently policymakers should hold themselves
useful purpose in financial markets to accountable to the public for whom they
outweigh the risks of abuse (FATF 2012: act. Under-resourcing the safeguards that
Recommendation 24). As a consequence, protect the integrity of business systems
many jurisdictions no longer allow the is a false economy that would devalue all
issue of bearer shares, and have the effort and expense put into creating
implemented measures for converting the regulatory framework in the first place.
existing issues into conventional,
registered, ordinary share capital (see,
eg for the UK, H.M. Government 2014;
for Switzerland, STEP 2018).
20Sources and
methodology
This report builds on ACCA’s existing body of guidance for members. In addition to drawing on
these previous publications, ACCA undertook a desktop survey of available business forms in nine
jurisdictions (UK, Ireland, India, Pakistan, China, Singapore, Malaysia, Nigeria and Hong Kong),
analysing the key features under four main themes: realising the returns; investing into the
business; legal characteristics; and administrative requirements.
Following this, ACCA surveyed targeted professional advisers
in practice (50%), existing small business owners (48%) and, The survey results identified four main populations:
finally, those actively considering the founding of a small • entrepreneurs with practical experience of small
business (23%) and garnered 345 respondents from 60 business operation but no related professional advisory
jurisdictions, 49% of individual responses from Western Europe, experience (32%)
19% Africa, 13% Asia-Pacific, 6% Caribbean and the balance
• professional advisers who had practical experience of
from other regions.
small business operation (16%)
Questions were designed to identify those features of the • professional advisers with no practical experience of
business model that were considered to be most important by small business operation (30%), and
each group, with a view to helping advisers recognise which
• entrepreneurs with no previous experience who were
aspects of the business format are likely to be most important
actively considering setting up a business (19%).
or attractive to clients and prospective clients.
A comparison of responses between the populations
indicates areas that are universally seen as important,
and those where an adviser’s focus might differ from
that of their clients.
21References
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22PI-BUSINESS-FORMS-PART-3 ACCA The Adelphi 1/11 John Adam Street London WC2N 6AU United Kingdom / +44 (0)20 7059 5000 / www.accaglobal.com
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