Table of Contents
2. What is Business Registration?
3. Why do Business Start-up Procedures Matter?
4. Can Reform Help?
5. Country Examples featuring Good Practice
5.1 Business Registration in Canada – Nr. 1 According to the Doing Business Report
5.2 Kosovo: A Good Practice Case in Business Registration, but not yet Online
5.3 Business Registration Reform Process in Turkey – Private Registry
This paper intends not to prescribe a single model of a well-functioning business registry, rather lay down general principles by giving varying cross-country examples. Choosing this approach, the paper will hopefully be universally relevant and helpful in pursuing reforms in this area (gradual or comprehensive). Unlike often heard, reforms on business start-up procedures are not easy reforms, mainly because they require coordination among various government agencies. However, the Registry can take multiple steps, which can improve the process and bring benefits to entrepreneurs.
Individual investment projects and private sector activities typically start with the establishment of an enterprise. While essential for the creation of a private sector, these start-up procedures are, in reality, everything else but simple. Doing Business 2006 shows that the time needed to establish a limited liability company in a capital city can range from 2 to 203 days among the 155 countries included in the analysis, with 1 to 19 steps involved in the process. These procedures are often associated with bureaucracy, corruption, and a lack of transparency or accountability in developing and transition countries.
While business start-up procedures are everything but identical worldwide, the main public policy objectives generally are that governments register companies to ensure that these activities are by the existing legal framework. The main regulatory functions are to ensure tax collection, to minimize risks for the public of risky business (to conduct, e.g., environmental assessments, one first needs to know what kind of new business has been established), to create legal entities which can be easily identified due to a unique name with rights and responsibilities (in case of, e.g., bankruptcy or litigation among shareholders), or for statistical purposes, providing vital information for the government on sectors, size, ownership of enterprises. Furthermore, governments argue that some regulations are in place to ensure that consumers buy high-quality products from “desirable” sellers (public interest theory)1 or to prevent the registration of fake companies2. How these policy objectives are being pursued differs from country to country.
2. What is Business Registration?
In the narrowest sense, establishing a business is limited to registering or incorporating a new company with the registration office (public, private, or a public-private entity) to create a legal entity. In practice, however, most governments require additional formalities to start a business beyond simple registration. Even in a best-practice case such as Canada, where it only takes three days to establish a new enterprise, investors still have to go through three different steps, one to search for a unique name, one to notify the legal existence, and one related to the registration for tax and social security purposes. In most countries, starting a business tends to involve many more steps and interactions with multiple public sector entities at different levels of government, typically also involving regional or municipal authorities. The complexity of start-up procedures is often reflected in the documentation requirements; a company often needs to go back multiple times to the same office or provide the same information to different offices. The different existing start-up procedures can be summarized in five categories
1. Screening procedures (e.g., notarize company deeds, open a bank account and deposit start-up capital, register company at Companies Registry);
2. Tax-related requirements (e.g., register for various taxes including VAT);
3 Labor/social security-related requirements (e.g., register with pension funds, register for social security, register for various insurances such as an accident);
4. Safety and health requirements (e.g., pass inspections and obtain certificates related to work safety, building, fire, sanitation, and hygiene);
5. Environment-related requirements (e.g., obtain environment certificate, register with the water management and water discharge authorities)
At this point, companies have typically fulfilled their basic administrative requirements, but that does not mean that they can start doing business. Interactions with public sector authorities will continue not only in the phase of business start-up – related to obtaining industry-specific licenses and permits, special approval procedures such environmental impact assessments, purchasing or leasing land, and constructing facilities – but also during the operation of the enterprise, be it tax reporting, government inspections by different authorities or customs procedures. In conjunction, all these different administrative processes and procedures form the legal and regulatory framework for private operations.
3. Why do Business Start-up Procedures Matter?
Even if start-up procedures are particularly complicated and time-consuming, enterprises have to go through this process only once. Can this be so important as to limit the growth of a country’s private sector seriously? Small and medium enterprises (SME) data compiled by the WB/IFC SME Department reveals a correlation between the number of SMEs per 1000 inhabitants and the cost to start a business4. This does not mean that a price decrease will automatically lead to more SMEs and job creation. Entrepreneurs – new or informal5 – will look at the overall regulatory cost when deciding to register a company, and start-up procedures are only one part of the overall costs. However, the private sector can benefit from formalizing its business by having access to business services, finance, or government procurement, which increases the chances for productivity gains and growth. As several country examples show (see point 4), improvements in the registration process will most likely positively influence company creation.
The worst the business start-up procedures, the higher the potential gains from successful reforms. Improved business registration procedures can help enhance the overall environment of the private sector and raise standards of efficiency and transparency for other government agencies.
Additionally, such reforms are relatively speaking easier and less costly than, for example, labor reforms. In short, fast and straightforward start-up procedures can contribute to a decrease in informality. This is particularly an issue in Latin America, where informal sector activity has increased and now represents the most significant source of employment in the region6. The result is distortions in the economy, with formal companies facing casual competitors with lower cost structures, violations of essential health, safety, labor, or environmental regulations. This can threaten social well-being and lower tax revenues, not allowing the public sector to provide the required infrastructure and support services7. It is also true that informal business is less productive than formal companies and faces barriers to growth. To create more jobs and increase growth, business registration reforms might be a good entry point to break the vicious circle in which many countries find themselves.
4. Can Reform Help?
There is ample evidence that simplifying the procedures to start a business can help increase business registrations. The European Union recognized that more accessible business start-up matters for the competitiveness of Europe’s private sector and initiated a broad reform program across all member countries in 1997. The European Commission Enterprise Directorate General published in 2002 the final report “Benchmarking the Administration of Business Start-ups,” reporting significant improvements in registration efficiencies and company formation within the EU8. According to Doing Business 2006, 31 countries eased business entry in 2004. In six of these countries, business entry increased after reforms: Spain (10%), Belgium (16%), Estonia (19%), Romania (22%), Vietnam (28%), Serbia, and Montenegro (42%). France was ranked among the five top reformers in 2003 by Doing Business, and the number of newly registered businesses increased by 18%, compared to the year before. Overall, European Union countries reduced the amount of time required to write a company by over 15%, and registration costs by almost 10% during 2003-04 – far outpacing other country groups9. Also, the OECD recognized that too much “red tape” is a common complaint from businesses and citizens in OECD countries.
But reform experiences were not limited to Europe: In Pakistan, business registration went up by 18.8% from 1998 to 2004, following reforms to improve business registration11, and in Vietnam, business entry increased 28% after reforms12. In Egypt, following reforms that cut the time to establish a business from something like five months to a few days, according to the Government, 3,012 new companies were established between last July and February 2005, with a total capitalization of USD 1.9 billion. That is double the amount of the like period of a year before13.
There is evidence that more accessible business start-up procedures can help generate more business ventures and, with it, create a more dynamic private sector. However, while simplified business registration is a necessary condition to motivate enterprises to become formal, it is only one element in the overall business environment, and some cases might not be a sufficient condition to spur further private sector development or formalization of existing enterprises; taxes might be still too high, or access to land might be a cumbersome process. In some countries, start-up procedures have been recently quite improved (e.g., Vietnam) and are not anymore the major impediment for companies to become formal.
How do we go about reforms, and what can we learn from good practices in other countries?
5. Country Examples featuring Good Practice
5.1 Business Registration in Canada – Nr. 1 According to Doing Business 2006
According to Doing Business 200614, Canada has one of the simplest and fastest business entry procedures. The responsible agency is Corporations Canada who belongs to the Industry Canada Department headed by the Minister of Industry. The easiest way to incorporate a company is via the Corporations Canada Online Filing Center, accounting for about 80% of all incorporation. The process is described below.
Step 1 (1 day): Choose company name – word name or number – through the online system16. Corporations Canada requires a “Canada-biased NUANS report” (Newly Upgraded Automated Name Search) before considering the corporate name. The report can be obtained either with NUANS Real-Time System or NUANS Registered Search House. NUANS is a registered trademark of the government of Canada. The software and data are the property of Industry Canada, while Hewlett Packard was awarded the license in 1996 to administer the NUANS system. The first time, you have to register to access the password-protected website and pay CDN$ 20 to receive a report. The proposed name has to meet the requirements of the Canada Business Corporations. Act name regulations and policies. If the name is submitted and the complete incorporation application and Corporations Canada rejects the name, the whole application will be refused. To avoid this situation, the company may ask for the per-approval of the proposed name.
Step 2 (1 day – the same day as step 1): File for Federal Incorporation and Register Corporation Provincially via the Corporations Canada Online Filing Center17. Two forms have to be completed: Form 1 for incorporation and form 2 for information regarding the registered office and the board of directors. On has also to attach the NUANS report and submit a “Corporate Name Information Form,” which provides Corporations Canada with additional information about the corporation’s name. Once the forms are signed and submitted electronically, an examiner reviews the data at the Online Filing Center. Unlike under “continental law” systems, the government assumes the integrity of the information provided by the applicant, and therefore, no sign of a public notary on the documents is required. However, if entrepreneurs provide false information, they are liable for prosecution by the Canada Business Corporations Act. Once accepted, the data is being entered into a database. The incorporation certificate is then sent via email to the company, together with the articles of incorporation. Once the company has incorporated federally, it is considered a legal entity. After processing a Corporations’ articles of incorporation, Industry Canada provides a federally incorporated business with its Business Number assigned by Canada Revenue Agency at no charge. The Business Number is a 9-digit number that allows registration with various government agencies (see step 3). No physical visit is required during the whole process.
While almost all Canadian businesses can use the online filing Center, it does not apply to nonresidents seeking to register goods and services tax (GST), harmonized sales tax (HST), and Corporation Income Tax account; GST/HST Registration for businesses with a mailing address in Quebec; and non-profit organizations.
In June 2002, the federal government, together with the provinces of Ontario, Nova Scotia, and Newfoundland and Labrador, launched a program pilot for joint registration to offer a single point of access on the internet for business owners to file for federal incorporation and extra-provincial registration (registration to operate the business in a specific province). In these provinces, when incorporating federally, the entrepreneur is simultaneously given the option to applying for extraprovincial registration with a company registry in that given province. Only a few additional online questions are required: Ontario requires information on the date business commenced in the area; name and address of chief officer/manager; and principal place of business if different from the registered office. Newfoundland asks for the primary type of business in which the company is engaged and share capital. Nova Scotia requires the date business commenced in the province, type of business activity, recognized agent (likely a service agent), and names and addresses of officers. It also requires that the document be sworn before a competent authority. The extra-provincial registration is linked online to the Canadian Revenue Agency (CRA), registering for taxable accounts.
Step 3 (2 days): With the business number, the corporate can register with CRA for tax accounts which may be done online. Clients with federally incorporated businesses can apply through the CRA online for other reports they require, such as GST or HST, import/export, corporate income tax, or payroll deductions.18 CRA also has public access to Industry Canada’s database and may invite additional information. The statistical office receives information on new incorporations by Industry Canada and that they also have unrestricted access to Industry Canada’s database.
Step 4 (immediately): According to the nature of the company or business registration with social security (old age security program and the Canada pension plan), labor-related insurances, etc., are required (http://www.cra-arc.gc.ca/tax/business/menu-e.html.). This can be done online, using the business number.
The reform process: The reforms to simplify the business start-up procedures were part of a comprehensive reform package to support SMEs, guided by “Growing Small Businesses,” a companion paper to the 1994 Federal Budget, released by the Ministers of Industry and Finance. Various consultations were held with public and private sector stakeholders resulting in several reports. Two approaches were identified in undertaking reforms: 1) to place responsibility on individual governmental institutions to address regulatory burden (bottom-up approach), and 2) to have the federal government take specific initiatives to reduce paper burden. In 1997, the ultimate report of the Joint Forum on Paper Burden challenged federal departments to gauge the impact of administrative requirements of federal regulations on small businesses, measure and track progress in reducing burden, establish permanent reduction targets, increase their use of results through performance reports.
Significant investments were made in information and communications technology for the delivery of business support services. The success of a 1992 pilot project that aimed to solve persistent problems of access to government programs and services, and perception of complexity and runaround, led to a network of Canada Business Service Centers (CBSC) – walk-in business resource centers. The CBSC network is designed to improve service to small businesses and entrepreneurs in the start-up phase, providing a single window for information on federal and provincial/territorial government services, programs, and regulatory requirements (online, in person, and by phone). The Canadian government’s Government Online initiative was the driving force that facilitated CBSC’s involvement in developing Business Gateway.ca, Canada’s business portal. One online tool developed by the CBSC network is the Business Start-up Assistant, which also provides links on registering a new company. Corporation’s Canada Online Filing Center was introduced in 1999. For the electronic filing of documents and the use of electronic signatures, statutory changes were made to the Canada Business Corporations Act (1994). Information required from the applicants was always relatively simple and is within the property right.
Therefore, the information requirements (forms) have not been changed19. In 2001 the fees were reduced by 50%, right down to CDN$ 250. On-line filing costs even less: CDN$ 200. According to a representative of Canadian Corporations at the Ministry of Industry, this has significantly contributed to the higher numbers of companies incorporated online. As a result of other re-engineering initiatives, Corporations Canada has been ready to process 50% more registrations annually, with minimal additional costs. Online business surveys have shown that companies are delighted with the possibility of incorporating their business online. The improvements were led internally, and various specialized consultants were brought in on a needs basis. The Revenue Agency (CRA) is leading an initiative to have the business number as a standard identification number for all government agencies. The various agency databases aren’t linked, one reason being the protection of knowledge.
Regarding joint registration – federally and at the provincial level – the program is functioning well, and Ontario is that the most advanced having the entire process online. The incorporation is not yet online in the two other provinces, as this requires a change in the law. The program pilot for joint registration is being rolled out to other areas, starting with the larger ones such as Quebec and British Columbia (negotiations are ongoing) and reaching out to the other ones. This requires negotiations with the provinces, mainly on the timetable of introducing the joint registration.
Following federal and provincial incorporation, to start specific operations, a corporation has to suit their municipal (licenses) requirements which vary from municipality to municipality. In the future, companies will be able to do this through Biz Pal. This web-based service will allow business clients to quickly generate a customized list of the permits and licenses they require from all levels of government. The Pilot Project is in development now and will be launched in summer 2005 with the lead group of participating governments. Additional jurisdictions will be invited to join by summer 2005, and the number of industry sectors covered will also be expanded.
5.2 Kosovo: A Good Practice Case in Business Registration, but not yet Online
Ex-Ante: In 1999, after a decade of social and economic hardship, the UN deployed an international security force and established an UN-managed civilian administration in Kosovo (UNMIK). Kosovo remains a province of Serbia but has “substantial autonomy and self-administration.” In fulfillment of UNMIK’s objective to establish a sound legal and institutional framework in Kosovo, the Provisional Business Registry (PBR) was established to identify the entities in the business. Still, it did not give legality to registrants. It was planned to include the PBR into a replacement modern business registry located at the commercial court.
The Reform Process: Despite plans for the PBR to be located at the commercial court, as a result of “good policy dialog with the authorities” via the World Bank’s Private Sector Development Technical Assistance (PSD TA) project, which started in June 2001, an administrative business registration system was adopted eliminating any court involvement. This was possible through an awareness-raising campaign.
The legal base of the Kosovo Business Registration is the UNMIK Regulation no. 2001/6, which covers personal business enterprise, a general partnership, a limited partnership, a joint-stock company or a limited liability company, the Administrative Direction no. 2002/22, and the Administrative Instruction of the Ministry of Trade and Industry (MTI) no. 1/2003. The Registry of Business Organizations and Trade Names of Kosovo (NBR) was established by UNMIK and the Provisional Institutions of Self-Government (PISG) as an independent executive agency under the MTI. The WB hired a private consulting company to simplify the process and introduce electronic filing. Adequate budget resources were allocated through the MTI – the law provides that fees have to cover the cost of maintaining the business Registry (financial sustainability). The Minister of Trade and Industry appointed the head of the Registry while the staff (all local) were being recruited through the competitive procedure. As of June 2004 (project completion), the NBR was fully operational and followed best practices in terms of a transparent and straightforward process:
1) There is a one-stop shop at the “federal” level, located in Pristine. The forms can be downloaded from the internet site, providing the number and sequence of procedures and their cost: http://www.arbk.org/en_default.asp (in Albanian, Serbian, and English). 2) Application: The forms and documents for each company need to be presented in person to the one-stop shop in Pristine. With the new WB project 2005, it is planned that Municipalities will be able to act as one-stop shops. The NBR will grant e-access to all Municipalities through a secure password after training the municipal staff in May/June 2005. Currently, Municipalities can only read information such as change of business name, address, type of business, founding capital, etc., but they do not have access to enter data themselves. 3) Lawyer/Head of Registry checks application (only formal) and approves it if complete and by section 9 of UNMIK Administrative Direction no. 3003/22 is done the same day as application. Once the company is registered, all the information is publicly available on the website. 4) Certificate released – the same day as application. 5) The Tax Administration, the Statistics Office, and the UNMIK Customs office receive weekly information on new business registrations by the NBR (CD Rom format). These Authorities and other offices in Kosovo will soon be linked directly to the NBR through protected passwords.
For some businesses, you need a license which has to be requested from the Municipality. A new WB project aims at streamlining the licenses process as currently, each Municipality has its requirements to obtain a license.
As of September 2004, the total number of businesses registered at the NBR amounted to 43,372, compared with 54,400 at the PBR (the previous high number is due to UNMIK regulation on provisional business registration, where branches/business units of the same parent business required separate registration. In addition, it is believed that many of these businesses were “paper enterprises” that never became operational, and others went out of business and never deregistered their enterprise). There are several discrepancies when comparing NBR data to Tax Administration data. An action plan involving nine inspectors is being implemented to reduce these discrepancies. According to the Head of the Registry, the following steps would include online business registration and implementing a complete one-stop-shop system utilizing a unique business identification number, both of which would require new legislation governing e-signature and upgrading of the Tax Administration and Customs registration system. Today, it takes only 0.7 days for the registration of a new business.
5.3 Business Registration Reform Process in Turkey – Private Registry20
This case study illustrates a reform that shifted authority over business registration from a government body to a private body and mandated sharing company information with relevant agencies.
Ex-ante: Before reforms, the process of establishing a company was cumbersome and problematic as analyzed by FIAS: • 19 procedures, 2.5 months • Few computerized registries (in main business centers), not online • Many office visits because no exchange of information among registries, ministries, and the public • Sequential and interdependent procedures requiring excessive documentation
Foundations for Reform- Preparation/Drivers/Champion • Preparation for acceptance into European Union • FIAS study leads to decree on improving the investment climate • Government forms committee (YOIKK) to design and oversee reforms • Chair of sub-committee on company establishment (Undersecretary of the Ministry of Trade and Industry) champions business registration reforms.
The reform process:
Despite resistance, authority over registries was shifted, and procedures simplified through intro-governmental public-private dialogue: • YOIKK convened, bringing together president, ministers, businesses, and NGOs • Over 25 meetings held to identify needs of all parties and eliminate procedures
Legal Reform • In November 2003, “Law Amending Turkish Trade Law, Tax Procedure Law, Stamp Duty Law, Labor Law, and Social Insurance Law” was enacted o requiring registries to provide relevant data to tax, labor, and social insurance authorities o eliminating the requirement for notarization and eliminated stamp taxes at regional registries
Institutional Reform • Delegation of authority over business registration was transferred from Ministry of Trade and Industry (MOTI) to the Trade Registry Office of the Chamber of Commerce • MOTI was removed from the registration process except for companies that must demonstrate compliance with special trade laws dictated by the Ministry • Creation of YOIKK has provided an ongoing high-level mechanism for public-private dialog on business registration reforms.
Operational Improvements/Tools • Searchable online company registration database, accessible to the public • Single application form from which information is distributed by post/courier • One window for registration with trade registry, tax, labor, and insurance authorities • Elimination of procedures deemed not necessary such as MOTI approvals and notarization.
Procedures, costs, and time have been reduced, while the number of company registrations has increased21. • 2 procedures, one day • No minimum capital requirement
Ongoing reforms: Efficiencies will likely increase as further IT enhancements are made • Automation of agencies will enable electronic transmittal of data among these agencies • Trade Registration Gazette will soon be automated • Application form will be available online when electronic signature regulation is enacted
Before… Process for Business Registration/Start-up in Turkey The former procedure required companies to register separately with each agency.