Back to basics - company law 101 for startups

Starting a business is a risky endeavor and requires courage. It is also an opportunity. Whether this opportunity will materialize depends on how well the aspiring entrepreneur is prepared and how adaptable the startup is. Equally important is the policy and legal framework that can mitigate the risk and increase chances of success.

What legal form to operate in is one of first decision points for startups. This decision has important implications on fundamental issues such as personal liability, taxation, financing of activities, innovation. A strong companies law can help entrepreneurs navigate this process and makes starting a business more predictable. However, the companies law often falls short. Many countries are still missing the basics, including the context needed to form an entity that will give the entrepreneur proper legal protection.
 

Without a strong companies’ law, navigating company legislation is not straightforward. As a consequence, entrepreneurs face significant uncertainty and do not have the basic elements to decide which legal form is appropriate for their needs.

Some common issues we observe are:

• Excessive and discretionary government controls of business entry and business activities.
• Uncertainty as to how long and when an entrepreneur can enjoy limited liability.
• Corporate governance provisions that are too complex and costly for small companies but insufficient for public shareholding companies. Simple company forms such as LLC’s are required to have complex governance structures such as general meetings, board of directors, company secretaries. On the other hand, public shareholding companies are not required to comply with good corporate governance principles such as disclosure, division of power between executive and non-executive board members.
• Insufficient or missing provisions on the relationship between the company and its stakeholders and shareholders.  

This influences the entrepreneur’s decisions and can significantly impair the ability of a startup to operate grow, innovate, recruit and retain talent. In short, without a proper company law framework that governs the formation, operation and corporate governance of companies in a country, there can be no entrepreneurship.

The World Bank group is currently working with many client countries to put in place a sound company law framework. Amendments to the Companies Law in Egypt introduced for the first time the possibility to have a single member limited liability company. A comprehensive review of the Companies Act in Zambia improved disclosure and protection of minority shareholders and reduced discretionary powers in business entry and operation.

From a development perspective, the private sector can indeed play a much bigger role in filling the $2.5 trillion gap required annually to meet the sustainable development goals. But in order to encourage the investment necessary, a lot has to change in terms of the business environment. A sound framework for company laws can go a long way towards facilitating entrepreneurship.