Promoting the formalization of Ecuadorian entrepreneurs just got easier

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One common characteristic of workers in the Latin American labor market is their high level of informality. The pandemic has aggravated this situation. According to the ILO, 34 million people in the region have lost their jobs due to the crisis. As in other Latin American countries, in Ecuador, thousands of micro and small entrepreneurs operate in the informal sector, partly because of cumbersome and costly bureaucratic procedures that continue to impede entrepreneurship and business formalization in the country.

However, since May 2020, in the midst of the pandemic, the government implemented a reform that could help change this reality, thanks to a new simplified, cost-free type of company that allows a single individual to start a business with maximum contractual flexibility, known as the simplified stock company, SAS.

To date, more than 5,200 simplified stock companies have been created, representing nearly half of all newly formed entities of any type.

After noting the considerable initial demand for creating these companies, in September 2020, the Superintendency of Corporations of Ecuador enabled an Electronic Creation System specifically for the SAS. The goal was to facilitate the creation of new companies and the formalization of existing businesses from the comfort and safety of Ecuadorian homes.

Ecuador finally joined the global and regional trend of introducing simpler, more flexible corporate rules in its regulatory frameworks, with the clear objective of stimulating the creation of new companies, especially micro and small enterprises, and of promoting the formalization of existing businesses. Thus, Ecuador has joined the ranks of countries that promote corporate simplification and flexibility, along with Colombia, Chile, Mexico, and Argentina, and more recently, Uruguay, Paraguay, and Peru.

On February 28, Ecuador will celebrate the first anniversary of the implementation of the Organic Law of Entrepreneurship and Innovation which introduced the Simplified Stock Company, SAS. This law has enabled entrepreneurs from all Ecuadorian provinces to fulfill their dream of becoming entrepreneurs, promoting business activity in all sectors. So far, the businesses that have most benefited are  in the wholesale and retail trade sector; professional, scientific and technical activities; and the construction sector. Approximately 1,500 women have managed to create and formalize their businesses through this new type of company.

The many benefits of the Ecuadorian SAS include:

  • simplified registration process;
  • both physical and electronic registration;
  • the possibility of a single shareholder;
  • no minimum capital requirement to be incorporated;
  • full-fledged limited liability;
  • indefinite period;
  • optional use of intermediaries to incorporate a company;
  • broad purpose clause or not at all;
  • flexible internal structure;
  • optional oversight board;
  • maximum freedom of contract;
  • simple grounds for dissolution;
  • the possibility of keeping corporate and accounting books online; and
  • the use of alternative dispute resolution methods.

One year after the enactment of this law and nine months after its implementation, we can confidently state that SAS has become the most popular corporate vehicle in Ecuador and is helping to drive economic recovery through the creation of businesses. Additionally, it has been very well received by Ecuadorian entrepreneurs, who view this simplified corporate arrangement as an opportunity to start new businesses and formalize existing ones in a flexible, cost-free way, without the need to make a public deed and avoiding cumbersome and expensive bureaucratic procedures.

The implementation of this new way to establish businesses is evidence that the world is increasingly aware of the need to simplify and modernize business registration, especially for micro, small and medium-sized enterprises. The World Bank Group has supported the Government of Ecuador in its efforts to create its SAS legislation, its regulation and proper implementation, and has witnessed the major and rapid impact that the introduction of this type of company has had on the Ecuadorian corporate landscape. Congratulations Ecuador, and happy anniversary!

Authors

Christian De la Medina Soto

Expert in Private Sector Development