Hi Andi4711,
some countries try to protect creditors and other businesses doing
business with a Ltd. better than others. Other countries want to make
it as easy as possible to found a Ltd. That is the simple reason why
some countries require a Ltd. to have a minimum equity and others
don't.
But let’s expand on this and start from the beginning:
The main advantage of a Ltd. is that it limits the amount of money the
owners of the business are liable for in case the business collapses.
As a result the Ltd. protects potential entrepreneurs at the expense
of creditors and business partners.
Because of this, some countries require a certain amount of equity to
be put into a Ltd. By doing this they guarantee a higher level of
security for creditors and business partners and a higher initial
commitment of the entrepreneurs.
Additional benefits of a required minimum equity are:
- A certain level of professionalism is required as most people don't
have sums like the required ones easily available to play
entrepreneur. If banks have to be involved in the financing there is
also automatically an additional level of control and advice in place.
- The company has a certain amount of actual working capital from day
one to realize a real business plan.
Other countries favour the creation of new businesses over the
protection of creditors and other businesses. They try to make it as
easy and risk free as possible for individuals or groups to create a
company.
The main benefit is obvious: Ideas can be realized without risking too
much of one's own capital (of which there might not be much available
in the first place) on the feasibility of the idea - therefore more
business ideas actually get a chance to come to life.
Of course there are also the accompanying negative sides:
- Business partners and creditors are more difficult to convince to
work together with the company. They are running greater risks
especially with new companies that haven't proven their ability to
generate money.
- Ideas are sometimes realized without securing an adequate amount of
capital and therefore the company runs into financial difficulties at
the most unfortunate time (e.g. when a patent has to be secured or a
fair comes up).
- A “can’t loose very much” attitude often prevents entrepreneurs from
really thinking about every relevant aspect of their company project
(e.g. making a business plan, reading up on legal requirements,
talking to specialists) which diminishes the success chance of
otherwise good business ideas.
As a side note, I should probably also mention, that some countries
require the founders to actually transfer their minimum required
equity to the company at the point of creation, while other countries
only require a certain share to be transferred. The remaining share is
kind of a payment guarantee in case of a failure of the company.
This point is relevant, because it makes it slightly easier for
entrepreneurs with a cash problem at the time of creation to still
found the company. Less capital is necessary to create the company in
exchange for a share of the liability towards creditors and business
partners, should the company fail (although the amount is of course
limited to the remaining share of the minimum equity that wasn’t
transferred at the time of creation).
From personal experience I can say that a minimum required equity
forced me to wait until I was really ready to form my first Ltd. (a
German GmbH), and to research my business plan etc. very carefully
before putting all that hard earned money on the line.
The second positive aspect for me was that I actually had a real cash
reserve when times got tougher than I had anticipated in my original
projections.
I’m sure it also helped the company during negotiations with banks for
credit lines etc.
I hope this explains the reasoning behind required minimum equity
versus no required minimum equity to your satisfaction. If you have
any additional questions, feel free to ask for a clarification.
voyager-ga
An interesting side note: While searching for relevant documents, I
stumbled upon countless offers telling me that I should form a Ltd. in
another country, where I could get the benefits of limited reliability
combined with no (or miniscule) required minimum equity. For Germany,
Great Britain and Spain turned up the most hits of this kind.
Search Strategy:
Personal experience founding a Ltd. and German and British law texts
(books)
"Private Limited Company" faq
://www.google.com/search?sourceid=navclient&q=%22Private+Limited+Company%22+faq
"Limited Company" faq
://www.google.com/search?sourceid=navclient&q=%22Limited+Company%22+faq
comparison limited liability companies
://www.google.com/search?sourceid=navclient&q=comparison+limited+liability+companies |
Clarification of Answer by
voyager-ga
on
17 Mar 2003 07:17 PST
Hi Andy4711,
sorry that I didn't reply to your request earlier... I was on holiday
(still not back at home, but at least I have internet access from
here).
I will try to give you a preliminary answer to your clarification
request, as I don't have my research notes from when I answered your
question with me (nor do I think that I kept them at home, sorry - it
was just too long, I believed that the question was answered and
done...)
My initial results show that you cannot really base the amount of
capital required on a firm theoretical basis. I have found a few
articles on the fixing of the minimum amount by Swiss authorities and
educational and political organizations trying to influence this
decission in one way or another (all sources I looked into so far were
German language).
As a result, I reitereate what I said in my initial answer:
- The most influential factor is the governments desire to either
protect the interests of existing businesses and the credit industry
(in which case the amount will be high) or the interests of new
entrepreneurs (who would rather spend less, risk less, and found their
businesses with as little as possible).
- Another factor that played into setting up the amount (at least in
the Swiss example) was what the avaerage founder will need as a
personal income from the company within the first year of operations.
This was contested as a factor by some sources, saying that a large
amount of those companies get started while the founder is still
working in some other business.
- Some argued also, that for the purpose of differentiating this form
of company from the next step: the share based company form - there
should be a difference in capital invested and that the difference
should be considerable.
- The calls for a higher amount, to cover the risks involved in
dealing with Ltd. type companies, were answered by others claiming
that this risk in actual ventures is often covered by individual
agreements with the owners of Ltd.s, like underwriting company dept,
etc.
Aside from the Swiss sources, I also found other documents from
nations around the world:
- Some nations apparently also have different minimum investments for
different branches (e.g. a production company has a different minimum
capital than a consultancy, etc. (example: China))
- Especially smaller nations set their minimum required capital low to
attract foreign investments or/and advertise with comparisons to
other (bigger) nations' minimum requirements.
- In some countries the minimum required capital varies between states
or even cities (e.g. UAE).
- Most countries leave their required minimums the same for long
periods - there is apparently no or only little adjustment for
inflation or economic situation.
As for your comment about the "risk sharing" - could you please
explain that in more detail? Are you talking about the risk sharing as
in balancing "the higher the minimum required investment, the higher
the risk for the entrepreneur" and "the lower the minimum required
investment, the higher the risk for the business partner/bank"?
I hope this helps. I'm sorry I can't give you a better formatted
answer (or a better spellchecked one) or more details at the moment,
as this is neither my computer nor my place. If you require further
information, feel free to ask. Please try to detail exactely what kind
of information you require, as this is a very big field with numerous
contributors and documents available (especially advertisements).
voyager-ga
Additional Resources:
Revision of the GmbH-law (German)
http://www.djs-jds.ch/vernehml/vern_gmbh.htm
China law - Establishment of limited liability companies
http://www.china-laws-online.com/china-law/company-law/establishment-limited-liability.htm
Search Strategy:
stammkapital gmbh begründung (I used this to search for the German
language sources)
limited liability captial reason
://www.google.com/search?hl=en&lr=&ie=UTF-8&oe=utf-8&q=limited+liability+capital+reason&spell=1
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