There’s a big difference between bankruptcy and business failure. Plenty of businesses fail without entering bankruptcy, they’re wound down responsibly and their creditors are repaid in full.
If a company fails due to bankruptcy, then it means that people who lent money to that business are out of pocket, and end up paying for the failure.
The whole point of “limited liability” companies is that the owners and management are shielded from creditors in the event of bankruptcy (hence the “limited liability”). So a five year ban (which is true in most countries) from directing another limited liability company is reasonable, it don’t prevent your from running a business, only from running a limited liability business, because there’s now evidence that in the event of failure you’ll leave your creditors high and dry.
Ultimately the privilege of running a limited liability company, where the state promises to protect you from your creditors if things go wrong, is just that, a privilege. If you prove yourself unable use that privilege responsibly, then that privilege is temporary taken away. To be clear, the privilege removed is protection from creditors by the state, if your business fails. You can absolutely start another business, it’s just that the state won’t protect you if you fail.
> Shareholders are often last in line to receive proceeds with preferred stock shareholders getting better treatment than common stock shareholders.
Loans aren't shares; not even early loans. Else they'd get much better returns from the successful businesses.
Though, I don't think the distinction really matters within the context of my point. Both investors and creditors are exchanging money for a bet on future profit derived from the company being solvent in the future and having extra money to either pay back debts or pay out dividends.
My point is that America tends to get a lot of flak for rigging the system in favor of those with excess money (some of it is even fair). My point is that if you want to structure your system past what we're willing to do, you may want to stop and think for a second about if that's what you really want.
Now, if you want to protect the money of people with extra money to lend out, that's absolutely fine. It's a completely internally consistent position. But my understanding is that it's not that popular of a position, so I'm surprised the system is set up this way.
Nope, that's still just investors.
Creditors are not people who made bets on the company's future profits. Creditors are people who the company made legally binding contracts with to pay them. For example people who provided products and services who are getting stiffed. Also: taxes due.
Even a bank loan is not a bet on the company's future profits. A bank loan is a contract that says you will repay the money lent, with interest. Irrespective of profitability.
Which is why a limited liability company usually can't get credit unless it is also guaranteed by someone else. Because with no outside guarantees, it would be a bet. (Yes, convertible bonds exist, but different topic).
That being said, I completely disagree with this part:
> Creditors are not people who made bets on the company's future profits.
Nope, that's not how reality works. If the company doesn't have the money (including their assets), you aren't getting paid.
Extending credit is fundamentally a risk. That's one of the reasons credit card companies charge interest.
And of course for startups in the early years it's not that relevant anyways, since nobody will lend you anything until you have revenue. VCs invest instead of lending and aren't owed anything if you shut the company down.
Banks can take into account the borrowing history of the executive teams already.
> And of course for startups in the early years it's not that relevant anyways, since nobody will lend you anything until you have revenue.
Being unable to make payments on leases, etc, is pretty likely for startups that fail.
And that's without even factoring in the effect of bankruptcy on consumers employed by the bankrupt company. Employees of a bankrupt company are considered the highest level of unsecured creditors, but they still come behind secured creditors. So bankruptcy can not only result in an employee (who is also a consumer in the more general economy) losing their job, but losing their last paycheck and benefits coverage. Which has a consequent effect not only on consumption, but on utilization of public, tax- or fee-supported services.
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If a person bankrupts a company, they could probably use 5 years to let all of the lessons that they should have learned sink in. If you fail out of school you have to retake your classes in order to graduate.
Ultimately most of the real creditors to small and medium businesses are other small and medium businesses. So if you offer no protection to them at all, you either get extremely risk adverse companies that refuse to offer any sort of credit (such as 30 day invoices), or a single business failure ends up causing a cascade of failures all of their suppliers take the hit, and also go out of business.
Ultimately increasing the trust between businesses, so they’re able to extend thing like 30 day invoices as standard, substantially improves the business climate. It reduces the barrier and risk of everyday business transactions, makes it easier for businesses to manage their cashflow, and ultimately allows businesses to grow faster and in more robust manner.
None of this is about protecting lenders like banks, or investors. Most of the time they screwed anyway, it’s about protecting other businesses who’s primary function isn’t financial risk management.
If you have no debts, and thus, no creditors, you can't go bankrupt by definition. Of course, if there are government fees or taxes to pay, the collector of those becomes a creditor. You would want to formally close the business so that it doesn't accrue annual fees and force you to do more paperwork.
If you spend all your money down to zero, then the normal thing is to just have your company dissolved and struck of the companies register. For which there is no consequences, you just tell the state your business is no longer operating, they make a note of that, and that’s it. Business dissolved, you get on with your day.
> If you prove yourself unable use that privilege responsibly
Good luck determining whose actually to blame and who is innocent... at the end of the days only unlucky small to medium business owners who can't afford expensive lawyers or consultants will suffer from such a policy.
I really dislike this attitude, lawyers, engineers and auditors are liable in case of negligence. Why should CEO's be excluded from liability?
Also CEO are liable when they engage in criminal behavior just like everyone else.
And where are talking about auditors there are very specific and procedures which define they duties and responsibilities. How could you replicate that for CEOs?
> I really dislike this attitude
I'm just trying to be rational...
The problem isn't the concept of regulation, but the follow-through on loopholes. By doing away with regulations you'll decrease quality of life for most people. Instead we have to find ways to react to loopholes in a fair way. It's not impossible, we've done it before, see the previously-mentioned examples!
See, for example, UL/CE and FCC regulations - unless they burn something down or interfere with emergency services, businesses can usually defer the regulatory cost till they can afford it. Or the FAA, which gives out slaps on the wrist like its going out of style, as long as the offender is not an airline.
Case in point: many countries allows underage family members to work for family businesses and even the ones that don’t, barely enforce it. A factory hiring dozens of kids? That’s a lot less likely to go unnoticed.
This is a remarkable claim. Why would you think that?
Bankruptcy is not a mild consequence. People can and often are ruined by a bankruptcy, not to mention the harsh impact that it has on employees who are suddenly forced out of a job. Declaring bankruptcy should not be considered as something mundane or yet another run-of-the-mill managerial decision.
Also, not being able to found a company is not what I would call "harsh". Even in a purely capitalist view of society, a entrepreneur needs to focus on ventures to ensure they are successful, and "failing fast" does not mean it's ok to file for bankruptcies.
At the end of the day, creditors must (and generally do) realise when supplying a limited liability company there is a risk that the company goes under you won't get paid. That's why credit insurance and credit control departments exist.
If the directors were committing fraud by misrepresenting the state of the business and it fails, that is a completely different thing and directors should be barred from trading. But businesses fail all the time and we must accept that. Barring people from trying again for 5 years isn't a great solution imo.
All the more reason why entrepreneurs should not take lightly the prospect of filing for bankruptcy, and should focus their energy on ventures where they can minimize the chance of burning through cash right into bankruptcy. Otherwise it starts to sound like these serial entrepreneurs are just flinging crap at a wall to see which one will stick with little to no effort. This is a massive disservice to investors and employees alike, if not outright fraud.
If you sell as an individual, it’s just you selling random stuff that you don’t need to pay taxes for. Once you do this as a business, you declare it as such and notify the state about it.
Britain is great. I can file my taxes online relatively painlessly for any non-employment income. Employment income is done automatically. To set up a small business, I buy public liability insurance and a domain. Many tasks that require multiple notary appointments in Spain can be done online or, for some obscure processes, at the post office.
I suspect that business climate divides sharply between the north and south, with Germany and France being honorary southerners. I'd love to unpack the link between Catholicism and stultifying bureaucracy, since both involve archaic institutions imposing themselves between oneself and one's goal.
The Economist Intelligence Unit ranks Germany 13th in its global business environment index, the UK 15th. In the local index, it's 7th vs. 9th.
https://country.eiu.com/article.aspx?articleid=222209005&Cou...
https://country.eiu.com/article.aspx?articleid=402870423&Cou...
If you want to sell in the Germany, get a business license from Estonia or Romania or some other low-cost low-bureocracy EU country, and pay your taxes there. Germany is still living in the business climate of the '60s.
In Germany income is taxed where it is generated, which includes the head of the person running the business. So if you run your foreign company from Germany - which is expect to be the case if you have no physical permanent office in Estonia, where you also have to be regularly present - you home is considered to be an business location and thus you are taxed accordingly.
Note that this only applies to limited liability companies.
If you are a single person with no need for limited liability, just register an individual business (Einzelunternehmen) with your local authority (Gewerbeamt). It’s really easy, cheap and if you need support, tax consulting for individual business is rather cheap as well and worth it if your business generates regular income. Otherwise you can just talk to the authorities, because income from passion projects (i.e. non-regular, without the goal of generating a substantial income amount) is not taxed at all.
Only if you're a resident in Germany, But if I live somewhere in the EU and sell something to someone living in Germany I don't owe income tax to the German government.
I pay my income tax where I'm a fiscal resident (Estonia, Romania, etc.)
If you are a freelancer trading without a corporate entity you can get screwed so hard. There are nasty people out there that will take advantage of this and can demand loads of free work or refunds, knowing that your entire personal wealth is on the line.
The UAE has no bankruptcy laws, so there is no protection for those who fail to meet their car repayments, pay off their credit cards or default on their mortgage, even accidentally.
Anyone who fails to make their payments faces imprisonment in the notoriously tough prisons of the United Arab Emirates, and the Sharia-influenced debt offences have even led Interpol to circulate red alerts to capture indebted Europeans attempting to flee the UAE.
There have been previously recorded cases of foreign workers being prevented from leaving the Emirates after being blacklisted for simply missing one credit card payment or bouncing a cheque. As a result, many expats are forced to abandon their lives to avoid jail time, often with their car keys still in the ignition.
https://www.carkeys.co.uk/news/the-story-behind-dubais-aband...
Actually, I had a friend working there as a nurse who bought property to live in, and they were underwater for a while. They were not stupid: it was an easy and normal mistake to make given their background (mortgages are not thought of as jail material at home, I’m not sure if they were warned of dangers).
I expect there are other unknown serious “gotchas”, because you are not a citizen in Dubai. You could easily be treated the same as the third-world working imported labour, and the legal system there can heavily penalise non-citizens.
Yeah: 0% tax is nice, but personally I think it is not worth it to live in a crappy place and there are hidden costs. Been there for a week just to have a good look around: fucking hated how people were treated there - weird economy.