Really? 5 years? That seems really harsh. Is it all business failures or does it have to be due to mismanagement? I've heard the climate is very hostile to businesses in Germany; my sister in law was trying to sell art on etsy and apparently she had to get a business license to do so in Germany. She's now back in the USA where she can just sell stuff online and the only thing she needs to do is file her taxes correctly
> Really? 5 years? That seems really harsh. Is it all business failures or does it have to be due to mismanagement?
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.
The counterpoint is what's the point of reducing losses on bankruptcy if it makes the entire business climate worse? By trying to protect creditors you just make everyone poorer.
Does it? You could equally well argue that punishing CEOs for bankruptcy makes banks more willing to lend money, improving the business climate.
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.
Well, you’re basically taking something (cost of capital) that could be priced (via interest rates and collateral requirements) and turning it into a regulatory barrier. Personally I doubt that that is better, and I think the general consensus is that it is quite a bit harder to do business in those places with these regulations.
Does it? For most companies their creditors are other businesses that they’re sourcing supplies from. What makes you think those businesses can afford to take the hit?
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.
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.
> Both investors and creditors are exchanging money for a bet on future profit derived from the company being solvent
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).
We could go back to bad old days, where business owners were directly exposed to their creditors. Business fails, say goodbye to home, car, personal savings. If that’s not enough, off to the debtors prison with you, you can work till you’ve repaid your business debts.
Screwing over the bond market by screwing over owners of your company's bonds make the entire investing and general retirement and pension climates worse. Retirements and pensions are often guaranteed in part by the government, with tax funds. Tax increases and retirement deficits directly hit consumers in their ability to consume, and at least a few years back consumers were responsible for about 2/3rds of GDP (in the US, at least), so a bit more important than the business climate itself.
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.
So just bring in another CEO just for the bankruptcy. Currently that's not an uncommon practice in the US. Of course this new CEO would have to be a one-use fall guy with somebody else actually doing the job...
> 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.
Because you can just hire the CEO to take the blame and continue running the company from another position. Unlike with lawyers, engineers and auditors this arrangement would be much hard to prove.
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?
You can also screw over your creditors without declaring bankruptcy. Just stop paying your bills. Elon is famous for not paying creditors at twitter. Bankruptcy is just a way to get relief from creditors and prevent them from suing you.
Is it possible to have declared bankruptcy with no creditors? Can you just spend all of your own money down to zero? Would you still be banned due to losing only your own money?
I think it would be very difficult to achieve, you would somehow need to convince a bankruptcy court to accept your bankruptcy, despite having no creditors.
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.
Bankruptcy is something you get into when you can't pay debts to your creditors.
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.
do you have any sources for that? Considering that in germany, the "Mittelstand" is the major economic engine powering the economy compared to major corporations.
You know, all regulations only hurt small sellers, people at the “top” always get away from all the crap they are directly responsible for, no matter they are hurting their own business or the society as a whole
It's the wrong take-away to say all regulations only hurt small sellers. Do you want to give up regulations on child labor, or worker safety, or foods and drugs? If not, how come, considering it all hurts only small sellers?
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!
I don't think small sellers have anything to do with child labour. And since you mentioned loopholes, it is always the big players who get away with loopholes that small business owners do not
Small sellers aren’t worth even going after until they reach a certain size for huge swaths of the regulatory regime.
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.
Business owners get away with breaking violating the law. Small businesses are infamous for paying people under the table, stealing wages, not giving appropriate breaks, employing children etc.. The size of a business only affects the kind of laws they're likely to get away with breaking.
Digging into his post history to avoid refuting his point (which is overstated) is ... not appropriate? great?
I can pretty easily agree with a weaker version of his statement: regulations have a disproportionate impact on small entities. They're expensive to comply with, and small entities tend not to have access to the exotic legal tricks and arms-length interaction with regulations that can make them much less effective.
For the first one, if we can agree the regulation is good, then so be it. If your business can only thrive by hurting other people, you don’t get to be in business, that isn’t a more fundamental right than not being harmed by businesses. For the second, the solution is to plug loopholes that allow businesses of any size to bypass regulations. In no case is it the correct solution to get rid of good regulations.
> For the first one, if we can agree the regulation is good, then so be it.
IMO: If we can agree that the regulation has a net good effect, considering externalities and adverse effects. Having a "good regulation" that also increases concentration of control in an industry can end up being a net negative.
> For the second, the solution is to plug loopholes that allow businesses of any size to bypass regulations.
This is a nice thing to strive for, but in practice layers of indirection and ample legal counsel accomplishes a lot even in well-run democracies (even leaving aside how large organizations often influence how they are regulated in both direct and indirect ways).
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.
But a lot of businesses fail for reasons other than the directors "mistakes". The general macro trend has a lot to do with it. Should the owners of a cafe or bar that went under owing suppliers some money during covid be banned from starting a new business? Or someone who buys a failing business trying to turn it around and failing also be barred for 5 years?
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.
> But a lot of businesses fail for reasons other than the directors "mistakes".
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.
Can’t speak about Germany for sure, but usual euro way is you don’t need to do taxes at all if you do not run a business. Employer fills it for you. And getting a doing-business-as-individual is as simple as filling a form at revenue service website telling you’re starting a business. Then you get a tax ID to put on your invoices next day.
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.
Germany is notoriously bureaucratic. And Spain is just pure fucking hell. Notaries should be hunted for sport.
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.
I doubt there's much link with Catholicism. Here in Lithuania bureaucracy is pretty simple as I described above. From what I hear Poland is even easier.
>she had to get a business license to do so in Germany. She's now back in the USA where she can just sell stuff online
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.
This is terrible advice and you or actually your Estonian company will be fined for tax fraud.
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.
Which single person doesn't need limited liability though? In my experience small freelancers/businesses need that protection much more than bigger organisations, which can afford legal fees and court costs if things go south.
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.
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.)
Lucky you in this case, not having to learn and deal with all this then :)
But the original comment was about someone living in Germany (at least at the time)
Dubai? Extremely bad advice unless you deeply understand the sometimes “crazy” implications of their Sharia based laws e.g. debts:
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.
I would bet they fixed their information systems, and you couldn’t now leave if you happen to screw up.
Don't forget the 0% tax lowering the probability of bankruptcy significantly while living expenses are on par to a regular German city... Most of those expats you mentioned simply wanted to live above their means.
> Most of those expats you mentioned simply wanted to live above their means.
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.
Taxes are due where the business is managed, where the rwvenue is coming from and where tax authorities consider you a company of being a resident. So in your example, the Estonian company will still pay taxes as a German company. Which is explicitly stated in the tax treaty between Estonia and Germany.
