Why are minimum capital requirements a concern …

1 Why are minimum capital requirements a concern for entrepreneurs? minimum capital requirements signi - Denmark slashed its minimum capital re- cantly slow Such re- quirement for limited liability companies quirements also fail to serve their intend- from about $22,000 to about $14,000. ed purpose of protecting consumers and All of these changes lower the costs to creditors from hastily established and entrepreneurs to operate in the formal potentially insolvent rms. In recent years sector. The other 90 economies still re- Across regions, minimum capital many governments have stopped requir- quire entrepreneurs to deposit capital be- requirements are lowest in Europe ing new businesses to deposit minimum fore registering a business.

2 This amount and Central Asia. capital in banks or with notaries before varies greatly from 1 in Germany to Of the 189 economies studied in they can begin operations. more than $58,000 in Myanmar. Doing Business 2014, 99 do not have minimum capital requirements for What is a minimum capital requirement? rms. Some economies have never It is the share capital that must be depos- had them, while 39 have eliminated ited by shareholders before starting busi- WHERE IS THE minimum them in the past seven years. ness operations. For the Doing Business capital REQUIREMENT MORE minimum capital requirements starting a business indicator the paid-in PREVALENT?

3 Are comparatively higher in low- minimum capital is usually the amount Across regions, minimum capital require- income economies. that an entrepreneur needs to deposit in ments are lowest in Europe and Central Paid-in minimum capital is often a commercial bank or with a notary when, Asia, Latin America and the Caribbean a xed amount that does not take or shortly after, incorporating a business, and OECD high-income economies ( g- into account rms' economic even if the deposited amount can be activities, size or risk related to ure ). In Latin America and the Ca- withdrawn soon after a company is cre- their activity. ribbean only 10 of 32 economies require In most cases this required amount new businesses to deposit minimum Higher minimum capital requirements are associated with is speci ed in an economy's commercial capital , with the Dominican Republic im- less access to nance for small and code or company Research shows posing the most almost half of income medium-size rms.

4 That the existence of a minimum capital per capita, or about $2,500. Still, most Higher minimum capital requirement directly hinders business de- of the 10 economies that had enforced requirements are associated with velopment and capital requirements keep them low. In weaker regulations on minority Suriname it is about $30 percent investor protections and tend to Of the 189 economies studied in Do- of income per capita and in Bolivia it is enable the informal economy. ing Business 2014, 99 have no minimum $40, equivalent to percent of income capital requirements . Some economies per capita. And in the past 10 years other never required rms to deposit money economies in the region, such as Mexico, for incorporation, while 39 have eliminat- St.

5 Kitts and Nevis, and Uruguay, have ed minimum capital requirements in the eliminated minimum capital require- past seven years. Armenia, Belarus, Bul- ments altogether. garia, Denmark, Kosovo, the Republic of Korea, the Kyrgyz Republic and the Unit- Among OECD high-income economies, ed Kingdom are among these economies Austria and Slovenia have the highest that have cut or eliminated such require- minimum capital requirements , asking ments. For instance, Belarus halved its entrepreneurs to commit more than 40%. minimum capital requirement for private of gross national income per capita. In limited liability companies in 2008, then Sub-Saharan Africa 13 economies have abolished it a year later.

6 In 2009 Bulgaria minimum capital requirements exceeding reduced its minimum capital requirement 200% of income per capita. An extreme by 99%, to less than $2. That same year, example is Niger, where the minimum 42 DOING BUSINESS 2014. compared with other regions. For in- FIGURE minimum capital requirements by region stance, in 2012/13, Sri Lanka was the only economy of 8 in those studied that sim- 150. pli ed business registration compared with 10 of 21 in Europe and Central min. cap. (% of GNI pc). 100. minimum capital requirements are rel- atively higher in low-income economies 50 than in lower-middle, upper-middle and high-income ones.

7 Among high-income economies, 25% have a minimum capital 0 requirement ranging from to 230%. Europe &. Central Asia Latin America &. OECD high income East Asia &. Pacific South Asia Middle East &. North Africa Sub-Saharan Africa Caribbean of income per capita from about $1,500. in Malta to more than $50,000 in Bahrain. Bahrain and Oman require new limited lia- bility companies to deposit the equivalent of more than 200% of income per capita Note: Myanmar is excluded from the sample as it is a signi cant outlier. in bank accounts to complete registration Source: Doing Business database. and commence business operations. Of the 34 low-income economies stud- capital requirement is equivalent to 528% $14,000 to less than $2.

8 Similarly, in 2013, ied, 18 do not have minimum capital re- of income per capita about $2,000. Morocco eliminated its minimum capi- quirements. Among the other 16, 11 are tal requirement for limited liability com- members of the Organization for the Globally, except in South Asia, minimum panies. Many economies in Europe and Harmonization of Business Law in Afri- capital requirements have been cut over Central Asia and the OECD high-income ca,6 which has xed the minimum capital the past seven years. The biggest chang- region have also sharply cut or eliminated requirement at about $2,000. es have occurred in the Middle East and minimum capital requirements .

9 North Africa, where the share of econo- mies with minimum capital requirements In South Asia only India and Maldives of less than 5% of income per capita fell still have minimum capital requirements . DO minimum capital . from over 60% in 2006 to 6% in 2013 In India it is about $1,900; in Maldives, requirements FULFILL THEIR. ( gure ). In 2011 Jordan reduced its $135. In general, South Asia is lagging be- REGULATORY FUNCTIONS? minimum capital requirement from about hind on business entry regulatory reforms The minimum capital requirement nds its roots in continental Europe of the 20th Back then, the minimum paid- up capital was stipulated by law and its primary legislative purpose was to pro- FIGURE Share of economies where the minimum capital requirement is less than 5%.

10 Tect creditors and nurture con dence in of income per capita nancial markets. Nowadays, despite the nancial burden that minimum capital OECD high income (30 economies) requirements impose on potential entre- Europe & Central Asia preneurs, some argue that they protect (22 economies) investors and consumers from new rms South Asia (8 economies) that are set up carelessly, might not be Middle East & North Africa nancially viable and will likely close (16 economies) soon after launching. Advocates of this Sub-Saharan Africa (45 economies) argument claim that minimum capital East Asia & Paci c requirements enable prospective inves- (23 economies) tors to consider investments more cau- Latin America & Caribbean (30 economies) tiously.