An entrepreneurial yet global view on how to legally incorporate a firm in today’s markets
Written by Marco A Soriano @sorianoCEO
Co-Written by Paul Parisi @sorianoGRP
Friday, May 29, 2015
The Soriano Group monitors global activity on how to leverage investment opportunities. That said, we happened to present to our readers A Global Perspective on Entrepreneurship, Competitiveness and Development, which examines the relationship of entrepreneurship and competitiveness from a fresh perspective at a global scale. In this publication you will find that it takes a nuanced stance on the prevalence and types of entrepreneurs globally, and the environments in which they thrive. Our look at entrepreneurship aims to provide a deeper understanding of early stage entrepreneurial activity by taking into account that not all entrepreneurs are the same. Specifically, we highlight early-stage entrepreneurs that are innovative and ambitious about their growth expectations, arguably those with the highest impact on economies.
What we find is thought provoking: In general, early-stage entrepreneurial activity is higher in economies that are less competitive and lower in highly competitive economies. Conversely, the proportion of ambitious and innovative entrepreneurs is more frequently high in more competitive economies. Importantly, we find that in many highly competitive economies with low rates of business starts, entrepreneurial drive manifests itself through more formalized structures – in what we call “entrepreneurial employee activity” –, which should caution anyone from jumping to quick conclusions about the quality of entrepreneurial ecosystems based on entrepreneurship rates alone.
The countries’ economies you will see in the tables below – combine high early-stage entrepreneurial activity with a high proportion of ambitious and innovative entrepreneurs. All other economies fall within the average (or below the average) on at least one of our three dimensions and we have grouped similar economies through cluster analysis.
The three aspects of entrepreneurial activity examined in the study are “early-stage entrepreneurial activity” measured as a percentage of the working-age population, the proportion of “ambitious” entrepreneurs (who expect to create 20-plus jobs in 5 years) and the proportion of “innovative” entrepreneurs (who offer new products or services).
To develop a deeper understanding of how entrepreneurship interacts with economic competitiveness, what preconditions and business strategies drive different combinations of entrepreneurship types and how policymaking can improve their impact, the study identified five clusters of economies among countries sample:
- All-rounder economies with high rates of early-stage, ambitious and innovative entrepreneurs;
- High-Activity economies with high rates of early-stage entrepreneurial activity, and average or lower ambition and innovation;
- High-Ambition economies with average or lower rates of early-stage activity and innovation, but high ambition;
- High-Innovation economies with average or lower early-stage activity and ambition and high innovation; and
- Neutral economies with average or lower rates on all three metrics.
[to be explained in the next publication of SG studies]
Figure 1.2.3 shows how the development stages (see “Development Stages” Box) and range of competitiveness of the economies of the 44 countries translate into this study’s unique competitiveness scores. All 14 highly competitive economies in the study’s 44-country sample are also innovation-driven economies while among the remaining eight innovation-driven economies, six are moderately competitive and two low competitive.
Competitiveness matters for entrepreneurship, but not in any simple or straightforward way. The most competitive economies are not the ones with the most new business creators, yet on a per-entrepreneur basis, their economies tend to derive greater benefit from their smaller concentration of entrepreneurs than do less competitive economies.
Not only does the rate of entrepreneurship vary significantly by country, but also the type of entrepreneurs that are most prevalent in different countries. This section discusses three dimensions of entrepreneurship and how they map across the globe:
- Early-Stage Entrepreneurial Activity refers to the percentage of the population aged 18 to 64 years that comprise ether nascent entrepreneurs or owners-managers of new businesses. This measure provides insights into the early stages of entrepreneurial activity and the environment that enables these early-stage entrepreneurs.
- Ambitious entrepreneurs need to build a significant organization to fulfill their goals; they cannot achieve them on their own. Therefore their estimate of how many people they will employ in the medium term is a good proxy for their ambition. The proportion of ambitious entrepreneurs is critical for measuring the job creation aspect of entrepreneurship.
- Innovative entrepreneurs are measured in the study as the proportion of early-stage entrepreneurs that introduce a new, unique product or service into a market. This is only one dimension of innovation, but it may indicate the level of sophistication of entrepreneurs in an economy.
All three dimensions are impacted by a country’s competitive environment. Particular conditions facilitate the ability to start a business, to develop and introduce innovations, and to grow businesses.
So, How do I start up a business legally?
First thing you should know is that generally speaking that incorporation of startup companies in today’s market has become drastically different than in past years. It is definitely becoming a much more common business practice, and there are multiple ways in doing so. The three most common methods of incorporating companies in society today are C-Corp, LLC’s and S-Corp.
The C-Corp is often viewed as the optimal way to incorporate a start-up. In today’s society, more and more companies are choosing this method than in the past. The C-Corp has to file its own tax report, and is selected by startups that are looking to raise venture capital, or who plan on reinvesting their profits back into the company. Within this form of incorporation, the owner’s personal assets are completely separate from the liabilities of the company.
LLC’s are an excellent method of incorporation if a company seeks liability protection, without the excessive paperwork. They are extremely simple and cheap to set up. LLC’s also contain economic interest that is transferrable. The only drawback of an LLC is that it may have difficulty in raising equity capital and using debt as a main source of financing. Providers of equity or debt capital may second-guess infusing capital where they would be unable to gain managerial control in the event of subpar performance.
An S-Corp is a pass-through entity for federal taxes, which means that the taxable P&L for the business are transferred directly to the business owner’s personal taxable income. This form of incorporation is frequently used for companies with projections of profit immediately following incorporation. Companies that decide on an S-Corp are often expected to distribute these profits to their shareholders. A drawback of an S-Corp however is that they are only permitted to have one type of stock, and are limited to no more than 100 shareholders.
Incorporating businesses is not the same in all parts of the world. There are different rules and regulations that are apparent among nations, and even amongst various states within the United States. Arguably the two strongest markets in the world include China and the United States.
In China, which has emerged to be the world’s strongest economy within the past decade, they have a standard 5-step process:
Step 1 includes registering a company name with the State Administrative Bureau for Industry and Commerce (SAIC).
Step 2 is where the company must prepare documentation, such as financing reports, risks, and earnings forecasts.
Step 3 requires submission of a business plan and budget to the local government authority.
Step 4 is where the company must obtain a business license from the local SAIC. Step 5 is the last step and requires a company to register with the tax bureau, foreign exchange control, statistics bureau, and the customs bureau.
In Contrast, the Process for incorporating a company in the U.S requires a total of 6 steps:
Step 1 is where the company chooses their desired name.
Step 2 includes submission of the incorporation forms to the secretary of state website.
Step 3 requires a payment to the secretary of state for submitting an application to incorporate their company.
Step 4 is applicable to a majority of the states within the U.S and it is where the company publishes their name and business operation in the in the local newspaper.
Step 5 requires the company to file for a tax ID number with the IRS (Form SS-4).
Step 6 is the final
Incorporation regardless of the method used does include similar benefits. Incorporating secures a companies assets, gains tax breaks, and are often valued by business owners due to their limited liability for business debts. When a company becomes incorporated, it is a signal that a company expects to be around for a significant period of time, which can trigger extra investors/investments. Lately for startups, the C-Corp is viewed as the best method, but not the sole method.
Table 1.1 above shows per country incorporation cost and time frame
In short, unlike early-stage entrepreneurial activity in general, higher proportions of ambitious early-stage entrepreneurs are found in highly competitive economies.
There are no countries with low competitiveness scores that have a high proportion of ambitious early- stage entrepreneurs. Instead, five countries with low levels of competitiveness are in the bottom quartile. Meanwhile three highly competitive economies – Taiwan, Japan and the United States – have early-stage entrepreneurs that include a sizeable proportion of ambitious early-stage entrepreneurs.
The typical profile of an ambitious early-stage entrepreneur is male, highly educated and working with a team of other owner- managers. The age profile, however, does not seem to differ markedly from the age profile of other early-stage entrepreneurs. In general, entrepreneurs are younger in factor-driven economies and the average age is older in economies with higher levels of economic development. Ambitious early-stage entrepreneurs, however, have a similar age distribution to early-stage entrepreneurs in general.
Generally, men report themselves to be more engaged in early- stage entrepreneurship than women. This gender difference is also apparent among ambitious early-stage entrepreneurs.
Although the popular image of entrepreneurs as sole business owners is in line with the reality of entrepreneurs in general, this is also how ambitious entrepreneurs are portrayed in the media: as one-person dynamos such as Steve Jobs, Richard Branson, Jack Ma, Oprah Winfrey or Mohammad Yunus. However, this image does not accurately describe the ambitious entrepreneur. In all of the countries’ economies studied for this report, ambitious entrepreneurs were instead much less likely to start a business on their own. Rather, they were more likely to start enterprises in teams of three or more people. Overall, 63% of entrepreneurs with lower growth ambitions were starting businesses on their own, but only 40% of ambitious entrepreneurs were single founders.
A most recent example of successful IPOs:
Innovation is both a critical driver and key outcome of competitiveness. And innovative early-stage entrepreneurial activity is one of the means through which significant innovation occurs. However, as with the rate of entrepreneurship in general, and with early-stage ambitious entrepreneurial activity, the rate of innovative entrepreneurship varies significantly across the economies in this study, ranging from almost no innovative entrepreneurial activity in Brazil to innovative activity accounting for over 50% of early-stage entrepreneurial activity in Chile.
Should you have any questions, please write to:
Marco A SORIANO, Managing Partner at