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Minimum capital requirements signifi- Denmark slashed its minimum capital re-
cantly slow entrepreneurship.1 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 firms. 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. 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? firms. 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? 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 fixed amount that does not take
or shortly after, incorporating a business, and OECD high-income economies (fig- into account firms’ economic
even if the deposited amount can be activities, size or risk related to
ure 4.1). In Latin America and the Ca-
withdrawn soon after a company is cre- their activity.
ribbean only 10 of 32 economies require
ated.2 In most cases this required amount new businesses to deposit minimum • Higher minimum capital
requirements are associated with
is specified in an economy’s commercial capital, with the Dominican Republic im-
less access to finance for small and
code or company law.3 Research shows posing the most—almost half of income
medium-size firms.
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 growth.4 capital requirements keep them low. In
weaker regulations on minority
Suriname it is about $30—0.4 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 1.8 percent of income
capital requirements. Some economies per capita. And in the past 10 years other
never required firms to deposit money economies in the region, such as Mexico,
for incorporation, while 39 have eliminat- St. 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. 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
100
Minimum capital requirements are rel-
atively higher in low-income economies
50 45.4 than in lower-middle, upper-middle and
high-income ones. Among high-income
10.4 13.2 15.8
3.5 3.6 economies, 25% have a minimum capital
0 requirement ranging from 1.5% to 230%
Europe &
Central Asia
OECD high
income
South Asia
Sub-Saharan
Africa
Caribbean
in the services industry with low start- freezing capital in a bank account may rules have lost virtually all of their value
up capital has to pay as much as a large undermine a company’s growth. In Bo- for stockholders and creditors because
manufacturing company with high initial livia and Ghana minimum capital can be better approaches have been developed.
capital in Gabon, despite the difference withdrawn in full only after a company’s Today creditors must rely primarily on
in business activity and size. Moreover, dissolution. Moreover, high minimum negotiated contractual protections, as
funds tied up in minimum capital require- capital requirements can enable fraudu- stipulated in statutory and incorporation
ments, particularly in economies where lent activities that they are supposed to agreements.21
the amount is sizable, could impose fi- prevent. Entrepreneurs eager to incorpo-
nancial constraints on companies that rate companies but lacking the required A study of 5 EU economies shows that
have other needs, such as hiring, buying funds, often falsify company incorpora- eliminating minimum capital require-
equipment or developing services.8 tion forms or withdraw funds soon after ments makes it easier to start small and
incorporation.15 medium-size enterprises. The number
Others argue that minimum capital re- of registered businesses has increased
quirements shield firms from insolvency If the capital requirement is too low, it in 4 of the economies studied that have
and so protect creditors and investors.9 fails to screen out potentially unviable lowered or abolished minimum capital
But lenders tend to base their decisions businesses. A low requirement does little requirements (France, Germany, Hungary
on commercial risks rather than govern- to protect creditors if a company under- and Poland). Research also shows that, in
ment-imposed minimum capital require- goes financial distress.16 In many econo- addition to significantly increasing the to-
ments.10 Creditors usually prefer to eval- mies the requirement is merely symbolic tal number of limited liability companies,
uate firms’ income statements, business because governments and company reg- such legal reforms have raised the num-
plans and other representative indicators. istries cannot predetermine how much ber of new firms created.22
Thus, many economies have found oth- money might be needed to cover compa-
er ways to protect investors, particularly nies’ liabilities if they become insolvent.17 Another study on the effects of deregula-
with limited liability companies. For in- For example, France, Germany, Japan and tion of corporate laws on company incor-
stance, Hong Kong SAR, China outlines Jordan have minimum capital require- poration shows that entrepreneurs have
solvency safeguards in its Companies Act ments of less than $5. In addition, a min- taken advantage of recent rulings by the
and does not require a specific amount imum capital requirement does not limit European Court of Justice allowing them
of paid-in minimum capital for business company debt because once the capital to select the economy where they incor-
incorporations. Furthermore, companies amount has been established, there are porate regardless of their initial location.
have different probabilities of becoming usually no limits on the borrowing of For instance, cross-country incorporation
insolvent. Even with a minimum capital companies.18 from businesses in other EU economies
requirement there is no guarantee that a increased significantly in the United King-
firm would not face insolvency because of Minimum capital requirements are espe- dom, driven by low capital requirements
other factors such as poor management cially futile if funds can be withdrawn and and start-up costs.23
and decision making, bad business condi- possibly used to cover expenses unrelat-
tions and market changes.11 ed to the business soon after a company
is incorporated. For instance, in Estonia,
If the enforced minimum capital require- Luxembourg and Thailand entrepreneurs
WHAT IS THE ECONOMIC
ment is too high, it might impede the can withdraw start-up capital immedi-
RELEVANCE OF MINIMUM
development of start-ups. It could block ately after incorporating a business—so
CAPITAL REQUIREMENTS?
potential entrepreneurs seeking to start minimum capital requirements provide Through the analysis of minimum capital
businesses as alternatives to unemploy- no security to potential creditors.19 requirements it is possible to identify 2
ment.12 In Ethiopia the official unemploy- main types of correlations: one relating
ment figure is more than 20%, yet the A better way to make markets more ef- minimum capital requirements to other
minimum capital requirement is 184% of ficient and protect creditors would be types of regulations and another relat-
income per capita. Though the minimum to enforce mandatory disclosure of in- ing minimum capital requirements with
capital requirement alone does not ac- formation, such as mandatory filing of economic outcomes, such as the size of
count for Ethiopia’s high unemployment, annual financial accounts in company the informal economy. All the results pre-
it does hamper the development of small registries and enhancing the supervisory sented here are based on correlations and
and medium-size formal businesses that role of company registries. Other forms of cannot be interpreted as causal.
might be a source of employment.13 creditor protection already exist in many
economies, including corporate gov- The analysis shows that minimum capi-
Some researchers also argue that high ernance monitoring, setting of interest tal requirements are related to 2 types of
minimum capital requirements distort rates and contractual provisions such as regulations: insolvency laws and its im-
healthy competition by putting at disad- bond indentures and loan agreements.20 plementation and minority shareholder
vantage entrepreneurs with less finan- The United States, for instance, once im- protection. The efficiency of insolvency
cial capacity.14 A firm is expected to use posed significant requirements on how laws is measured by the Doing Business
its financial resources to establish the much capital had to be contributed and recovery rate indicator. The regression
business and day-to-day operations. So maintained in a corporation. But those analysis suggests that minimum capital
44 DOING BUSINESS 2014
those firms have a greater incentive to 7. The German AktG of 1937 and the Italian
become formally registered. Civil Code of 1942.
NOTES 8. Chan 2009.
This case study was written by Valentina Saltane 9. Miola 2005.
There is also a strong negative association
and Paula Garcia Serna. 10. Djankov 2009; Ewang 2007; Alonso Ledes-
between minimum capital requirements
ma 2007.
and the number of new formal business- 1. vanStel, Storey and Thurik (2007); Blanch- 11. Mülbert 2006.
es.29 This result supports the argument flower, Oswald and Stutzer (2001); Klapper 12. Hornuf and others 2011.
that minimum capital requirements deter and Love (2011); Dreher and Gassebner 13. World Development Indicators 2012 and
entrepreneurial activity, creating obsta- (2011). Doing Business database.
cles for business development. 2. The paid-in minimum capital measured by 14. Chan 2009.
the starting a business indicator represents 15. Chan 2009.
the amount an entrepreneur needs to depos- 16. Miola 2005.
it within 3 months of business incorporation. 17. Ewang 2007.
CONCLUSION In the following sections it is referred to as 18. Alonso Ledesma 2007.
minimum capital. 19. Miola 2005.
Despite its shortcomings, minimum
3. For instance, in Belgium the required 20. Miola 2005.
capital requirements remain a reali- minimum capital is defined in the Company 21. Booth 2005.
ty for many economies, especially in Code, in Ecuador in the Companies Act and 22. Hornuf and others 2011.
the Middle East and North Africa and in Togo in the Organisation pour l’Harmon- 23. Becht, Mayer and Wagner 2008.
Sub-Saharan Africa. But every year more isation en Afrique du Droit des Affaires 24. The results are significant at the 5% level
economies slash or eliminate how much (OHADA) Uniform Act on the General after controlling for income per capita.
money entrepreneurs must deposit to Commercial Law. 25. The strength of the investor protection index
start businesses. Governments can take 4. vanStel, Storey and Thurik (2007); Blanch- is the average of the extent of the disclosure
various other steps to protect investors flower, Oswald and Stutzer (2001). index, the extent of the director liability index
5. Belarus, Bulgaria, Kazakhstan, Kosovo, and the ease of the shareholder suits index.
and creditors, minimize risks of bank-
Lithuania, FYR Macedonia, Romania, Serbia, The index ranges from 0 to 10, with higher
ruptcy and safeguard consumers from
Ukraine and Uzbekistan. values indicating more investor protection.
potentially hazardous products. 6. OHADA members are Benin, Burkina Faso, 26. The results are significant at the 5% level
Cameroon, the Central African Republic, after controlling for income per capita.
Chad, the Comoros, the Republic of Congo, 27. The results are significant at the 5% level
Côte d’Ivoire, the Democratic Republic of after controlling for income per capita.
Congo, Gabon, Guinea, Guinea-Bissau, Mali, 28. The results are significant at the 5% level
Niger, Senegal and Togo. after controlling for income per capita.
29. The results are significant at the 5% level
after controlling for income per capita.