Monday, September 24, 2012

Fostering Entrepreneurship—III

Greater Regulatory Simplicity

Cartoon asking how much more paperwork we need to create
 ~ Early stage startup companies have too high a regulatory burden. The recent Pacific Northwest Innovation Summit examined ways to promote a more vigorous entrepreneurial ecosystem, but this issue was explored mostly by participants rather than as part of the official program. As a state, we could improve here, as I've posted before, but what should we change?

Regulation is an appropriate activity of government, and in many places we need government to be more active, not less.

However, regulation should be appropriately detailed and appropriately stringent. Neither too much, nor especially too little. Some business interests, notably Wall Street and Big Oil, bleat with tiresome repetition that they are over-regulated, even as they preside over widespread financial fraud or environmental disasters.

How do we know what the right level of regulation is?

The primary purpose of regulation is to protect people against threats to the their health, possessions, or opportunities consistent with a democratic society. This is why we regulate and enforce laws about such things as food inspections, child labor, and rules of the road.

So it makes sense to have firm and detailed regulation of banks and oil drilling; failing to do so can (and has) cost people their livelihood and their lives.

Startup businesses in Washington have a several regulatory burdens. Depending on the particular type of entity and its activity, a new business in our state may need to file or complete:
  • Formation documents (e.g. articles of incorporation)
  • Filing with the Secretary of State
  • An application for a business license (state and local)
  • Registration with the Department of Revenue (DOR)
  • Registration with the Department of Labor and Industries (L&I)
  • Registration with the Employment Security Department (ESD)
  • Getting a federal Employer ID Number (EIN)
Once formed, the business may have to annually file:
  • Corporate renewal
  • Business license renewal (state and local)
  • Affidavit of business property owned/purchased/leased
  • Income tax return (IRS Form 1065 or 1120)
  • Employment information returns (W-2 and W-3)
  • Tax information returns (Forms 1098, 1099-MISC and others)
  • Federal Employment Tax return (Form 940)
Twice a year in King County are tax payments on property owned by the business. And then there are the quarterly filings:
  • Combined Excise Tax return to DOR
  • Employment taxes (state) to ESD (Form 5208)
  • Employment taxes (federal) on Form 941
  • Workers compensation taxes to L&I
This doesn't even include what a business needs to do to sell stock to investors (a subject for a future post.)

I'm sure I've left out a few. Since I've done all of these many times I have a good handle on them all, but if you're a first-time entrepreneur it can be daunting. That assumes of course that you even know about all of them. Washington State does a decent job in guiding one to and through the main pieces, but it is easy still to be out of compliance and not know it.

Some are pretty easy once you've done them a couple of times, but some are rather wretched, time-consuming and expensive, even if you're quite experienced. The worst require additional expense to properly comply or to make payments even when the business has no cash flow (much less profits) with which to pay.

So, how could we improve the startup ecosystem? Get rid of all of these filings and fees for the earliest stage companies, and replace them with one form you file at the beginning which basically announces your existence and provides the key information of who, what, when and where. And then don't require another filing or tax payment until a threshold of real significance is reached, say, the first one of:
  • 5 employees
  • $100K in annual revenue
  • $5K in annual profit
  • 2 years in business
Of course there would be some details to work out, like inter-governmental coordination and agreement, how to properly credit first employees' FICA contributions, etc. But even if we could rid startups of half of this dross it would make a real difference. At a minimum, give startups a tax holiday for the first 2 years.

So what of the legitimate purpose of regulation? The revenues in taxes and fees from new businesses are so insignificant and the threats posed to other people so remote, it is hard to see this level of regulatory burden as serving any useful purpose. To the contrary, it detracts from the time, energy and attention better spent in building the business to create jobs and economic activity that does provide actual benefit to the state's people and economy at large.

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