Startup & Law: initial requirements in Italy, what should we change?

When it comes to starting a business, the most hated and boring activity is looking up for the legal requirements a company should have to be good to go. Even though this is undoubtedly one of the less entertaining parts of entrepreneurship, it is probably one of the most important, since being compliant helps the business to take off in the proper way. Governments approach this topic in different ways: some are stricter and impose rigid conditions such as high minimum capital requirements or more complex procedures, some prefer not to put any barrier and make it simpler. In the article that follows we are going to analyse the fulfilments a start-up must respect in Italy, comparing them with those requested in other countries and trying to draw conclusions on Italy’s strategy. Despite we are fully aware that not only “starting procedures” have an influence on entrepreneurship, they are an element new business owners look carefully upon.


Italy’s picture

The Italian government has recently embarked a policy which goal is to facilitate the starting of a business. To achieve this, it has been introduced a new type of company: the start-up; start-ups are defined as “limited companies (including cooperatives) which have been operational for less than 5 years (or newcos), which have their Headquarter in Italy or in another EU country, at least a production site branch in Italy, a annual turnover below €5 mln, and that are not listed on a regulated market nor on a multilateral negotiation system, do not distribute profits, are not the result of a company merger, split-up or selling-off, develop, produce and commercialise innovative products or services with a clear technological component”. Furthermore, start-ups should meet at least one of the following alternative requisites: a.1) at least 15% of the expenses incurred by the business need to be attributed to research and development activities; a.2) at least 1/3 of the company’s employees need to be PhD students or researchers or at least 2/3 of the workforce must have a master’s degree; a.3) the company is a holder or licensee of a registered patent or the owner of a program for original, registered computers.


Start-ups can be private limited companies (srl or srls), public limited companies (spa), one person companies (srl unipersonali), limited liability partnerships (sapa) or cooperatives (cooperative): for the sake of simplicity we will have a look at the procedures needed for creating a private limited company (srl), the most common form of start-up in Italy, according to MISE (89.1% of start-ups were srl) . The steps to open a start-up in Italy are pretty easy: first of all, it must be constituted a company; to do so, the Articles of incorporation (concerning scope of the company, indication of the headquarters and the capital etc.) and the statute (which contains rules in relation to the general functioning and management of the company) must be signed: before March 29th it was possible to underwrite such documents online but after a State Council decision on the matter, now it is required completing the acts in the presence of a notary. However, the on-line procedure needed an improvement, since only 37% of the companies had chosen this modality to send their paperwork (source: 2020 data by MISE). The last step it should be accomplished is the registration in the special section of the Registro delle Imprese. There is no minimum capital required.


Data

With the purpose of determining what effects Italy’s measures have had on entrepreneurship, we will consider some data: the number of days required to start a business, the cost of the process, the number of procedures and the number of new companies founded. Again, we acknowledge that this data is “polluted” by the presence of other types of companies but are a useful indicator to determine Italy strategy’s weaknesses.

a. Number of days required: as we can see on the World Bank database, to set a business up in Italy are needed 11 days. From the dataset we also can notice how this number steadily decreased since 2013 (it was 12.5) except then settling on 11 in the recent years.

b. Costs: forming a company costs (in terms of % of GNI per capita) 13.8% in Italy. Although such a number may seem high, it has been lowered since 2012 (when it was 16.7%); however, with the impossibility to sign the Articles of incorporation and the statute online from now on, this number could suffer an increase in the next years.

c. New businesses registered: One of the most important indicators to assess the effects of the policies put in place by the countries’ governments is the number of new businesses registered. Italy did remarkably well, in fact 114.360 new activities were created in 2018 (10th country globally), resulting in a +33.85% compared to 2012 and a +3.15% than the previous year. However, if we have a look at the number of new businesses per 1000 people (15-64 years) we can see that only 3% of the population considered started a business in Italy: such a percentage, though, was 2% in 2012 and kept on increasing in the following years.


Comparison with EU and OECD countries

Despite Italy’s mild improvements, still a lot of work must be done to align with other EU and OECD countries. Not only start-up procedures have a role in the differences we will report below: in fact, we will not examine fiscal aspects such a more favourable tax rate. OECD countries spend on average 9.1 days for the opening of a new business, while on the EU 12.2 days are required. The gap with EU and OECD countries is far more evident in relation to the costs of starting up a company: in the EU it costs 3.2% of GNI per capita while among OECD countries 3.7%; conversely, the number of new business per 1000 people is similar in Italy, EU and OECD countries (3%, 3.8%, 3.7%). Weighing this data, what stands out is the high cost of opening a business in Italy: this depends, presumably, on the bureaucratic system which our country has, whose influence was confirmed by the recent ruling of the State Council that, factually, has blocked the possibility to register a start-up online.

Looking at the EU, there are two countries that in the recent years have successfully reduced the expenses needed to have a start-up running: Estonia (1%) and Denmark (0.2%).


Estonia

Estonia’s case is really interesting because the country launched its e-residency program in 2014 and has seen a lot of start-ups growing since then; its taxation system, its labour laws and its simple, fast and accessible procedures boosted the economy, making Estonia one of the world’s more advanced countries in IT and digitalization. Starting up a company in Estonia is made so easy by the online procedures, that allow entrepreneurs, even foreign ones, to fill in all the documents only owning an e-residency (which does not grant all the advantages of an actual residency but make it possible to access to the State’s official portals): the very first step to open a start-up in Estonia is requesting a e-residency, then it is needed to register at e-Business Registry and at the Tax and Custom Board (if it is necessary to pay VAT or registering employees). Also, having a e-residency allows the entrepreneurs to access a community and a marketplace, which can help company owners to establish contacts or find partners. Last but not least, it is possible to fully manage a company remotely, only having a “contact” in Estonia, which is possible to buy (on monthly subscription) on a dedicated marketplace; for “contact” we mean a person to whom local authorities would send all the official communication or would reach out in case a meeting in person is needed. The online procedures have the effects, together with other measures, of lowering the initial costs for start-ups (such as notary fees). As a consequence, 98% of the companies registered in Estonia opted for the on-line procedures (data taken by Estonia official website).


Denmark

Especially regarding life-sciences field, Denmark is one of the most performing economies in the world and one of the most welcoming among EU countries. Just as Estonia, Denmark procedures to start a business are much easier and less expensive than Italy and it is possible to register a company online in few and agile steps. However, what is more relevant about the danish model is the so called ‘Flexicurity’; flexicurity, quoting Denmark’s official website words, “has three core elements:

1. Employers can hire and fire at will, without excessive costs for dismissing employees. Litigation surrounding dismissals is uncommon.

2. Employees who join and pay subscription fees to an A-kasse (unemployment insurance fund) get up to two years' dagpenge (unemployment benefit) after losing their jobs.

3. The Danish government runs education and retraining programs and provides counselling services to get unemployed people back to work as quickly as possible.

Even though labour system is not directly connected to the procedures of starting a business, it is one of the main initial costs for entrepreneurs (especially in the first months of the companies) and the danish labour market is one of the key elements for the success of the country, which ranks at the 4th place in ease of doing business in the world while 1st among EU members (source: World Bank).