Wednesday, February 03, 2010

February Mailbag of Legislation

More lawmaking commentary today. Two interesting bills are up for a vote in the near future:

1) Establishing an LLC without cash.

There are a bunch of different ways to do business as an individual in Estonia - from signing ad-hoc contracts with your customers (the way I do it with translation agencies), to registering as self-employed, to starting a limited liability company.

Self-employed status gives you a bunch of benefits, such as a VAT number and the ability to write off business expenses, but also some inconveniences in terms of how you pay tax. Incorporating as an LLC is the best way to go, and the process is streamlined: you can do the entire thing online in half an hour. The big hurdle is that you need to have the starting capital, 40,000 EEK (~2500EUR). Up to half of it can be made up of material assets without additional paperwork, but you still need to have a pile of cash that will be tied up in the business. You can get the money out of the company's account right after it's established, but what if your business doesn't require any material investment? The only tools of the trade I need to run my freelance work are a netbook and an Internet connection. Now, I could use the LLC's starting capital to pay for both, VAT-free - but it's still very inconvenient to tie up 40k in a business with very little up-front investment and negligible recurring costs.

The new bill will allow an LLC to list the up-front capital as the founding partner's liability. Basically there's still 40k on the books, but it doesn't have to be an actual pile of cash or a bank balance. If someone has outstanding claims against my company, they can sue me personally to take up to 40k's worth of my personal assets.

The upshot is that anyone with a bright idea can incorporate over a lunch break, and start doing business immediately. Considering that we're a small country that is trying to stimulate high-tech, dynamic businesses where the principal investment is the owner's time and effort, this is an excellent move, and frankly I'm a bit disappointed that it took the government so long to get to it.

2) Mortgages to become non-actionable.

The gist of this is that a borrower's liability will be limited to the collateral. When a homeowner can't make the mortgage payments, the bank's only recourse will be to sell the house, and the borrower gets to walk away from it. Currently, the borrower is liable for the actual loan amount, so if the house is worth less than the balance of the loan, he'll have to keep paying. The only way to wipe out the debt is to go through a personal bankruptcy, which means five years of constant supervision by a court-appointed administrator.

I don't actually like the idea, because in my opinion the government only has a very minimal responsibility to protect people from their own stupidity, and overpaying in a booming market is the sort of mistake everyone should be able to make on their own. Certainly the economic liberals in power are also against the idea, as are the Swedish banks. Normally I would dismiss it as just another piece of populist legislation that has no hope of passing - it was introduced by the Social Democrats - but the BBN article claims there is support for it in the ranks of the coalition as well.

I'm pretty sure hell freezes over before Reform supports the bill (but then Jõgeva has been seeing -30C temperatures this winter), but there is at least one line of reasoning that might convince some IRL members with re-election jitters to go along with the plan: it's not like we're overly sympathetic to the plight of the banks. The effects of the property bubble's burst in Estonia could have been far more dire if we didn't have relatively strict lending rules in place already - most importantly, the loan amount was a direct correlation of the applicant's income, there was no widespread practice of giving "interest-only for the first three years" type mortgages to deadbeats trying to flip properties for a short-term profit. The insane growth in Estonia's real estate prices was precipitated by low interest rate margins and growing salaries.

So stricter-than-elsewhere banking regulations made the inevitable crash not as disastrous as it might have been, and by the same token, new and even stricter banking regulations are probably a Good Thing(tm) as we're recovering from the credit crunch. I still don't think it's necessarily a good idea, but if the Riigikogu's right wing sees a need to engage in some kind of populism, this is one of the better bills to support: it is straightforward in principle, has no immediately obvious loopholes, and its primary negative consequence is that banks will be forced to only issue home loans to people who can afford them, on properties which are more or less reasonably priced. Interest rates will go up, the construction industry will suffer another hit, and fewer people will be able to build equity rather than just spend a portion of their income on rent, but at least we'll have learned from our mistake and will be forced to rely on something other than real estate for our economic growth.

2 comments:

Kristopher said...

There are other ways. If you have a thin business like the one you describe, you can also start a limited partnership (UÜ) or general partnership (TÜ). These are underused forms of business in Estonia. No capital requirements there. Unlimited liability, but being a translator, you're not going to take huge debts. And there's still always personal bankruptcy in the unlikely event that you get sued or something.

Flasher T said...

Fair enough, but I don't want to run an unlimited liability company on general principle.

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