Overregulating Businesses

by Azreel | July 29th, 2008

Mark Cuban made an interesting post yesterday. He posted his solution for jump starting the economy.

What has impacted my decision on whether or not to start a business is the amount of paperwork involved and the local, state and employer taxes involved. Its complicated and expensive to start even the smallest business in the real world.

This is from the State of Texas: (Which I am proud to say makes it far easier than most states to start a business).

Step 1:Legal Structure and Registrations
Step 2:Business Tax Responsibilities
Step 3:Licenses Permits and Registrations (Note to State of TX, this link was broken, I had to find the destination page )
Step 4:Business Employer Requirements

As an entrepreneur , I can tell you that working through the requirements of these four steps is scary and intimidating. Why ? Because to merely start your business, you have to deal with lawyers and accountants, which not only costs a lot of money, but more importantly, requires you to trust those lawyers and accountants to make decisions that could have make or break consequences on your business. You may have the best idea with the ability to execute on that idea, but one little snafu by these professionals and your business is down the tubes.

Even worse, if you mess up on any of this, you could get in legal trouble. You could get sued, or find yourself in the middle of some legal nightmare.

Then of course, there is the financial reality of having to pay all of the business and employer taxes.

His solution is to eliminate payroll and franchise taxes. But Mark fails to address the real problem; the paperwork and legal minefield that has to be navigated in order to get a business up and running. At every level of government there are multiple agencies that a new company must register with. Miss a government department, and there will be big legal trouble down the line. And heaven help you if you are one of the hundreds of businesses that must be licensed or regulated in some way.

Many of these various government agencies have online websites to help facilitate the compliance process, but registering with each one is still onerous and time consuming. Each one has different requirements for usernames and passwords. Some use an email address as the user name, others require you to choose a name. Passwords for some require letters and numbers and some special characters, but not all special characters, thereby making it necessary to write down the user name and password and, in some cases, a special PIN that they mail to you (thank you very much EFTPS.gov).

You can, of course, avoid all of the above by simply hiring a lawyer, accountant, and payroll service to do all of this for you. And these guys aren’t cheap. These small business support industries rely on complex laws and tax regulations and the burden they place on small businesses for their bread and butter. The complex maze of regulations and laws ends up becoming a substantial defacto tax on these businesses. There’s the tax you pay the IRS and the state, and the city, and the workman’s comp and unemployment, and then you pay another tax to your accountant, and another to your payroll processing, and then another to your lawyer.

My point is that businesses in the USA, small businesses in particular, are overregulated. This creates a huge legal hurdle for small business start ups. But things get even more difficult if you are doing something new and different

Consider the guy in Alexandria, Virginia who uses tiny carp to nibble the dead skin off of clients feet.

Ho spent a year and about $40,000 getting the pedicures up and running, with a few hiccups along the way.

State regulations make no provision for regulating fish pedicures. But the county health department — which does regulate pools — required the salon to switch from a shallow, tiled communal pool that served as many as eight people to individual tanks in which the water is changed for each customer.

Mr Ho had a novel idea. The problem is that what he wanted to do wasn’t exactly permitted or prohibited under nail salon regulations. Nail salon regulations did permit a tiled communal pool for pedicure foot soaks. I’m sure it took a fair amount of research to figure out that he would have to tear it out and put in individual foot baths. $40,000 is alot of money for a small nail salon, or any small business, to spend.

One might argue that health considerations demand that Ho use individual baths, but obviously the state board felt that the communal pool met the necessary health standards. The county had conflicting regulations. This is not at all uncommon. Local regulations, taxing districts, and zoning can also place incredible burdens on small businesses.

If we really want to jump start the economy we need to make it easier for innovative small businesses to be created and to grow. Our world and our economy are changing rapidly around us, and the way businesses operate has to change as well But first, our government, and the regulations that it places on businesses, must be changed and streamlined to reduce the invisible “red tape” tax on businesses.

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