28/03/17

Tax haven debate shows many people don't know the difference between a business and a company

What’s the difference between a business and a company?

No, it’s not a trick question.

Whilst “company” and “business” are terms people use inter-changeably, there are important differences with a company being a legal construct and absolutely not the same thing as a business, reports City A.M.

Businesses exist by virtue of people buying and selling stuff, companies exist because the law says they do. Some companies do have employees, bank accounts and property but that isn’t the point of them. Companies exist to box up ownership and control and allocate responsibility and risk.

This is relevant because the current debate on offshore companies is based on misunderstandings of what a company is. While the current focus is offshore companies, in the medium term it threatens the whole idea of the company – and you don’t have to be a corporate lawyer to believe that the company is an essential tool to global prosperity.

Take a software distribution agreement which requires the distributor to keep full accounts relating to sales of the kit, to let the supplier see these accounts, to get data licences and a whole host of other reasonable things.

Let’s say the distributor was a moderately complicated business. The obvious way of dealing with all these requirements without the complexity of special accounts and to minimise the risk is to incorporate a subsidiary just to carry on this business. If the supplier wanted more financial comfort it could have a guarantee from the group. But simply boxing this particular bit of a business into a separate company makes life simpler and better for everyone. No tax angle, no deception, just clarity.

This example is just one of many reasons companies exist and are set up in offshore financial centres.

Partly because of this lack of understanding, companies, particularly ones based offshore, are facing scrutiny within calls for public beneficial ownership registers. People want to know who really owns these companies. This may sound reasonable, but it ignores reality because the whole point of many companies is to transmute ownership.

In this sense, companies are a way of picking apart and repackaging the elements of ownership and control. This is relatively simple say in relation to a person, but which get more complex with multiple assets and people where some control goes one way, some another, some rights to a return or to proceeds here, some elsewhere, some liability here, some there.

A company is not unique in doing this but it is probably the most widespread sophisticated mechanism for this risk and reward allocation in relation to ownership and control.

Companies exist not to hide real ownership but in many cases they do exist to change it. Pretending they don't and that the issue is to expose "real" ownership in a binary register does no-one any good.