Stop breakdancing in ballgowns: The need for an overhaul of business forms

Jason Piper is Head of Tax and Business Law at ACCA, and works within the Policy and Insights team. His policy and research interests cover all aspects of business form and their regulation, how they interact with tax systems and the wider economic and social environment, including the influence of technological change on both the regulatory and economic environment for entrepreneurs and criminals. The Olympics is the ultimate festival of sport and skill. Since its inception in Ancient Greece, to its modern day revival just over a century ago, the ideas of the Olympics have changed little. However, the modern day sporting event is very different to the ancient arenas - and with good reason.To survive, thrive and remain relevant to changing audiences, all models must adapt and evolve. That goes for the Olympics as much as it does for business forms. The Olympics in 2024 no doubt looks different to the Olympics of 3,000 years ago - but equally it looks different to the Olympics of even 2021. New sports, such as breakdancing, have been included this year, reflecting the changing world of sport and modern interests. Unlike the ever-evolving Olympics, business forms remain largely the same as their Industrial Revolution formats (in some cases, even older). This limited flexibility and adaptation is akin to trying to breakdance in a ballgown. While technically suitable for dancing, the outfit is no longer suitable as dance trends evolve. You can end up with a tangle of taffeta and silk, that while perhaps looks impressive and is recognisable, it is generally not fit for purpose. The same holds true in the world of business. An entrepreneur’s vision can stand or fall on the availability of finance, or the willingness of partners to enter into long term contracts – and the determining feature in that decision is often going to be the nature of the legal person that the other party thinks they’re contracting with. People need to see and believe that what they are buying into and becoming part of through investment is fit for purpose, shows scope for growth, and above all, resilience and adaptability. A complex business landscape The legal system of the UK contains no less than 18 distinct business forms which attract different treatment under the Taxes Acts and legal system. It’s possible there are more, given the guidance has not been updated since November 2011. This number will no doubt surprise most outside the professional advisory community (and doubtless a few inside it too). To the vast majority of people there are three ways of doing business – on your own account, in a partnership, or through a company. The rules around how you operate in those three forms have a long and distinguished history, although for most current practical purposes, typically those rules emerged around the 19th century. There have been developments and updates, but the fundamental mechanisms and structures are rooted in an environment far removed from today’s global economy. While the majority of businesses are sole traders, where contracts are made with the human at the centre of things, most of the value in trade, both intra and international, is carried out by companies. The largest multinational corporations have economies larger than countries, and they can afford the legal advice to structure their affairs however they want. Most smaller businesses aren’t like that; they go for the off-the-peg option - and in the overwhelming majority of cases that’s the limited liability company with share capital. It’s a model with ancient roots and one that the financial world is familiar with. In general, these models work well - they are widely understood and people know the steps of the dance. However, while suitable for many, there needs to be an acknowledgement that the future of business is changing, and new digital formats can and will emerge. The future of business structures At the European Commission’s 2011 Conference on the future of company law in Europe, Michel Barnier warned of the dangers of sterile academic discussion of legal forms while entrepreneurs simply go out and do things. In the years since he made those comments, the pace of change in technology and business models has illustrated that more starkly than perhaps anyone could have imagined. From about 2014 I started to tease colleagues in audit and corporate reporting by asking them how they were going to respond when someone put together a non-incorporated business structure, crowd-funded entirely in cryptocurrencies. Such a structure would sit outside every known framework of transparency, accountability and regulation. In 2016, we stopped laughing when the Ethereum-based DAO (Decentralised Autonomous Organisation) hit the headlines – first for doing just what I’d predicted, and crowdfunding a non-incorporated business venture in cryptocurrency, and then for doing the bit I’d feared, which was demonstrating why it’s not a good idea to throw away several hundred years’ of social development in favour of an untested software model. Warren Buffett is famous for saying you should never invest in anything you don’t understand, and one thing the DAO incident did was ram that message home loud and clear. Without the recognised corporate institutions of memorandum and articles, backed up by the authority of the courts in case of dispute, the DAO was an exercise of faith in the software for investors, combined with trust in every other investor. Ultimately, all that really amounted to was a hope that things would ‘turn out fine’. $50 million of opportunity cost for those investors caught out by the “undocumented features” of the code dashed that hope. However, just because the DAO didn’t do what most of the investors had hoped for doesn’t mean we can write off the concept of software based business forms. One thing the DAO’s architects did get right is that the legal form of a business, just like the model it uses to make money, is no more than a bunch of agreements about transactions. Breakdancing in ballgowns? So how is this relevant to corporate law, and what about the image of breakdancers getting tangled up in yards of silk taffeta? Digital tools have created the possibility of supply chains and value chains which take no heed of lines drawn on maps. Through the internet, individuals and businesses can deal with one another around the globe, almost entirely outside the recognised frameworks for trade – which relied upon the physical presence of goods, paperwork, and service providers for the authorities to track, tax and regulate. Historic designs for companies were based upon assumptions around the nature of information and supply of goods and services which simply do not hold true in the modern economy. The nature of information in particular has changed fundamentally, and the practical limits on duplication and transmission have all but evaporated, with the focus shifting to reliability - which is where blockchains can actually be useful. Consumer demand is shifting too, with entire new markets emerging alongside traditional physical supplies, whether of essentials such as food, or more luxury items. The investment, and investors, which can most efficiently support the new business models may not fit well with the paper-based business forms currently available. There’s a psychological aspect to this too – returning to the clothing analogy, existing well-known corporate business forms are like dressing in black tie. Investors are comfortable with the top hat and tails of a limited company, even if it doesn’t always come naturally to the business founder. Of course there are well dressed crooks, but to get through the ballroom floor, there are certain conventions to observe - patterns of dance, if you will. The new technologies of the modern business world, just like the changing music and clothing of dance, have opened up whole new worlds of possibilities, none of which would qualify for the conventional competitions and prizes. For some traditional businesses, the benefits offered by digitalisation are relatively trivial, such as reducing administration overheads but not having much impact on the direct business activities. In these scenarios, we can liken this to tailoring or alterations - making minor adjustments to the outfit of the business with updated materials to allow for a better fit as shapes change over time, while the outfit remains functionally the same. However, we also need to consider there are many new global businesses that simply could not exist without a move to digitalisation - a ripping up of the rulebook on business. Crypto currency transactions, self-executing contracts and cross-border crowdfunding can all pose issues for conventional business forms, based in paper forms and fiat currencies. As patterns of trade change, a legal framework that will allow new technologies to flourish needs to develop – without losing sight of the reason why the rules were there in the first place. The athletic gear ideal for breakdancing is pretty handy for making a swift getaway after a bank robbery too, just as the investors in the DAO found. And when one party is dressed for getaway and one for the ballroom floor, it is undoubtedly the more adaptable outfit which will find things easier. What we need to see in business models is an alignment and understanding of all models, giving business decision makers the tools and knowledge to make a decision that best fits their needs and is most suitable for purpose. There’s nothing wrong with ballroom dancing, and the world would be a poorer place without it. We could all be so much richer if we acknowledged, embraced and encouraged a little more diversity all round - in the forms of business and on the dance floor.