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Starting a new business : USA vs. France

Is it really easier to set up a business in the USA?

Dearest readers,

For the very first article of our brand new Rethink category, meant to question established mindsets and stereotypes commonly heard and to review our vision of the corporate world, we wanted to focus on one of the most common stereotypes there is : the one assuming that setting up a business in the USA is much easier than in France. “Americans are more optimistic, when they decide something they really go for it", "the American government is so liberal that you can create you own firm in just a few seconds online", "there are too many taxes to pay in France, it discourages everyone" ... You probably already heard this from Sam at the coffee machine, from Amy during Happy Hour or from good old uncle Bob at the Christmas dinner. Despite these self-assured declarations, we still wanted to investigate and maybe tear down one of the oldest stereotypes there is. For our greater pleasure.

According to a World Bank ranking, the USA is the eighth country in which setting up a business is the easiest. The top country is New Zealand, while France is… 29th. Behind Iceland. And Macedonia. Yep.

The ranking compares 190 countries based on numerous criteria that are essential to a business setup such as credit access, taxes, exports, contract execution and labor legislation. However, many other factors are involved in entrepreneurial dynamism. About Work… has investigated to get over the usual stereotypes. Can you really set up a business in the blink of an eye in the USA? Should the USA be used as a model for French economic reforms?

To get a satisfying answer, we tracked down the differences between the countries’ business creation process step-by-step in order to achieve a full and complete comparison.

1/

Understanding the legislative and regulatory environment

in a nutshell

Being a federal regime, the USA is much more complex in terms of legislation : a full understanding of they way its legislative body works and a thorough knowledge of its laws and tax regimes is crucial. France, on the contrary, is centralized and homogeneous : its legal environment is easier to comprehend.

more specifically...

The USA is famous for its liberalism. Hiring and firing someone is basically much easier and less expensive than in France. This means that the turnover is stronger and HR policies for new businesses are more dynamic. However, the USA bears a strong regulatory complexity. France remains a homogeneous land, shaped by one single body of law, as opposed to the American federal patchwork. The federal State imposes core legal principles but each State adds up its own set of corporate laws and tax regimes; not to mention county and other local specificities. This means that each company needs to take the time internally to understand them or to outsource this domain of expertise to a legal adviser in order to take advantage of these tax and legal differences. Half of the Fortune 500 firms are based in Delaware while operating in the whole USA. Litigation is also exposed to a certain level of complexity: usually the federal State legislation settles the disputes, but in some cases it’s one of the 50 States. Additionally, as part of the Common Law, jurisprudence takes a big part in the way litigation is handled and dispute settlements are more pragmatic when compared to the French system. Finally, lawsuits occur more often. Potential gains are high and encourage American firms to directly sue or to use it as a means of pressure. Nonetheless, potential losses can also turn out to be substantial, partly due to the cost of the discovery procedure (a sort of preliminary and compulsory investigation for both parties).

2/

Taking into account social constraints and their costs

in a nutshell

In terms of social constraints, differences are minimal : the yearly amount of work and the hourly wage are similar. However, the habit of being on strike is a drawback for France.

more specifically...

Now let’s take a look at the social constraints in the two countries: we find that the difference is somewhat minimal. The gap between the minimum (hourly) wage is negligible: 7.58 euros (post-tax) versus 7.25 dollars (this can vary from one State to another : it goes up to 10 dollars in California). Any extra working hour is paid 25% more until the 34th, and then 50% for any further hours. In the USA, any hour adding up to the regular weekly 40 hours has a 50% bonus. However, many exceptions can blur this observation just as much in the USA as in France, where the legal threshold discussed in collective agreements is 10%. By contrast, there is a core difference when looking at strikes: some sectors in the USA are banned from striking. Not that we want to do any french-bashing, but it can make quite a difference...

3/

Anticipating market costs and potential

in a nutshell

The French tax regime is famous for being heavy, and American taxes are less expensive. Nonetheless, the reality is more complex than this and opening a business in the USA involves costs that add up to taxes, such as legal advice and private insurance schemes.

more specifically...

It’s no secret: french taxes are heavy, with a profit tax of 33%, although a 15% rate can apply to small companies and access to tax credit is easy. The American government applies a progressive profit tax: federal rates add up to this common rate and vary from one State to another (7% in New York, 8% in California), going up to a maximum of 10%. This tax is replaced by other kinds of taxes like lottery tax or sales tax in certain States, like Texas and Alaska. Employer costs consist in the OASDI (Old Age, Survivor and Disability Insurance of 6,2 % of the first 118 500 dollars), the FUTA (Federal Unemployment Tax of 6 % on the first 7.000 dollars and can be deducted), and the SUTA (the amount depends on the State location), also adding up Medicare. However, we can point out that the average time to pay taxes is higher in the USA than in France, which invalidates some common clichés (for our greater pleasure). But just because French taxes are higher, it does not mean that setting up a business in the USA is cheaper. Inevitable yet recurrent costs need to be considered. Lawyers are usually hired to help the management team navigate in the realms of American legislation. Due to its complexity lawyers are specialized in various domains (tax legislation, corporate legislation, real estate, trademarks, patents, environment…) and their hourly fee can be expensive. As private insurance is more developed in the USA, an insurance broker can come in handy. Moreover, closing accounts and paying taxes can also be more complicated, meaning that an accountant is often deemed necessary. Finally, when looking at market potential, we cannot deny that the USA represents a stronger market of 300 million consumers who have access to consumer lending. But all in all, living conditions in both countries remain close.

Total tax includes labor costs (53.5% in France). Source : “Paying Taxes 2016”, PwC, http://www.pwc.com/gx/en/paying-taxes-2016/paying-taxes-2016.pdf

4/
Choosing the best suited legal structure and registering with the government

in a nutshell

What you commonly hear is not exactly true : differences are really minimal when it comes to legal structures offered by both countries and to the administrative registration.

more specifically...

The first step consists in choosing the right legal structure for the project. On this matter, there are big differences for sole entrepreneurs, as they don’t even have to register themselves to the American administration. However, for companies looking at hiring at least one additional person, legal forms are similar to the exception of Partnerships, which have no direct French equivalent.

This registration step is not as quick as it may seem, even in the USA. For an LLC, the time to register and to publish the articles of association can take up to 9 weeks (although commercial activity can be launched before that). Once again, we would be wrong to think that the process is more simple in the USA. The trademark process is an independent and relatively time consuming process, should the business wish to enjoy its name exclusivity throughout the whole USA. We can point out that it is possible to register under a fictitious name that can be used to hire, to open a bank account, or to issue invoices. You only need to ask the County and it costs 15 dollars. Broadly speaking, the steps for setting up a business are similar on both sides: finding a corporate location, writing and registering the articles of association, getting published in official journals, signing up for a pension plan, registering the trademark, finalizing a corporate agreement...

5/

getting financed

in a nutshell

There are more Capital ventures and business angels in the USA, so getting financed is generally easier in the USA. However they do not necessarily respond to the financing needs of any kind of startup. Banks remain cautious and unlikely to underwrite loans to brand new entities, whether in France or in the USA. Moreover, both governments have created sizeable public organizations to open up new business’ access to credit and equity.

more specifically...

According to an Ernst & Young report, the USA is the country where start-ups have the best access to financing. Indeed, business angels and Capital Ventures are more developed than in France. When considering the French and American top 40 market caps, we find that those that opened up a Corporate Venture or incubator/lab are twice as many in the USA. However their standard levels are still high. They usually feel more comfortable with start-ups operating in biotechnology, high-technology, or communication, which are sectors providing a high return on investment. They will look closely at managers’ past experience and at the marketing strategy on which they can make suggestions. If financing looks easier in the USA, France seems to be trying to fill the gap. Among the CAC 40 companies, the ones that have launched a Venture Capital entity has grown fivefold between 2010 and 2015. As for incubators and labs launched, those have been multiplied by 9 in just 5 years. Thus, at an early stage, one should explore other financing sources. Banks, on both sides of the Atlantic, seldom lend to new entities. Despite European initiatives such as the TLTRO to fuel the credit input, they prefer controlling credit risk by focusing on at least 2 years old companies, that have a stable or at least transparent cash flow and that have assets available as credit guarantees. Some surveys, such as one led by Hiscox, notice few differences and report that French and American entrepreneurs alike show little enthusiasm when it comes to achieving a credit request with banks. Consequently, many start-ups can also get some government support. American authorities have implemented the Startup America program in 2011, which unlocked 2.4 billion dollars for American newbies in high tech. This adds up to existing organizations such as the Small Business Administration that generated 28 billion dollars of investments (both equity and debt) to small companies in 2015. France offers a very interesting research tax credit in order to encourage innovation. Also, President François Hollande created Bpifrance which enables the government to financially support promising projects thanks to a 20 billion euro budget in 2015. In other terms, governments are evenly supportive of new ventures, however business growth may be slowed down a few years later, especially in France, where private equity fund raising is less common. One solution may rely on individual investors, who are an increasingly interesting source of financing: the Jumpstart Our Business Startups (JOBS) Act has now authorized small companies to become publicly listed (‘mini-IPOs’). One interesting observation is that both France and the USA are the world leaders in crowdfunding, which many consider a booming source of financing. In April 2016, crowdfunding became a legal source of capital increase and, according to some surveys, it may become even bigger than venture capital in the near future...

6/

hiring the right people

in a nutshell

The true question relies in motivation : the French take less risks and are more attracted to safe decisions and jobs.

more specifically...

Hiring the right person depends on two conditions: motivation and skill. Admittedly, the 2016 Financial Times ranking of the best MBA Entrepreneurship is topped by American universities : Stanford, Babson, Dartmouth, UCLA, Berkeley… But the French also enjoy top-ranking business schools, not only at European level but also worldwide. Let us also remind that this type of programs is only one source of education for the many entrepreneurs who have very diverse profiles. By all means, motivation remains the main focus points. Working in a start-up does not suit everyone, what with irregular wages, heavy workload, and young or inexistent processes. Facing this imbalance in working conditions between big established firms and small businesses, we find that the key issue is the risk culture, prior to any start of a business.

The main reason for this gap between American and French entrepreneurship has more to do with risk culture and basic enthusiasm than with the actual conditions for business creation.

When looking at the bigger picture of our findings, we realize that the conditions within which an entrepreneur starts a business in France or in the USA are relatively similar. There are some differences in the general costs of a new business, in the flexibility of legal structures, in the access to funds but they do not appear to be determinant to the point of actually influencing the statistics of business setups. Admittedly, there is a core difference when considering the financing question: the American GDP is 7 times bigger than the French one, while American Corporate Venture investments are 24 times higher than in France. However France does seem to progressively fill the gap. 

The core difference is in the culture, the enthusiasm, this undefinable - and unmeasurable? energy that expresses itself from within each individual, and which could not be prompted by a single government. This is at the core of everything - the prestige of being an entrepreneur for society, the will to start a new business, the willingness to finance it, or the curiosity to join one. In 2015, the IFOP asked a French sample what entrepreneurship meant to them: 33% of the sample replied that it was too complicated in France, and then 24% considered the risks and constraints. 31% of the sample wanted to set up a venture but only 45% would advise their children to become entrepreneurs, while 61% would do so if it meant setting it up abroad.  

Source :  2008 study from Fiduscial on a sample of 500 French entrepreneurs and 1000 American entrepreneurs, http://www.ifop.com/media/poll/Flash_TPE_USA.pdf

We can appreciate the extent of this gap when looking at the teaching programs that spur young people to engage in a new company. Entrepreneurship-themed Summer Camps are organized for teenagers, and even children are familiarized with this state of mind : they can sign up to Lemonade Day, for example. It allows them to set up a lemonade stand from scratch with the help of an adult mentor and to sell their product on Lemonade Day, which takes place in 20 cities. According to their official website, 800,000 kids participated in 2015! Replicating this model as it is in France does not realistically seem achievable. Although there is indeed proof of a burst of energy that can be envied. What is there to learn from the USA? This is truly the question at the heart of our 3-month investigation across the USA, on the tracks of unique businesses.

Meanwhile, in case you’re French and you would like to give it a try in the USA...

Setting up a business in the USA is easier for a local, and some hurdles bar the road to a French entrepreneur in the USA. Indeed, American authorities have toughened migration selection since 2008. The administration wants to make sure that the project won’t go bankrupt right away: a minimum capital amount is required for a Visa E application. It usually approximates 100,000 dollars. A startup visa was implemented by Barack Obama in August 2016, easing up foreign investment but the conditions are demanding: the applicant should already hold 15% of an American company’s shares in the last 3 years, the startup must already have collected American investment and it needs to show a “potential for quick growth and job creation” . We might also want to mention the political uncertainty following the election of Donald Trump as 45th President of the United States.

Philippe Pouletty said so...

“France is the best country in Europe for entrepreneurs. You have the engineers, the researchers, the clinicians, the tax credit for helping research, the legal status of a young innovative startup, the Bpifrance which provides financing and supports business development, and investment funds, although they are not that many.” Philippe Pouletty in November 2015

For the full video of Dr Philippe Pouletty's interview, cofounder of Truffle Capital, you can click here (but it's in French)

> still skeptical about our conclusions? You can listen to Emmanuel Macron describing a "cultural revolution" back in February 2016 in the French entrepreneurs landscape right here

>
 
and for Ernst & Young groupies, there is an interesting international comparative study 

 

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