The electoral debate and the lack of attention to small businesses

Within 30 days of the general elections, it is disappointing the lack of attention from presidential candidates to the Brazilian SMEs. Very little is said on the subject, and the usually shallow feedback ("small businesses are the engine of Brazil") only show the irrelevance of the subject in the campaign agendas.

More attention to small businesses - 99% of Brazilian companies; 8.9 million formal employment records, according to SEBRAE – would do very well to our economy. The Labour directory built by SEBRAE and DIEESE points out that 70% of the new jobs in the private sector between 2003 and 2012 were generated by SMEs (which account for 52% of formal private jobs). The good news are even better considering that the real increase in wages of SMEs for the period was 33% over inflation – 1/3 above the actual increase in large companies, 22%.

The quality of the small businesses is also evolving. The GEM survey, international entrepreneurship research which has its Brazilian chapter developed by IBQP with SEBRAE’s support, show that since 2003 the profile of the new businesses in the country is by Opportunity – reaching 71.3% in 2013, most historical value – rather than the traditional prevalence of business deployed by Need (the first group’s survival rate is substantially higher, therefore the relevance of this indicator).

The resilience of small businesses also benefited from the economic development of the country in the 1994-2008 period: according to data from IRS analyzed by SEBRAE, the mortality rate of SMEs in Brazil practically reversed a reality of about 20% survival over the second year of activities in 1993 to 75.6% in 2009. That is, the investment in our SMEs promises to bring more and more lasting results.

Data and signals of the importance of SMEs for the recovery of the Brazilian economy abound, but the campaign agendas remain insensitive. And what kind of changes in the Brazilian business environment would benefit SMEs?

There is no doubt that SMEs would benefit from all known major initiatives for the country"s competitiveness, such as reducing the overall tax burden, reducing bureaucracy, flexible labor relations and fostering innovation – but small businesses also have their own agenda.

An inconspicuous and very important change is the transition criteria between the tax categories of small businesses. The “Simples Nacional” was designed with multiple and noble goals, including increasing the degree of formalization in the Brazilian economy. The success of the initiative has enabled this argument also to sustain the creation of the MEI, the individual microentrepreneur: the two initiatives have served and serve as "gateway" for many small businesses to the formal economy, adding benefits to these companies and society. But more is needed.

The difference between the tax steps applied to the MEI, to the Simples Nacional and for other companies is very huge – which discourages the formalization of the growth of these companies. The consequence is that, over time, only part of the MEIs’ revenue is accounted for – by hiring a second employee or leaving the original track billing, restricted to R$ 5.000,00 monthly, the MEI becomes a small business, starting to support charges much larger than on the previous step. To avoid this, the MEI grows with considerable part of the revenue or team in the informal limbo.

The case of SMEs is even more striking. Exceeded R$ 300.000,00 monthly billing, the EPP (category for “Small Size Company”, the next step after SME) becomes a "normal" company, losing the benefits of the “Simples Nacional”. The difference in taxes on the economic activity itself is not the most significant - by failing to opt for the “Simples Nacional”, the company will also collect the employer"s portion of the INSS labour tax, equivalent to 20% of the total payroll. SEBRAE and FGV data show that one in every two small Brazilian companies is on the trade activity, where normally the payroll is among the top three business costs – which makes this a very painful change, and feared by entrepreneurs in this stage. The consequence is that entrepreneurs are fleeing the noncompliance by opening new businesses and the use of “laranjas” (“oranges”, people who serve as legal owners), which is illegal and threatens the business productivity.

The smoothing of the steps for changing tax class for the MEI, SME and EPP would bring more efficiency and more formalization – a comprehensive actuarial study probably would confirm the suspicion that the final collection could even increase the impact of the reduction of informality. This is an agenda already pursued by SEBRAE and the Department of Micro and Small Enterprise, but the absence of the subject in the candidates’ speech raises doubts about the success of the venture, of course difficult in a country where the IRS is one of the most efficient public entities.

Another factor where the evolution is still facing controversy – and that, even for this reason, should be part of the electoral debate – is with respect for the separation between personal and business assets of members of limited companies.

A limited company ("Ltda.") is one where, according to the legal definition, the liability of shareholders is limited to the value of their shares. The law also defines the cases in which the legal personality of the company may be disregarded, especially when there is mismanagement of the business. However, the judiciary notoriously overlaps this legal statement and the assets of the partners of limited companies often respond by unlimited business problems. And what"s wrong with that?

A serious consequence is penalizing the honest mistake. Endeavouring is and always will be a considerable risk activity, and faults and failures are part of the business game: the most successful entrepreneurs own several failure stories in their resumés. According to the American researcher Lawrence Cooley, one of the characteristics that differentiate successful entrepreneurs is precisely the ability to see failure as learning, not as the "end of line".

In this context, the failure would serve to teach the entrepreneur what not to do, preparing one to succeed on the next attempt. In a society in which the error is punished not only on business assets, but on the entrepreneur himself, the discouragement to try again is evident. And even if this is not enough to "break" the willingness to try again, the numerous registration and eventually legal problems arising from business failure usually gives the message – for those who escape, there is always the bureaucratic quagmire that involves the closure of a company in Brazil. That is, the verdict is given: to endeavor, the first time is almost always the last chance.

This seemingly minor issue wins dramatic contours when one considers the numbers: a projection of SEBRAE on data from the IRS shows that 4 million small businesses will be opened in Brazil between 2013 and 2022. If this continues the business mortality rate mentioned earlier in this article, 976,000 companies will fail before the end of the second year, claiming about 1.8 million jobs.

It is for our society to decide if we want the honest portion of these entrepreneurs (presumably the majority) to venture again benefiting from the lessons learned, generating new jobs and moving the economy; or if we want to discourage them or stop them to new initiatives, most common fate of those who fail to implement a business. Examples for the second chance abound in the more developed economies like the US itself, Singapore (notorious city-state also known by the harshness of its laws) or South Korea. Certainly there will be arguments for and against, but hardly would not be unanimous the need to discuss the matter – that deserves to at least be raised by applicants to the maximum country post.

Brazil is seen almost as a consensus by the international economic criticism as the country that has least acted to tackle macroeconomic risks between the five "fragile" (we, India, Indonesia, Turkey and South Africa). Given the huge scope of macro challenges ahead, to consider the valuation of small businesses as an effective way of improving the economic situation in Brazil would be at least smart. Based on an example of how the private sector works: in a recent interview with the economic newspaper “Valor Econômico”, Microsoft Brazil’s CEO, Mariano de Beer, credited mainly to sales to the segment of small businesses the growth of the Brazilian branch - the largest in dollars between corporate operations in emerging markets worldwide, in fiscal year 2014 (including China).

Small businesses are an asset of our society, which certainly deserve the attention they demand. The floor to the candidates.