Entrepreneurship Law: a new step for business growth and economic reactivation in Colombia

For some time now, the National Government has sought different ways to support new ventures and MSMEs in an effort to make Colombia a regional reference for business growth.  Law 2069 of 2020 (“Entrepreneurship Law”) is another step towards achieving that purpose. With this law, companies in the aforementioned categories will have a legal framework that will allow them to develop their business projects with legal and tax benefits.

1.In addition to this, from a corporate standpoint, four important changes stand out which are summarized below:

The decrease of the departmental registration tax rates
Article 188 of Law 1607 of 2012 established the ranges within which the departmental assemblies could set the rates for the procedures subject to registration. Although these rates were generally maintained, in the new Entrepreneurship Law, a differential range was determined for small businesses (according to the definition set forth in Decree 957 of 2019) applicable as of fiscal 2021 as follows:

In addition to that, the law sets forth that small businesses may not be charged with surcharges additional to the current legal tax rates.

As evidenced, this inclusion that directly benefits small businesses, intends to reduce the costs that entrepreneurs have to incur to register documents before the Chamber of Commerce.

2. The inclusion of a dissolution event due to non-compliance with the going concern principle.

Besides that, the Entrepreneurship Law brings a change that implies a new business focus for the country. This is done by including a dissolution event "due to non-compliance with the going concern principle."

It is worth noting that before this law entered into force, the Commercial Code, and other provisions on corporate matters, contemplated as a dissolution event those losses that reduced the equity of the company to less than 50% of the subscribed capital [1] That is, when the net worth of a company is less than 50% of the capital that the shareholders of a company undertake to pay. This provision repeals the following articles of the Commercial Code: numeral 7 of article 34 of Law 1258 of 2008, as well as articles 342, 351, 370, 458, 459, 490, numeral 2 of article of article 457 of Decree 410 from 1971. . This dissolution event was based on the thesis that the viability of a company could be determined by how robust its equity was [2] Mainly since assets are the general pledge of creditors according to Colombian law. . However, this event had been widely questioned and, for some time now, the private sector had asked for its re-evaluation. The foregoing, mainly due to the fact that under the current business model of Startups, many companies report losses during their first 5 to 10 years as they are in the early development phase, even though they have a solid position in the market. Therefore, these companies were in a constant risk of falling into a dissolution event due to the decrease in equity.

Another reason to re-evaluate this event, was because of the economic consequences that the pandemic had on companies. The pandemic caused that many of them could be at risk of falling into the dissolution event that was provided by law. In fact, this was already a concern of the National Government, which, through article 15, numeral 3 of Legislative Decree 560 of April 6, 2020, suspended for a period of 24 months, the configuration of the abovementioned dissolution event for losses; including the 18-month period that existed for its recognition and/or cure. 

For those reasons, article 4 of the Entrepreneurship Law, modified the abovementioned dissolution event so that the financial reasons that led a company to that state are related to the concept of going concern principle [3] According to the Colombian Technical Council of Public Accounting, the going concern principle refers to when the company is in operation and will continue to do so for the foreseeable future according to the analysis carried out by management for at least 12 months in the future. This being the case, it is a going concern unless the entity intends to liquidate it or cause its operations to cease, or when there is no other more realistic alternative than to do so. Recovered from: https://cijuf.org.co/normatividad/conósito/2017/concopio-971.html ; that is, the capacity of permanence of the company in the future. In consequence, when this permanence cannot be accredited, the administrators must refrain from carrying out operations other than the ordinary course of business and summon the Board of Members or Shareholders Assembly immediately, so that decisions related to the continuity of the company are taken. Failure to comply with these provisions implies a joint and several liability of the administrators for the damages caused to the shareholders or third parties.

Additionally, this same article establishes that, without prejudice to the foregoing, the administrators must summon the highest corporate body immediately when the analysis of the financial statements and the forecasts of the company show deterioration of equity [4] According to the National Institute of Public Accountants of Colombia, an asset is impaired when its book value is greater than its recoverable amount (its real value). Retrieved from: https://incp.org.co/se-calcula-la-perdida-deterioro/  and risks of insolvency [5] Insolvency risk refers to the uncertainty due to the possibility that a company may not be able to meet their financial obligations; that is, a state of financial vulnerability that leads to society being unable to meet its debts. Concept taken from: "The stages of the life cycle of the company by the patterns of the cash flow statement and the risk of business insolvency" by Dante Domingo Terreno and others. . Otherwise, the administrators will be jointly and severally liable for the damages caused to the shareholders or third parties due to the breach of this duty.

3. The change in the minimum percentage of shareholders required to summon an extraordinary meeting.

On the other hand, the Entrepreneurship Law modified the system of summoning and deliberation of ordinary and extraordinary meetings and included a transitory paragraph where the National Government is empowered to establish the time and form of summoning the ordinary meetings of the corporate bodies (including compulsory meetings [6] According to the Superintendence of Companies in Concept 220-020467 dated April 2nd, 2012, it is a right contemplated in the law to guarantee that the partners can meet at least once a year to exercise their political and economic rights when the administrator of the company failed to comply with his obligation to summon the highest corporate body in the year. ) for the year 2021 and those pending for the year 2020.

Regarding the modification of the summoning regime, the administrators, the fiscal auditor, or the official entity that exercises permanent control over the company, as authorized bodies to summon extraordinary meetings, will be obliged to do so when requested by a number of shareholders representing at least 10% of share capital - as opposed to the 25% required prior to this change. This means greater protection for minority shareholders in company decisions and the possibility for them to exercise their rights as shareholders in a broader way.

4. The assignment of inspection, surveillance, and control competence of the Chambers of Commerce to the Superintendency of Companies

Finally, regarding corporate matters, the Entrepreneurship Law assigned the power that was headed in the Superintendence of Industry and Commerce to exercise the inspection, surveillance and control over the Chambers of Commerce to the Superintendence of Companies as of January 1, 2022. This implies greater coordination and coherence regarding the functions of the superintendencies in Colombia and the direct application of their doctrine.