Think of all the people who you know who started a business, including yourself. How many of them drew up a careful business plan, ticked all their legal boxes and opened their doors on the first day with all the right accounts, paperwork, and tax formalities in perfect order?

Sure, a few seasoned entrepreneurs fit that description. But you can probably also think of far more people who started out by taking a bit of under-the-table consulting on the side. Or someone who began selling just a few items on Etsy and now makes a living from online retail. What about the farmer who got started with trips to farmers' markets on the weekends.

Did all of them pay all their taxes right off the bat?

That's the question asked by British researcher Benedict Dellot, author of a new report released by the Royal Society of Arts. Dellot, in a thought-provoking but bound-to-be-controversial move, argues that tax evasion--a.k.a. "informal economic activity"--isn't always about greed. Often it's a sign of budding, but still fragile, entrepreneurialism.

Of the 1 in 5 small business owners we surveyed who said they had engaged in informal activity when setting up their firm, 40 percent reported doing so because it gave them the breathing space needed to formalize their operations, and two thirds said they did so because they first wanted to see whether their business would be a viable option. Only 9 percent identified the desire to earn extra income as a factor driving their decision.

With a full 20% of business owners admitting to having worked off the books at one point, Dellot suggests that cracking down too harshly on this sort of tax evasion might have the unintended consequence of closing off viable paths to entrepreneurialism.

Obviously, everyone needs to honor their tax responsibilities, but Dellot told Fast Company that the government, at least in the U.K., should give people a little more leeway in the early days of their transition to becoming entrepreneurs. He advocates:

A stepping-stone model helping entrepreneurs make their journey from informality to formality, helping them to become aware of their obligations and to do simple things like set up bank accounts, register for income tax, and so on... The problem is, at the moment, if you’re an informal worker and you drop in to talk to an advisor and say you haven’t been declaring your income the last six months, that advisor is currently obliged to disclose that to somebody else, and the government then clamps down on that individual. We want to see a bit of leeway there, with no duty to disclose.

He acknowledges, this is "really politically unpalatable," but he insists in the LSE post that by not facing the complicated realities of informal work "we are in danger of losing the vast amounts of entrepreneurial potential that lies untapped in the informal sphere."

Do you know anyone here in the United States who started their business informally? Do you think of this route as cheating or an acceptable (if not ideal) path to business ownership? 


Published on: Nov 27, 2012