A deep dive into corporate governance structures in the United States and United Kingdom
The study of corporate governance, while a relatively modern development, has received significant attention during the last half century. Corporate governance is identified as a set of rules, laws and regulations that are interwoven with common law and therefore helps to govern a company's day-to-day business practices. Normally corporate governance would revolve around several factors including: the relationship between stakeholders and shareholders, community, government, and the company. These relationships can become a little tricky when venturing into international waters.
Before deciding on a US LLC, or UK Limited company - or any of the other popular structures, a little time for local knowledge may be useful. What follows is an overview and comparison between corporate governance structures found in the U.S. and the UK. These governance structures play a significant role, irrespective if the entrepreneur wants to start an LLC, corporation or other business entity.
Rules-based U.S. versus Principle Based UK
In the book, Corporate Governance: Principles, Policies, and Practices. 3rd ed, the author identified that United States companies favor a rules-based model. This model follows a set of predetermined actions and a comprehensive set of rules and regulations in order to comply with local, state and federal laws. The author further identifies that although the United States system had many similarities in common with the UK model, the rules-based approach helped to purposefully distance themselves from their colonial past. The promotion of freedom in business and the market subsequently became hallmarks of U.S. business culture.
An interesting point to note is that the rules-based approach is largely tied to the American legal case system, which is based on case laws. In layman's terms, every case won or lost in the Supreme Court becomes a precedent that can be used in disputes. The system is relatively rigid and brings with it high volumes of litigation, with legal penalties issued to non-compliant directors. The 2002 Sarbanes-Oxley Act serves as the benchmark for the U.S. corporate governance system. This act enforces law penalties for improper governance as well as disclosure requirements.
Across the Pond (a term British speakers sometimes use for the Atlantic), corporate governance is based on a set of principles. This system is inherently more flexible, unlike their American counterparts who seemingly have a rule or law for most aspects involving business. While the principles are more open to interpretation, within reasonable margins, the UK law enforcement system is based on case laws as well. The reason why the UK model is considered to be principal based has to do with the accounting standards and economic models present in Europe.
The UK is mainly characterized by an ownership model dominated by financial markets. This would suggest dispersed ownership and a high prevalence of institutional investors. Due to the fragmented nature of ownership, most business entities may lack a concentrated authority between shareholders, allowing the directorial board to determine the direction of the company.
Dr. Pankaj M. Madhani notes in his research paper that in the United States the corporate governance model is mainly centered around strong leaders, CEOs and directors. The United Kingdom revolves around block holders. This is due to differences in the economic landscape. The paper describes the United States market culture as highly competitive. The government's role is simply to provide a fair economic playground for companies to compete in.
On the contrary the United Kingdom borrows some aspects from the German economic model, emphasising cooperation between government, stakeholders and shareholders of the company. Madhani notes that the UK model leaves some room for employee determination, whereas the US governance system almost completely excludes employees from the process of corporate governance and decision making.
Business Taxation Models In the UK and U.S.
A United Kingdom company is typically subject to UK corporation tax on the income profits and capital profits. Normally corporation tax is paid nine months after the end of the accounting period. Companies who meet certain profit thresholds may have the option of paying taxes in four equal instalments. Trading profits are calculated by deducting certain reliefs and/or allowances together with expenses incurred exclusively for the purposes of trade. Trading profits are taxed on an accruals basis and capital gains are generally taxed on realisation.
In the United States taxes become a little tricky. Corporate tax is generally imposed on the federal, state, and local levels on the income of entities identified for tax purposes as corporations. State and local taxes and rules vary by jurisdiction, though many are based on federal definitions. Corporations are expected to file tax returns annually and must make quarterly tax payments. Groups of corporations controlled by the same owners may have the option of filing a consolidated return.
The issue of double taxation is a complicated one. In the United States income earned by C corporations is taxed at a statutory federal rate, plus state corporate taxes. After paying the corporate income tax the corporation has the option of distributing the after-tax profits to shareholders (usually in the form of dividends), reinvesting, or holding the after-tax earnings. If a corporation chooses to distribute dividends, those are taxed at different rates. States may levy additional taxes on dividends.
The UK, on the other hand, has an extensive network of double tax treaties which attempts to clarify what income is taxed in which country. However if the matter cannot be resolved via the treaties then some statutory reliefs may become applicable.
A Few Final Words
Corporate governance systems in the United States and the United Kingdom have some similarities regarding ownership dispersal and the connection with the legal system. However, different factors heavily influenced the trajectory in which both nations would evolve in their approach to corporate governance. The UK moved closer towards European standards, whereas the U.S. mostly developed on its own.