Otar Abesadze: “Twenty-six percent of the registered 92,000 LLCs remain active.”
Verdict: FactCheck concludes that Otar Abesadze’s statement is MOSTLY FALSE.
Among the 922,000 business entities that are registered in Georgia, only 241,000 are active, including individual entrepreneurs constituting a 26% share.
There are six legal forms of entrepreneurial activity, with five designated for enterprises and one for natural persons, according to the law.
Individual entrepreneurs constitute 62% of registered business entities whilst the remaining 38% is comprised of 349,000 companies, 97% of which is made up by LLCs totalling 337,000.
A total of 80,500 LLCs make up 99% of the 81,700 legal persons among currently active business entities. Moreover, active LLCs constitute 24% of registered LLCs.
The number mentioned by Otar Abesadze – 92,000 – does not correspond to either the total registered business entities or specifically LLCs. Whilst the statement correctly identifies the share of active entities among registered businesses, it overlooks the fact that business registration is a relatively simple process in Georgia, although cancellation is challenging. Not all registered entities survive even in developed countries.
The statement by the former City Council member contains some truth but disregards the crucial aspects that could lead to different impressions. Thus, FactCheck concludes that Otar Abesadze’s statement is MOSTLY FALSE.
Analysis:
A former City Council of Tbilisi member made the following statement during his appearance on the TV Pirveli show Reaktsia (from 0:44): “Over 92,000 legal persons are registered in Georgia following the principle of doing business and 26% of them are companies, as in LLCs. It should be the objective of political parties, tax policies and economic reforms to make the minimum percentage of active businesses 76%.”
According to the Law of Georgia on Entrepreneurs (Article 2), six forms of business activity are legally allowed, including a limited liability company (LLC), a joint-stock company (JSC), a limited partnership (LP), a general proprietorship company (GPC) and a cooperative. Natural persons can operate as individual entrepreneurs.
Graph 1: Registered and Active Business Entities
Source: National Statistics Office of Georgia
The limited liability company LLC stands out as the most favoured form of business activity establishment due to the limited liability protection it offers to the personal property of its founders. A total of 97% of registered legal persons take the form of LLCs. Active legal persons make up 99%.
Delving deeper into the statistics reveals that 24% of registered LLCs and 3% of joint-stock companies are active as of 1 October 2023. Individual entrepreneurs are displaying the highest mark at 28%. The particularly low share of active cooperatives can be explained by their popularity in the 1990s, thus only a small number of them have withstood long periods of challenging conditions.
The situation was similar two years earlier as well when only 201,000 were active from the 807,000 registered businesses as of 31 December 2021. Currently 35%, standing at 40,000 businesses, are active out of the 115,000 businesses registered during the previous year and in the first nine months of the current year.
Otar Abesadze presented these statistics to back up his argument about an “unstable business environment.” He believes that the target proportion should be 76%, implying that 700,000 businesses should be active which is hard to imagine in a developing economy with a population of 3.7 million.
Additionally, the low share of active businesses can be attributed to the relatively simple procedure of business registration, ranking Georgia as the second easiest country globally for registering a business. The LLC registration fee is GEL 200 with no need for authorised capital. A business can legally be registered in under two days with less than USD 100, requiring only a notice, a personal ID card and a statute. The aforementioned easy process encourages many to register a business, often disregarding the numerous challenges that arise post-establishment, including the legal framework, the independence of the court, other macroeconomic factors in the country and the founder’s lack of skills to successfully sustain business activity. Cancellation of businesses is tough as compared to their registering. Moreover, an inactive business poses no problems for its founders, thus hardly anybody legally liquidates their businesses.
Otar Abesadze accurately identifies the percentage but misinterprets the quantitative figures and the reasons, ignoring crucial aspects. Thus, FactCheck concludes that his statement is MOSTLY FALSE.
