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Small Businesses - Legal pitfalls


There are several legal pitfalls for small businesses, and in this post, we will explain a few of the most important legal pitfalls, and how to avoid them.


Separate Legal Entity:

Several businesses in South Africa are being run as sole proprietorships or partnerships, but many of these business owners are not aware of the potential dangers of running a sole proprietorship or partnership.


Sole Proprietorships and Partnerships are not regarded as separate legal entities in our law, therefore, although these businesses appear to be independent from their owners, the reality is that the owner’s or partners' assets are exposed to the business’ creditors and other liabilities.


It is therefore important to register a separate legal entity (usually a company) and run the business within this entity. By doing so, the owners (shareholders in the case of a company) limit their liability towards the debts and other liabilities of the company.


Employment issues:

Every growing business will employ one or more employees from time to time, and we can almost guarantee that employment issues will arise. The labour laws are very much in favour of employees and therefore employers must proactively provide for employment issues before they arise.


The best way to protect your business from the negative consequences of employment issues, is to have a comprehensive Code of Conduct and Policies and Procedures Manual in place. Without these documents, employees "do not know" what is expected from them, or what procedure to follow should any issues arise.


Strictly speaking, an employee who is constantly on social media cannot be dismissed if the employer’s code of conduct does not prohibit social media during working hours. Similarly, when an employer has a formal code of conduct, prohibiting social media during working hours, any employee who contravenes this rule, can be dismissed.


Any type of employee behaviour and conduct can be regulated by a code of conduct, which without, the employee can basically do what he wants, until he is told otherwise.


Shareholders agreements:

Any company with more than one shareholder, SHOULD have a shareholder’s agreement. Just because the Companies Act does not require the shareholders of a company to enter into a shareholder's agreement, does not mean it is not important.


Many companies these days do not have shareholder's agreements, simply because it is not required by the new Companies Act.


The Companies Act regulates the legal status and requirements of a company. A shareholder’s agreement regulates the relationship between the shareholders themselves on the one hand, and the relationship between the company and the shareholders on the other hand.


Without a shareholder's agreement, the relationship between the shareholders are unregulated and is a disaster waiting to happen.


Are you married out of community of property, but you don’t have a shareholders agreement with your co-shareholders? If so, do you trust your co-shareholders more than you trust your spouse?


Litigation:

Litigation is expensive, as several small businesses have learned the hard way. The best way to save costs in litigation, is to avoid it altogether.


Know your legal position before you sue or are being sued, so that you can make an informed choice to avoid costly litigation whenever possible. Prevention is better than cure.


If you are not prepared for litigation by knowing your legal position in advance, protracted and expensive litigation can ruin your business financially.


How to avoid the pitfalls:

  1. Get an attorney on retainer. Nothing is more frustrating than to go through an onboarding process with an attorney when you need legal advice. You need someone that is just a phone call or email away.

  2. Ensure that your attorney puts your interest above his own pocket. Some attorneys are blinded by how much money they can make out of you, instead of helping you with your legal issues in the most cost-effective manner.

  3. Run far away from an attorney who does not go through an onboarding process. An attorney who takes on any client that comes his/her way, might either be desperate and greedy, or desperate and inexperienced.


At Botha Bezuidenhout Attorneys Inc, we strive to keep our retainer clients happy by:

  1. Tailoring retainer fees according to their needs and budget;

  2. Recommending the most time- and cost-effective legal options when any issues arise;

  3. Approve each retainer client by asking a set of questions, to ensure that we match the necessary experience and expertise for a successful business relationship; and

  4. Being brutally honest, even if it means giving you the answer you don’t want to hear, or didn’t expect.

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