Many business owners are inundated with tasks, and don’t give a thought to legal issues – until it’s too late. How to grow your business – while avoiding pitfalls? What smart moves can you make to protect your business? Here are 6. 

Business is brutal. If you haven't had legal issues yet, you will. Ensure that you stay standing while others fall with these smart legal moves.

1. Choose the right structure.

Operating as a CC or sole proprietor may expose you to personal liability. Consider incorporating a private company instead. Larger entities may consider creating holdings and subsidiary structures to demarcate financial and tax liabilities.

Consequence: Failing to use the correct legal structure can lead to personal liability and financial loss.

Cost of preventing problem: R0 – R1,000

Cost of being held personally liable for your business debts: everything you own including car, house and sanity.

Then, with this in place: set up all your company systems to ensure no liability is on you personally. If applicable, separate certain business interests into different companies to protect each unit from liability of the other.

Learn more about structuring options here.

Gears in the structure: the way you structure your company has a significant impact on your personal liability and taxation.

2. Protect your intellectual property – and be mindful of infringing on others.

Your business name, logo, website name, trade secrets and creations all form part of intellectual property (IP) which has a significant value. Register your business name and logo as trademarks, and take steps to protect against the use of your other IP.

Why does it matter? A client recently received negative google reviews based on the poor service of another business which had been using its name. The client suffered damage to its reputation as well as disputes with creditors of the copycat business, whom it hadn't paid.

Consequence: Failing to defend your business IP could lead to another business trading under your name – and if they do business negligently, it impacts the reputation of your business.

Cost of trademarking your business name: R5,000

Cost of a lengthy, technical lawsuit arguing over who owns your business name because you didn’t trademark it: R100,000 + in IP litigation, plus potentially irreversible reputational damage.

Learn more about trademarking here.

Starbucks' logo vs Stars Coffee logo (the Russian replacement of Starbucks).

Image credit: Starbucks / Stars Coffee

3. Get properly drafted custom contracts to regulate your relationships.

Would you rather sign a contract that favours you, or one favouring your supplier? You, of course. Yet some business owners still google contracts, download the first template they find, and slap some signatures on it without properly investigating whether it suits them – then wonder why disputes and breaches of contract arise later. (Meanwhile, your attorney, after hitting their head against their desk, cheers up because you’ve just created unnecessary litigation for yourself and more legal fees). Instead of using template contracts you don’t understand – or worse, not having contracts at all, get a suite of custom contracts which suit your business.

Example: Lindy gives 40% shareholding to Sue, using a template shareholders agreement she googled. The agreement is fairly good, but doesn’t include any performance indicators, or provisions for deemed offer or forfeiture. But Sue is lazy and the relationship quickly sours. Now, Lindy can’t just seize the shares and get rid of Partner – she has to buy Sue out or worse, resort to litigation.

Cost of template Shareholders Agreement: free

Cost of custom Shareholders Agreement and in-depth consultation would’ve been: R10,000

Cost of finding out you gave your business partner shareholding too easily and can’t get rid of them: 40% of the value of the business, or R100,000+ in litigation costs.

Read more about disputes between shareholders and directors here.

A badly drafted contract or lazy business partner could be holding you back.

4. Labour – implement not only employment contracts, but full labour policies.

As an employer, you’re up against labour laws that favour employees. The bottom line in labour law is you want to be able to fire a bad employee and get away with it, without losing at the CCMA.

So, how to do it right?

You need to set up a framework that empowers you to get rid of that bad employee when you need to.

Comprehensive employment contract and KPIs – your staff are already on an employment contract and you can’t just alter it – but you can implement new performance standards through KPIs.

Comprehensive labour policies that deal with all situations – alcoholism, absenteeism, poor performance, misconduct, insubordination, lateness.

Involve your attorney at the beginning of an employee management cycle – not just at the end when you’ve fired the employee on the spot.

Cost of doing it the right way: R5,000 – R10,000

Cost of firing employee the wrong way and paying a CCMA award of up to 24 months for unfair dismissal, plus reinstatement: employee salary multiplied by 24…… R240,000? Plus, the Bad Apple is still there – impacting operations and team morale.

You can improve your employees' productivity and get rid of the Bad Apples, with the right systems in place.

5. Debt collection - Get tough on non-paying clients.

It’s a common scenario – you allow a client to get away with an unpaid account for way too long, hoping it will be paid one day, and not wanting to damage the client relationship. We do understand. But, when a client has neglected to pay you, they have impacted your cashflow, hurt your operations, and caused tax liabilities for your business. Realise that it is the client who has damaged the relationship with you – not the other way around. We advise clients not to tolerate accounts in arrears of more than 3 months. To keep the relationship, you can have us send a “friendly letter” (and subsequent unfriendly letters if necessary) to the client, and you can blame it on the attorneys. We don’t mind being the bad cop so you can be the good cop.

Spiralling debt books are often only a symptom of the problem – the real problem is that the business operations aren’t set up to manage it. While not all debt can be extinguished, you can minimise the problem by:

-            Taking a strict approach to credit management – and get attorneys involved sooner rather than later

-            Ensure you have strict contracts dealing with liability of the client

-            Insist on upfront payment or deposits for work wherever possible.

Cost of implementing better debt management: R0 – R5,000

Benefit: up to 70% reduction in unpaid accounts, and improved cashflow

Cost of not collecting debts: reduced cashflow, stunted company growth and tax liabilities (SARS wants its VAT regardless of whether you’ve been paid or not, so you either pay the VAT upfront, or start pulling dodgy bookkeeping moves to write the monies off – not recommended).

You're stressing about cashflow, while your debtors are buying fancy new German sedans with another bank loan. Don't tolerate it - let us help you get tough on them.

Read more about debt collection here.

6. Legal battles are inevitable - get prepared.

Most small businesses can’t afford litigation (a lawsuit). So they often neglect to protect their rights, or write off money owed to them – stunting cashflow and growth in the process. But legal issues happen to the biggest of companies - it's only a matter of time before they happen to your business.

Think it won’t happen to your small business? One of our clients thought the same – until a customer of theirs summoned them in an urgent High Court application, blaming them for loss of income to his business. That frenzy of urgent litigation over a week cost R70,000.

Normal cost of defending that application: R70,000 excluding costs of counsel (another R30,000)

Price the client paid, being on Business Protect: R5,000 a month for all legal tasks mentioned in this article, plus Litigation Cover.

Don't have R100,000 lying around for litigation? Consider the Litigation Cover provided by our Business Protect package – it covers you for all these legal tasks, plus gives you cover in the event of a lawsuit – all for an affordable monthly fee.

Find out more about how Business Protect helps you grow your business here.

Implement these smart legal moves and you’ll save money, avoid fines, improve cashflow and grow your business faster.