Common legal mistakes SMEs make and how to avoid them

Legal matters can be confusing within the business landscape and particularly so for small and medium-sized enterprises (SMEs). From contract drafting to intellectual property protection, doing business in accordance with the law can be complex. Mistakes can be costly and can even lead to more serious consequences, such as significant financial loss or business closure.

For example, in 2019, the Commission for Conciliation, Mediation and Arbitration (CCMA) revealed that 80% of its cases were from small businesses. This statistic highlights the significant legal and compliance challenges faced by SMEs – challenges that can lead to costly financial setbacks for businesses. Too often, SMEs fall outside of compliance not due to negligence but simply because they are unaware of essential legal requirements involved in running a formal business. This lack of awareness can expose them to unnecessary risks and hinder their growth potential.

While large companies have the advantage of access to specialist in-house counsel, most SMEs scrape by with minimal resources, seeking advice from unverified online sources, or well-meaning friends or family. This approach can lead to difficulties that impact profit, spark internal disputes, or even threaten the business’s survival. It is necessary to be aware of these traps and to steer clear of them to succeed in the long run.

These are five common legal mistakes SMEs make and what they should do instead to avoid running into any legal issues:

Forgetting about formal contracts

Most small entrepreneurs think that an email, text or word-of-mouth agreement is sufficient. Without written, formal contracts, and especially when things go wrong, intentions become blurred and can lead to disputes. It is always safer to put every agreement in writing, with responsibilities, deliverables, deadlines, and payment conditions specified. This protects all parties in a transaction or agreement. Wherever feasible, have a lawyer review any major contracts, especially with suppliers, customers, or business partners.

Failure to safeguard intellectual property (IP)

A business’ greatest asset could be a distinctive logo, brand, process, formula, product design or specialist service. Failure to protect IP will fall on the business owner entirely. This responsibility may include registering trademarks, copyrights, or patents, failing which SMEs risk exposing their business to imitation or litigation. Data and operating systems need to be safeguarded too. SMEs should map out their core IP assets in the initial phases of starting to run a business and protect these through registrations or other protective measures as required.

Ignoring regulatory compliance

Each business must comply with general legislation, industry-specific laws, tax rules, and labour legislation. Non-compliance can generate fines, penalties, or even prosecution. SMEs need to become well acquainted with legislation to which their business is subjected to, maintain proper records, and, if necessary, seek professional advice to avoid non-compliance.

Blurring business and personal finances

Using personal accounts for business operations is another common mistake. It makes accounting more complex, invites tax issues, and exposes one's own personal assets in the event of a legal dispute or court case. Separate administrative structures should always be kept for personal and business transactions. It is essential to run a business formally and separately from home life and personal expenses, and to keep proper records to stay on the side of relevant tax and compliance laws.

Neglecting employment contracts and policies

Even with minimal staff, clear employment contracts and policies need to be in place. Conflicts regarding job roles, responsibilities, or termination procedures can occur without contracts. Ensure that workers are informed of their terms, benefits, and conditions, and that all communication and transactions are documented. The verified online resource by the CCMA and Business Unity South Africa (BUSA) – www.smelaboursupport.org.za – can also provide some guidance in navigating many labour issues.

With these precautions in mind, SMEs can avoid costly disputes and focus on growing their businesses with confidence. 

Jeremy Lang, Managing Director at Business Partners Limited

*** The views expressed here do not necessarily represent those of Independent Media or IOL.

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