Avoid These 7 Legal Pitfalls

Avoid These 7 Legal Pitfalls


Most entrepreneurs will confirm that starting a business is a lonely affair. As business owner you get to take all the decisions, but you also carry all the risks and the costs that come with trial and error.

When you start your own business you ideally want two people on speed dial: a mentor and a commercial lawyer. While a mentor with goodwill to spare can still be found, commercial lawyers come at a price.

Unfortunately entrepreneurs often run substantial risks by trying to avoid legal costs by foregoing legal advice, which often results in businesses being incorrectly structured or basic business agreements not being in place.

Entrepreneurs frequently incur unnecessary opportunity costs by trying to progress important business deals as far as possible on their own in order to minimise the costs of briefing a law firm.

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7 things you should know

Since most entrepreneurs do not have a lawyer on speed dial, here are some basic pointers aimed at keeping you in your boardroom and out of the courtroom.

  1. Ensure that your company is properly set up and registered in order to protect you against personal liability
  2. Every transaction has a tax consequence. Make sure you understand what these consequences are. If you are not sure, it is worth investing in a consultation with a tax specialist
  3. Do not make promises or commitments in writing if you are not completely committed to honouring them. Always assume that what you say in an email or text message is as legally binding on you as a signed agreement
  4. As soon as there is more than one shareholder or member of the business, all parties involved should sign an agreement to govern their relationship. Make sure you address the following aspects: how profits are shared and paid out; how new partners/shareholders can be brought in to the business; who will fund the business; and how and when loans will be repaid
  5. If your business supplies goods or services to the public, know what your obligations are in terms of the Consumer Protection Act
  6. Avoid signing personal surety, especially a covering surety, since it cancels the benefit of limited liability that trading through a company provides. Instead consider other forms of security such as a bank guarantee
  7. If you are selling your business, do not forget that your employees must transfer to the buyer and cannot simply be retrenched. Also, remember to transfer your rights and obligations under the business’ contracts to the buyer. If you do not transfer the contracts to the buyer, you will remain liable under those contracts.

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Yvonne Wakefield
Yvonne has a BA (law) and LLB from Stellenbosch University, a Diploma in International Studies from Antwerp University, and an LLM from UCT. She has qualified as both an attorney and an advocate in South Africa, and as a solicitor of England & Wales. Yvonne now heads up Caveat Legal, a legal consultancy aimed at making quality commercial legal services more accessible to the business market.