If you run a small business, you probably have not considered that operating your day-to-day entrepreneurial activities could put you in a danger of a lawsuit. But as it turns out, the risk of crippling litigation is never too far away.
Legal headaches, especially in Kenya can take you by surprise and severely hurt your bottom line. Today we would like to talk to you about 4 common legal mistakes that small business owners make. Some of these mistakes may look or sound trivial today but their impact, in the long run, can permanently cripple your dreams.
4.Bad-Mouthing Your Competitors
So your business is just gathering momentum, customers are slowly trickling in and you are just about to hit the jackpot – but then this “jealous” competitor comes up and starts to undercut you. He sells similar products at a cheaper rate and so he slowly starts to eat into your market.
What do you do? As an entrepreneur and a human being it is easy to be tempted to bad-mouth your competition as you try to salvage the business that you’ve taken so many years to build. But that should not be the case.
In fact, talking ill about any other business whether on social media, in public, private or anonymously could easily land you in a deep DEFAMATION legal suit. You should know that there is a very thin line between FREEDOM OF SPEECH and LIBEL.
So be very careful before you share that rant on your social media handles, talk to a lawyer on ways to avoid being caught up in a legal quagmire.
3.Accepting Handshake Deals (No Paperwork)
This problem often happens when you are just getting started in business or when you are really desperate to seal a deal. Company A wants to order a bulk supply of Product X that you supply.
So you meet with Company A’s representatives but out of excitement you supply everything the next day without first insisting on a contract that spells out the terms of payment. Then what happens? Company A decides not to pay you dwelling on flimsy excuses…it happens! And just like that you lose a significant chunk of your working capital.
That’s just one example of how we small business owners can easily fall victim to hand-shake deals. As a rule of the thumb, always insist on signing a contract on all transactions that affect a significant amount of your working capital.
If you are purchasing something like a plot of land for your business, don’t fall prey to Share Certificates or Allotment Letters, always insist on getting a title deed which is the only legally recognized document of land ownership.
If you are buying a car, always insist on handling the transfer through KRA. Always involve a lawyer in such transactions – it’s a small price to pay for your success and ultimate peace of mind.
2.Registering The Business As A “LIMITED COMPANY”
We have noticed most small business owners end up registering their firms as LIMITED LIABILITY COMPANIES even when they haven’t figured out what they are really doing. What you should know as a fact is that you can always transact business formally even without having the LTD status.
All you need to do is apply for SoleProprietorship or Partnership so you get a formal certificate with your ideal company name. The reason we discourage very small entrepreneurs from rushing to get the LTD status is that the privilege of a LTD company comes with responsibility and cost.
You may easily find yourself with a lot of legal and tax fees – in addition to government-imposed fees – just for having a LTD tag to your business name. Only when the benefits of operating a limited liability company outweigh the likely administrative costs, it may be the perfect time to incorporate.
1.Failing To Remit PAYE, NHIF, NSSF and Sales Tax
I know most of you may not like the sound of that but I have to tell you about it anyway – always give to Caesar what belongs to him. You may escape today by not paying PAYE, NHIF or NSSF returns for your employees…or you can even hide your sales records so that you don’t pay your sales tax…but you will not survive for long.
There are very serious consequences of failing to remit these payments and if the authorities catch up with you you’ll be in deep trouble. You really don’t want the KRA guys to slap you with a “You owe the government Ksh10 Million” claim. You don’t want your employees to report you for failing to pay their NHIF deductions on time.
Take Home
It doesn’t matter what kind of business you are doing. Whether you are a tailor, farmer, transporter, accountant firm, PR firm, medical consultancy firm, taxi or online business – if you have dreams of growing your trade then you need to play by the rules of the game.
Familiarize with the laws that concern your industry, always double check before you sign contracts and most importantly always meet your end of the bargain.
What other legal mistakes have you seen small business owners make?
