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The laws of attraction: how to drive your business along the legal paths

Article provided by Discovery Business Insurance

Business law spans employment to contracts and ethics. Lawyers Lwando Xaso, a constitutional law expert and Graeme Wilson, a legal eagle for start-ups, share their guidelines.

South Africans could have been spared years of lost opportunity and growth had our leadership stuck to the basic tenets of the country’s founding document – the Constitution – says legal expert Lwando Xaso. “And as an entrepreneur or business owner, you are bound by the Companies Act, which means you have to make sure your affairs are in order in that sense. But all laws, including the Companies Act, flow from the highest law in the country, which is the Constitution.”

“It is important for businesses to understand what the Constitution does for them. Usually it is seen as a tool to control public powers and not private powers, but if you read Section 8 of the Constitution, it says that companies are also bound as ‘private actors’, by the Constitution. In this way, the stability of this country, accountable governance, etc goes a long way in creating fertile ground for businesses to grow.”

She adds that the flaw of corrupt South African leaders and businesses ignored these guidelines and they set us back many years. “There’s a an ethos that’s embodied by the Constitution about how companies should behave, especially in a post-conflict society. You can’t just be driven by profits. You also have to be driven by the well-being, not only of your employees but the entire country,” she says. “The Constitution demands of you. to perform whatever your business activity is in a way that enables this country to actually realise the human rights that are actually set out in it.”

While Xaso says the Constitution can seem like an “airy fairy sort of document without the nuts and bolts,” it should be a guiding light in business conduct. “Build your company on those values of being transparent, of affording the people that you work with complete  access to your thinking, being able to justify your decisions and explain why a particular decision was taken. When you look at the Companies Act and how boards take decisions etc, it is all geared towards the values that are embodied in the Constitution. Those legal and moral structures in place right from the start,” Xaso adds.

But what about those nuts and bolts?

Graeme Wilson says practical lessons for entrepreneurs are simpler than we might think. “An important starting point is for people to understand or appreciate that to you set up a business, no formality is actually required. You actually don’t need to set up a legal entity or company to start a simple business, like trading or selling a service,” he says.

When businesses grow however, they do need measures in place. “When you operate by yourself, the difficulty with that is there is no difference from a legal perspective between you and your business. So if something was to go wrong, for example, there was a death or an injury or a damage or a loss to your client, the liability lies with you personally,” says Wilson. Then, all your assets are on the line.

A few tips, Wilson shares, is to keep matters simple. Simple language that anyone can understand, in legal terms is a necessity. “If you write a good contract, people should able to understand it clearly. Basically, that you and I agree on this and we can just record it in simple terms and we can say back to each other in simple terms,” he says.

When partners and shareholders become involved, then, a lawyer can assist to keep matters on track and fair. “Typically the relationship between shareholders is governed by a shareholders agreement and in the more modern company structure, it can all be dealt with in what is called the ‘Memorandum of Incorporation’ or the MOI.”

“It’s an important document particularly in the in the start-up space because people can get into business together with what they believe to be a very common understanding of what they’re trying to achieve and where they are going to go but things change over time,” says Wilson.

Employment contracts are another important legal aspect to consider. “Understanding the nuances and who is doing what and what category they fit into, how they’re treated and the ways in which those contracts can be terminated is, is very important and something that a lot of small to medium-sized businesses actually get wrong,” Wilson warns.

The other – is accounting. “You need structure. Whether it is an Excel spreadsheet of income and expenses or some online software to help you, you need structure so that objectively if someone looks at it down the line they could say, I see what you’ve been doing. This makes sense, I can see what your income is and I can see what you output is.”

While he says ensuring procedures are in place in a simple manner, it is essential to have those procedures. “Running the business in an orderly fashion, it is important from an accounting perspective and then from a legal perspective as well.”

Then, how would an entrepreneur know that more legal structure is important? “Your intuition is going to tell you. You are a business owner and you’ve figured out a lot of factors, you’re going to realise that you need a bit of a bit of help, and you should seek it,” Wilson says.

 The 15-episode The Healthy Business Show is brought to you by Discovery Business Insurance. For more insights from Lwando and Graeme, listen to her podcast below.

Discovery Business Insurance is a proud Partner of the NSBC