Legal areas SMEs need to look out for

IN the complex and rapidly evolving landscape of small business operations, navigating the myriad of legal requirements and considerations is paramount for success. From structuring the business entity to safeguarding intellectual property, ensuring compliance with employment laws, understanding tax obligations and protecting data privacy, small businesses must proactively address critical legal areas to mitigate risks and foster sustainable growth.

This series shall look at the key legal issues that small businesses must navigate, offering insights and recommendations to help entrepreneurs navigate the intricate web of legal regulations and obligations that impact their operations. By equipping themselves with the knowledge of these legal considerations, entrepreneurs can position their small businesses for long-term success and resilience in an ever-changing legal landscape.

Importance of small and medium enterprises (SMEs)

We need to provide some context for this article, by looking at the importance of SMEs in an economy. They play a crucial role in driving economic growth, fostering innovation, creating jobs and promoting social development. The importance of SMEs in an economy can be seen in various ways, and some of them are:

1. Job creation: SMEs are significant contributors to employment generation, as they often have a higher propensity to hire locally and support job opportunities in rural and underserved areas. By providing employment opportunities for a diverse workforce, SMEs contribute to reducing unemployment rates and promoting economic stability. In our economy, many people have found employment in these SMEs. The growth and survival of SMEs, therefore, becomes important.
2. Innovation and entrepreneurship: SMEs are nimble and innovative, and are often at the forefront of technological advancements and market disruptions. They are key drivers of innovation, promoting creativity, competition and efficiency in the marketplace. SMEs are more agile in adapting to changing market trends and have the flexibility to bring new products, services and business models to the market.
3. Economic growth: SMEs contribute to economic growth by increasing productivity, enhancing competitiveness and attracting investments. They form a vibrant ecosystem of interconnected businesses that support each other and contribute to the overall economic vitality of a region or country. SMEs also enhance economic diversification, reducing reliance on a few dominant industries.
4. Local development: SMEs play a vital role in fostering local development by supporting community-based initiatives, promoting social cohesion and addressing local needs and preferences. They contribute to the socio-economic development of regions by investing in infrastructure, supporting local suppliers and engaging in corporate social responsibility activities.
5. Resilience and sustainability: SMEs are often more resilient to economic shocks and market fluctuations due to their size, flexibility, and agility. They play a critical role in promoting economic sustainability by fostering long-term relationships with employees, suppliers and customers, and investing in sustainable business practices that minimise environmental impact.

SMEs are the backbone of the economy, driving innovation, creating jobs and fostering economic growth and social development. Supporting and nurturing SMEs is essential for building a robust and inclusive economy that benefits all stakeholders and ensures long-term prosperity.

Legal area one: Business structure

Small businesses need to carefully consider their legal structure. Choosing the right business structure is a critical decision for small businesses as it can have significant implications on various aspects of their operations. Each type of business structure — sole proprietorship, partnership, limited liability company, or private business corporation — has advantages and disadvantages in terms of liability protection, tax implications and regulatory requirements.

1. Sole proprietorship: A sole proprietorship is the simplest and most common form of business structure, where the business is owned and operated by an individual. In a sole proprietorship, the owner has unlimited personal liability for business debts and obligations. While this structure is easy to set up and involves minimal paperwork, the owner is personally responsible for all business debts and legal obligations. I once did an article on the corporate veil. You may need to go through it to see the benefits of incorporation.
2. Partnership: A partnership is a business structure where two or more individuals share ownership and management responsibilities. There are different types of partnerships. They include general partnerships and limited partnerships, each with its own liability considerations. In a general partnership, all partners share equal liability for business debts and obligations, while in a limited partnership, at least one partner has limited liability.
3. Limited liability company: A company offers limited liability protection for owners, meaning their personal assets are generally protected from business debts and liabilities. The only instance when personal liability can be visited is when the corporate veil has been lifted. I have done an article on this subject.

You can read it as well. Companies provide flexibility in management structure and ownership, making them a popular choice for small businesses. The crafting of your memorandum and articles of association has to be properly done.

When choosing a business structure, small businesses must consider factors such as the level of liability protection needed, tax implications, ease of setup and maintenance, and long-term growth plans. Consulting with legal and financial advisers can help small business owners evaluate their options and choose the most suitable structure that aligns with their business goals and risk tolerance.

By selecting the right business structure, small businesses owners can safeguard their assets, optimise tax efficiency, and position themselves for sustainable growth and success.

LEGAL DISCLAIMER: The material contained in this article is set out in good faith for general guidance in the spirit of raising legal awareness on topical interests that affect most people on a daily basis. They are not meant to create an attorney-client relationship or constitute solicitation. No liability can be accepted for loss or expense incurred as a result of relying in particular circumstances on statements made in the article. Laws and regulations are complex and liable to change, and readers should check the current position with the relevant authorities before making personal arrangements.

Arthur Marara is a practising attorney, author, human capital trainer, business speaker, thought leader, law lecturer, consultant, legal proctor (University of Zimbabwe), and a notary public and conveyancer. He has vast experience in employment law and has worked with several organisations. He is passionate about promoting legal awareness and access to justice. He writes in his personal capacity. You can follow him on social media (Facebook Attorney Arthur Marara), or WhatsApp him on +263780055152 or email [email protected]