By Anthony Malunga for Classic Oriental Consultancy (11/01/2023)

Receiving appropriate legal advice during and after the start-up phase can save your company a lot of money and help you avoid costly litigation and penalties as your company grows. Penalties for even inadvertent legal non-compliance can often financially cripple a new business. We examine some of the pertinent legal compliance issues affecting start-ups and SMEs in South Africa today. The list below is by no means exhaustive, but it is intended to highlight some of the legal compliance issues that start-ups and SMEs frequently face.

1. Deciding On The Legal Structure That Will Be Used For The Business

The term “responsibility” refers to the act of determining whether or not a person is responsible for his or her own actions. As a result, it is critical for business founders to decide on the legal entity to be used to conduct business, how the relationship between the founders, shareholders, and investors will be regulated, and what written agreements and legal documents are required for the proper operation and functioning of that legal entity.

An experienced attorney should draft a shareholders agreement for shareholders of a private firm, as this document governs their business relationship and covers the following topics:

• How the company will raise working capital (for instance, whether the funds needed to run the business will come from banks, the shareholders themselves, or some other source);
• How the company’s income will be distributed to the shareholders;
• Whether the shareholders will be required to approve the company’s budget and business plan, as well as any changes to them;
• The procedure to be followed if a shareholder wishes to exit (including come along and tag along provisions); and
• What happens to a shareholder’s shares in a private company when she or he dies?

2. Protecting Your Business Concept

• Entrepreneurs frequently come up with novel and useful ideas for how to address a societal need. However, it is important not to spread that business idea too widely before determining whether the idea, business process, invention, service, work, or product is legally protected.
• It is therefore prudent to conduct some research on this topic or, ideally, consult an intellectual property attorney who can advise you on the complexities of copyright, patents, and trademarks.
• Furthermore, your attorney will be able to advise you on when to insist on the use of a non-disclosure agreement (NDA) and the appropriate provisions that NDA should contain in order to provide your business with the desired legal protection.

3. Labour Laws

• As a small start-up, it is highly unlikely that you will hire employees to help you with your business from the start. However, as your business grows, you will require the assistance of others in certain areas.
• From a labour law standpoint, there are a few key legislative provisions that businesses must follow. These include the Labour Relations Act of 1995, the Basic Conditions of Employment Act of 1997, and the Occupational Health and Safety Act of 1993, among others.
• However, some start-ups make the mistake of not entering into written independent contractor or employment agreements with their employees, or of not doing so on appropriate legal terms. This error has the potential to put your most valuable human resource at odds with the start-up business, diverting the company’s resources away from commercializing its innovative business idea.

4. The Protection of Personal Information Act, 2013 (POPIA)

• POPIA’s purpose is to, among other things, give effect to the right to privacy contained in section 14 of the Constitution of the Republic of South Africa, 1996 by safeguarding a “data subject’s” “personal information” when such information is “processed” by a “responsible party,” as those terms are defined in POPIA. Fundamentally, if a public or private body or any other person processes personal information, that body or person must follow the conditions stipulated in Section 4 of POPIA for the lawful processing of “personal information” and “special personal information.”
• Since POPIA’s far-reaching provisions affect start-up businesses (as well as larger well-established businesses), all businesses should acquaint themselves with the prescriptive provisions of POPIA as soon as possible and take the appropriate steps to ensure legal compliance.

5. Consumer Protection Act, 2008 (CPA)

• Apart from a few clearly mentioned exclusions, any transaction that takes place within the Republic of South Africa is covered by Section 5(1)(a) of the CPA. When beginning business, a start-up company must be aware of its obligations and responsibilities under the CPA to customers if it plans to offer and sell goods or services to consumers. The CPA primarily controls suppliers’ obligations related to, among other things, marketing and selling products to customers. Hence, the CPA governs matters like direct marketing, the right of consumers to return goods, unfair, unreasonable, or unjust contractual terms, product warranties, lay-bys, liability for harm caused by products, and National Consumer Commission investigations.
• It is essential for start-ups to evaluate the risks of legal non-compliance, especially during the start-up period, given that offenses under the CPA and unlawful conduct could result in some severe administrative penalties (of up to 10% of annual turnover) and/or even imprisonment of up to 10 years.

6. Industry Specific Codes, Legislation And Regulations

There are several codes and laws that apply to businesses in a particular industry. For instance, the Competition Commission has published policies, market investigation reports, and strategic papers that can be relevant to your company. A lawyer with knowledge of your sector will be able to pinpoint the legislative texts that are relevant to it.

Conclusion

While the internet has made information more readily available and accessible, information is no substitute for timely practical legal advice tailored to your business. In the same way that large corporations surround themselves with a team of professionals and advisors, startups should ensure that their attorney (as one of their core team players) understands their business and provides timely, practical, and tailored legal advice. This legal advice is especially important during the start-up phase, when the business is being structured, shareholder roles are being defined, and operational decisions are being made that affect the long-term strategic direction, operation, feasibility, and financial sustainability of the business.