5 LEGAL MISTAKES MADE BY ENTREPRENEURS

Dear Entrepreneur,

Statistics show that 50% of startup businesses fail within the first five years. A common reason for this trend is the failure of most entrepreneurs to appreciate and implement proven business principles but rather get carried away with the exhilaration of starting or owning a business.

A business is beyond just having an idea or identifying an opportunity and the serious entrepreneur should be willing to give what it takes to avoid being part of the failure statistics.  This week we have identified 5 legal mistakes made by entrepreneurs and how you can avoid them:

1. Wrong Business Structure- Entrepreneurs need to select the best business structure that is suitable for their business. Choosing to structure your business as a Limited Liability Company, Business Name, Registered Partnership etc depends on the type of business, regulatory requirement, growth potential, investor requirements. Not having the right legal structure can open the business to different types of risks which is avoidable if the entrepreneur gives adequate attention to choosing the right structure with the assistance of a commercial attorney.

2. Failing to Document Shareholders/ Partnership Agreement.- It’s a common saying that Partnerships don’t work in Nigeria but research has shown that this is usually a failure of partners or shareholders to clearly document their relationship at inception. As a business grows it’s not unusual for partners/ directors to start questioning contributions or sharing formulas which invariably leads to chaos. It’s therefore important that entrepreneurs engage a commercial attorney to draft a partnership agreement or shareholders agreement clearly stating objectives, responsibilities and profit sharing formula amongst other things.

3. Disclosing an Idea without a Non-Disclosure Agreement.- In this part of the world, it’s not uncommon for ideas to be stolen, leaving the idea owner helpless because there is nothing protecting such information. Based on this fact, it’s wise to get a commercial attorney to prepare a Non-Disclosure Agreement which would be the Company Template for all transactions with 3^rd parties. It needn’t be elaborate, but it should say that they acknowledge they may be exposed to trade secrets, and they agree not to use or disclose them without permission. Business plans/ proposals  should also state on the cover page that information contained within the document is confidential and proprietary.

4. Failure to Conduct Background Checks on Employees-Making the right hiring decisions for your company is critical to business success. A negative hiring can prove very costly for a business as it can lower your team’s morale, hinder productivity, impact customer relations or incur liability. Pre-employment background check can not only save you money in the long run, it can also protect your business. Getting a commercial attorney to conduct a background check can provide useful insight into an individual’s character and integrity which would ultimately have a bearing on your Company.

5. Not remitting Taxes/Levies to Government Agencies.- Businesses must pay Taxes and Levies stipulated by law because failure to do that can lead to the Government shutting down your business with stiff penalties. Some examples of taxes and levies payable by businesses include, Company Income Tax, Pension, VAT, NSITF, ITF etc. A commercial attorney can be of great assistance in advising you on payable taxes and levies, in some cases he can also help reduce your liability by pointing out tax breaks or loopholes that would benefit your business.

CONCLUSION

Business success is not a consequence of being in the right place at the right time. Business success can be engineered by following the right process. Taking steps to avoid mistakes frequently made by new entrepreneurs is a part of this process.

The content of this document is solely for information purposes only and should not in any way be construed as a legal opinion. If you require specific legal advice on any of the matters covered in this article please contact a professional.