Understanding the legal aspects of our businesses is not always at the top of our priority list. So many other things grab our attention. However, if you plan on growing, you can only avoid thinking about the law for so long. You need to consider how to legally operate and protect your business. This is especially important as you deal with investors, partners and others.
We recently hosted Arthur Byara from Mashariki Advocates and Rodney Mulindwa from Cymbell Advocates on a SHONA SIGNAL Webinar focused on businesses and the law. Together, they broke down the different facets of the law businesses need to consider as they start and grow their operations.
Below is a summary of the discussion. We share the 5 legal tips they recommend businesses follow to ensure they are protected and on the right side of the law.
Registration
Many businesses opt to skip this step or put it off for as long as they can. However, an unregistered business eventually hinders your growth. This is especially the case as you expand. You might require loans or external financing. However, banks and most sources of external financing will only deal with registered businesses.
There are different structures to consider as you register your business. These include:
i) Business name: This is best suited for you if you can’t immediately register your business as a company. It doesn’t cost a lot of money to register a business name in Uganda. Additionally, it is easy to convert from registering a Business Name to a company. Once registered, you get a Certificate of Registration.
ii) Partnership: In a partnership, partners have full liability and are responsible for any debt the business owes. Additionally, you can sue or be sued.
iii) Company: Unlike in a partnership, a company is considered to be a separate entity. The shareholders are not responsible for any debt the business owes and aren’t liable. This is the main difference between a Company and a Partnership. It is the company and not the individuals behind the company that can sue or be sued.
Keep Records
Records include minutes of meetings and records of official communication, among others. These are important for proper financial planning and reporting. In addition, they will come in handy when dealing with potential funders and business partners. Proper records are also necessary for tax compliance.
Contracts
Let’s take a look at two important contracts you should have;
i) Shareholder Agreement
This is a private contract between the company’s shareholders. It states who is responsible for the shares and the shareholders’ obligations. According to Investopedia, it is intended to make sure that shareholders are treated fairly and that their rights are protected. This is good news for all shareholders! It also states how the shares are to be paid and sold. This isn’t to be confused with the Articles of Association, which is a public document that talks about how the company should be run.
The Shareholder’s Agreement helps manage the shareholders’ expectations. They should agree how profits will be shared and dividends paid out. In addition, they should discuss whether or not income is to be re-invested into the business.
The agreement also states what to do in the event that a third party wants to buy shares into the business. It also highlights what to do on the event that one of the shareholders dies.
Discuss these issues even before seeing a lawyer because he/she may not understand your vision for your business as well as you do.
ii) Non-Disclosure Agreements (NDAs): This is sometimes known as a Confidentiality Agreement.
It is used when dealing with sensitive information. This might include technical information, business plans or information on your pricing in the market. Any external individuals or businesses should sign this when getting into business with you. This will ensure that no sensitive information is leaked to the public. Some businesses also instruct their employees to sign NDAs.
Handling Disagreements
Have a plan on how you handle shareholder disagreements. Is there a lawyer or senior accountant that can mediate? Mediation should be explored first before escalating the issue to the courts of law.
Furthermore, the shareholders need to discuss voting rights. For example, an investor might ask to have more voting rights than all the other shareholders before investing. The shareholders need to decide if this is something they are willing to do.
Ask For Help
Utilize business support organizations to help you professionalize your business.
At SHONA, we run various training sessions as well as offer one-on-one consultancy to businesses. In addition, there are a number of free guides provided by Government entities set up to help businesses. The Uganda Registration Services Bureau (URSB) is the government entity that handles all registration of documents and services. Visit their website here for user guides on company registration. They as well as details on the services they provide. Although most businesses hire someone to handle the registration process, it is important for you to know what it entails. Another helpful online resource is the Uganda Revenue Authority (URA) website.
The tips above aren’t the only ways to lawfully operate and secure your business. They are merely a step in the right direction. Seek legal help from legal professionals for more in-depth support on how you can protect yourself and your business from avoidable legal problems.
**Many thanks to Arthur and Ronald for sharing their knowledge with us!