Common legal mistakes made by Singaporean SMEs (and how to avoid them)

Running a business can be a very time-consuming task for any entrepreneur, even for an SME business owner. With various challenges, especially with limited funds, many tasks end up on the back burner as you deal with the most demanding and urgent targets to keep your business afloat. One common aspect of running a business that often gets overlooked or put off due to costs and complexities is hiring legal representation to handle legal matters. While some businesses are aware of the most basic laws to kickstart a business, not everyone can stay abreast of changing laws to defend their legal rights on top of the multitude of laws they need to abide by to run a compliant and effective business.

To avoid legal complications down the line, here are some common legal mistakes that occur in Singapore and how you can avoid committing them.

Common legal mistakes by Singapore SMEs

Business formation and structure

One of the most common legal mistakes made by many Singaporean SMEs is concerning business formation and structure. It is important to clearly define your business structure as it serves as the foundation of all of your future work. Without a properly defined business structure, every part of your business will be affected significantly, from how to outline your policies correctly to how to file your taxes properly, and how liable you will be in future employment legal matters. Thus, you will need to define and register your business correctly at the very beginning of starting your business.

Defining your business structure means understanding the different types of business structures, then registering the business legally and obtaining the necessary licences as outlined by the law. Business structures are defined based on ownership, legal representation and levels of liability:

Sole proprietorship

A sole proprietorship is a business owned and run by a sole owner. This type of business structure does not require any registration under a separate business or legal entity, which means that the business has no separation between the business and owner. While the owner receives all profits, this also means that they are 100 per cent liable for any debts, losses, and taxes. This type of business files their taxes under personal income tax.

Partnership

Partnerships encompass several different types of agreements but are often formally arranged between two or more individuals or parties on how to operate a business and manage its profits. In partnerships, all partners are made responsible for any liabilities, and the taxes are borne by the partners under their individual income taxes in Singapore, not the partnership entity.

C Corporation

C Corporations are companies that are required to be registered as their own independent legal entity. Unlike a sole proprietorship or partnership, this type of business structure is independent of its individual or collective owners, also known as shareholders. This means that the taxation is completely separate between the corporation and the shareholders, creating a double taxation of the corporation and individual shareholders.

S Corporation

An S Corporation is slightly more advantageous than a C Corporation in terms of taxation. In this business formation, the company’s income and losses pass through shareholders, which means that the corporation is only taxed through its shareholders, eliminating double taxation. However, this type of corporation is only available to smaller businesses with fewer than 100 shareholders.

Limited liability company (LLC)

As the name suggests, a limited liability company’s strength lies in its ability to protect its owners from personal responsibility, limited only by the shareholders’ investment in the company. With an LLC, the corporation has the option to pay its taxes through the personal taxes of its shareholders.

Contracts and agreements

Another common issue in legal matters that SMEs face is revolving around contracts and agreements. Without proper legal awareness or hired legal representation, SMEs in Singapore may find it difficult to draft suitable contracts and agreements with their clients, vendors and employees. Some would even opt to enter into an agreement without a contract! Without one to defend the rights of both parties in an agreement, a legal dispute can occur even amongst the best of friends. Unfortunately, while oral agreements can be legally binding, they are often very difficult to contest, making them undesirable in a court of law.

Additionally, a regular mistake to avoid in 2024 regarding contracts is the habit of signing agreements without reading and fully understanding the terms and conditions of the contract. Every legally binding document needs to be checked and double-checked, especially by a professional in legal matters. However, many SMEs find legal services to be a frivolous expense they cannot afford, which often contributes to this blunder. It is always advisable for companies and business owners to invest in legal advice to avoid any future liabilities.

Employment law

Another related issue to the contracts and agreements is SMEs’ compliance with Singapore’s employment law. While drafting contracts for employees, some companies tend to misclassify their employees as independent contractors. While it can be an honest mistake, many employers have also abused this misclassification mistake, making penalties and fines for purposeful misclassification more severe. Changing rules and laws further complicates the process, so businesses need to be extremely careful. On top of that, other employment regulations that are either commonly flouted or unintentionally violated also include minimum wage, overtime pay laws as well as leave entitlement. As they can be perceived as intentional violations, it can be difficult to prove yourself in court, hence why it is necessary to be extra careful.

Intellectual property rights

Businesses, especially SMEs, tend to overlook the importance of protecting their intellectual properties (IP), either due to a lack of awareness of their rights as IP owners, or a lack of resources to protect their IP. Without protection, either through trademarks, copyrights, or patents, your ideas and products can easily be “stolen” and replicated by another company without any legal repercussions. Similarly, a lack of awareness and understanding of IP rights can get your business in trouble should you unknowingly infringe on the intellectual property of others. Research is key in preventing these issues, and investing the time and resources to protect your IP and your rights will benefit you in the long run.

Data security and privacy

As the world digitally transforms, more focus needs to be directed to complying with the country’s data protection laws. Many smaller companies with smaller budgets may apply different technological improvements to their business without considering their compliance with data protection laws such as the Personal Data Protection Act. Without the proper understanding of the law as well as the right architecture to prevent issues like personal data collection, this mistake is much easier to occur than you would expect. On top of that, data security measures are also often left unchecked, leading to data breaches due to inadequate security measures. These are only a small part of the legal hurdles SMEs in Singapore face in data privacy and security.

How can Singaporean SMEs avoid common legal mistakes?

While it can be daunting for SMEs to avoid these common legal mistakes, taking small first steps to move forward is better than none. While SMEs are limited by their smaller budget, seeking professional legal advice is the most effective way to prevent more costly troubles in the future. Consulting with a business lawyer specialising in SMEs is highly beneficial for you to learn and understand your rights and responsibilities as a business owner. Seek legal counsel to clarify your legal requirements and obligations before delving into establishing your new business so you have a basic foundation of the law. Over time, you can work with your trusted legal advisor on a case-by-case basis, like drafting contracts and other essential legally binding documents to ensure you are cleared.

Other than that, as an SME business owner in Singapore, it should be your duty to keep up with the changes and reforms in the laws and regulations in your country, especially regarding employment and entrepreneurship. To avoid any future legal dispute, always make an effort to invest your time to fully comprehend the laws surrounding your business. Take the chance to attend workshops and seminars on legal compliance for SMEs in Singapore when the opportunity arises. This way, you learn and grow with the help of other professionals, giving you room to ask the questions that may come up.

Finally, to avoid common legal mistakes as SMEs in Singapore, make it a habit as an employer and business owner to implement good legal practices in your business. Just like Rome was not built overnight, your business will need time to grow and develop. With constant commitment, you will be able to develop better and clearer business policies and procedures over time, including how to handle contracts, employee relations, as well as data security. It is also advised that you regularly review and update your legal documents as time goes on to ensure that you keep up with the most current regulatory compliance.

Building a company takes time and dedication, and cannot be taken lightly. Even so, these efforts to stay compliant with a complicated and ever-changing legal landscape will only do your company good, protecting you from harm’s way and ensuring your company’s longevity in the market.