6 Legal Mistakes to Avoid in a Small Business

Embarking on an entrepreneurial journey can be a very exciting one. You may be excited about the ideas and opportunities ahead, but being new to the industry and certainly to the entrepreneurial journey means that you may not know the potential pitfalls and mistakes.

In this article, we will share the common mistakes a small business owner might make so you can avoid any legal issues to the best of your ability. This includes:

1. Entering into verbal contracts
2. Not getting a lawyer to review any written contracts/agreements
3. Not reading the fine print of a contract before signing it
4. Not abiding by the relevant employment laws
5. Not understanding your tax obligations
6. Marketing and advertising pitfalls

Common Mistakes a Small Business Owner Might Make 

1) Entering into verbal contracts

As a greenhorn in the relevant industry, you may be inclined to enter into a verbal contract especially given your weaker bargaining power vis-à-vis the larger industry players. You may wish to do so as a means to build goodwill with stakeholders or simply think that contracts are enforceable, whether written or verbal.

Whilst verbal contracts are strictly as binding and enforceable as a written contract, there may be issues with proving the existence of one. This will be a huge issue if you wish to enforce the contract but there are no records of one except those from your verbal discussions. The reverse is true, if you had only agreed to something verbally but thought it was in passing – the other party may not share the same view and may act to enforce this verbal agreement. Obligations may be misinterpreted given the absence of written records, and there may be potential breaches of the misinterpreted obligations.

For a detailed discussion, you can refer to this article on enforcing verbal agreements in business contracts.

2) Not getting a lawyer to review any written contracts/agreements

Yes, there are legal precedents available everywhere online now, and there are even AI-based tools such as ChatGPT which may help you with drafting a contract. However, it is a huge mistake if you do not get a trained legal professional to review your written contracts and agreements.

The thing about precedents and AI-based tools like ChatGPT is that they may not always be accurate. For one, you cannot be sure that these precedents are based on the most up-to-date legislation and regulations (or are even based on Singapore laws). Some of the clauses in these precedents may not completely be relevant or suitable for your situation, and any amendments could change the entire meaning or interpretation of the clause. Most importantly, a poorly drafted contract would fail to protect your business interests, and worse still, lead to costly litigation.

You may wish to refer to our article on the pitfalls of relying on AI tools like ChatGPT to draft contracts. We discuss the risks of relying on AI to produce business documents, and discuss how best to use these AI tools for your business needs.

We also have a repository of contract templates which may be relevant to your business needs. Nevertheless, it is still prudent for you to hire a qualified legal professional to review your business contracts and agreements. This will help ensure that these contracts and agreements are suitable for their purposes and that your business interests and legal rights are adequately protected.

3) Not reading the fine print of a contract before signing it

It will not be easy juggling an entire set of responsibilities and tasks if you are new to the entrepreneurial journey, especially if you are a sole business owner. A common consequence of this is overlooking minute details like the fine print of contracts before signing them. This is especially so if you are signing contracts with well-established organisations that may have a robust legal team and whose contracts are catered to their business interests. Also, we have to bear in mind that fine print may sometimes be printed in smaller or less noticeable text, and it will therefore be easier to overlook these.

The fine print in a contract usually includes boilerplate clauses like force majeure (removing liability for unforeseeable and unavoidable catastrophes more often than not being natural disasters), no waiver, confidentiality, notice, entire agreement, variation and third party rights.

Boilerplate clauses are known better as standardised clauses as they typically do not contain commercial terms and therefore are hardly ever negotiated. But even boilerplate clauses like governing law and jurisdictional clauses may affect the enforcement of your rights vis-à-vis the contract. Imagine you do not review the fine print of a contract, and sign it, therefore accepting, say, that the governing law is that of another jurisdiction. If that jurisdiction’s laws are less favourable to you, then you may encounter a lot more legal issues in enforcing your rights and interests under the contract.

To ensure that you have read and perused every single part of an agreement, take note of the following:

• Take your time. Do not rush through the agreement. Unless there are extenuating circumstances, there is no reason why the other party would need to rush you to confirm the agreement or contract without adequate time to go through it or even engage legal representation to help review it.
• Mark the document. Use a highlighter or pen to mark sections which may be of contention or require review.
• Peruse the interpretation section of the contract which will and should contain definitions of key terms used in the agreement. The interpretation section may sometimes appear only in the back of the agreement together with the boilerplate clauses.

4) Not abiding by the relevant employment laws

As a small business owner, you may have amassed a team of people. You must therefore also be aware of your obligations as an employer under Singapore laws and regulations. For example, payment of your employees’ salaries must be made at least once a month, and all salaries must be paid within 7 days after the end of the salary period. Itemised pay slips must also be issued.

Further, the employment contract has to be in accordance with the terms set out in the Employment Act (EA). If a particular term in your employment contract is less favourable than the one set out in the EA, then the latter will take precedence. This is where hiring an employment lawyer will help as they will be much more familiar with the applicable obligations imposed on employers under the EA so you can avoid any unforeseeable penalties that may be imposed as a result of non-conformity with the EA.

For example, if you fail to pay your employees their salary on time, your employees reserve the right to file an employment-related claim at the Tripartite Alliance for Dispute Management or even with their union. This will lead to unnecessary costs and time spent dealing with this issue or even bad publicity if information relating to this appears in the public domain. As always, it is prudent to consult employment lawyers for more specific employment-related issues.

Please refer to this article for a detailed overview of the obligations an employer owes their employee.

5) Not understanding your tax obligations

As a corporate entity, you will also need to be cognisant of your tax obligations. For a start, your business will be responsible for paying corporate tax. This tax applies to your income earned in Singapore, and also income earned overseas and is then remitted back to Singapore. If you are a corporation (company), you will be taxed at a flat rate of 17% of your chargeable income.

As expected, you will face serious consequences if you do not or are late to file your corporate tax returns. It will be treated as a criminal offence. The authorities can, at their own discretion, issue an estimated Notice of Assessment (you must then pay the estimated tax within 1 month), or even summon the company or persons responsible for running the company (including the directors) to court.

Read our other article for an overview of the common taxes and possible exemptions for your business, as well as this article for a detailed discussion on corporate tax in Singapore.

6) Marketing and advertising pitfalls 

To grow your business, you will need to grow your marketing and advertising efforts. In doing so, and especially in today’s digital era, you may market and advertise your business online and on social media. You may even opt to send marketing and advertising materials via email, and in doing so, obtain personal data of others. Any data which can identify a person is considered personal data, for example, email addresses, and phone numbers.

You should therefore be cognisant of the data privacy laws in Singapore, and relevant requirements and consent obligations. For example, you will need to notify people of the purposes for which you are intending to collect, use or disclose their personal data and can only collect, use or disclose the personal data for these specific purposes for which the recipients have consented. Additionally, under the Personal Data Protection Act (PDPA), you are required to appoint at least one individual as your Data Protection Officer to ensure compliance with the PDPA.

In expanding your marketing efforts, you may also inadvertently or potentially infringe the intellectual property rights of third parties. For example, you may use parts of a song which still enjoy copyright or design a logo which is similar to another business’. If you do not adequately seek protection or registration for your content rights or even your brand, you may jeopardise these rights even before your business grows. It is therefore prudent to consult an intellectual property lawyer to seek advice on your marketing and advertising efforts before you proceed.

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As discussed, there are many small details you may miss out on as a growing business owner. You have to ensure that your business complies with the various laws and regulations in Singapore, consider your business financing needs and find innovative ways to grow your business.

We have only discussed the issues above very briefly, and there are of course many other considerations that you, as a small business owner, should keep in mind. Should you require further assistance, you can consider engaging a qualified and trained legal professional via our Find a Lawyer service. He/she can help with reviewing and analysing the potential legal issues and pitfalls which may arise in running your business. Alternatively, you can check out our Call a Lawyer service for a more cost-effective way to get quick legal advice.