Legal Risks In Business: What You Need To Know

Business operate in an environment inherently fraught with numerous risks, ranging from market risks, policy changes, legal issues, financial instability, human resources, and more. Among these are legal risks which are not uncommon and often leave severe and debilitating consequences. Some businesses inadvertently or deliberately violate the law due to a lack of legal knowledge. While others, despite having a team of experts or regular legal advisors, will still encounter risks during their operations. While legal risks are undesirable, they can be mitigated by thoroughly understanding and strictly adhering to the law. Identifying common legal risks in business, and subsequently developing appropriate measures and responses, is essential for any business aiming for sustainable growth.
Understanding Legal Risks in Business
Legal risks refer to unexpected, objective events that may arise from both the subjective actions of the business and external factors. These risks can stem from changes in laws or regulations that significantly impact business operations or alter the competitive landscape. Legal risks can even lead to criminal penalties for those involved. While there are many types of legal risks with varying consequences, financial legal risks are the most common among businesses.
Legal risks inherently exist alongside a business’s development and are a critical and unavoidable aspect that businesses must be aware of. Accordingly, areas such as business strategies, commercial operations, and management practices can harbor potential risks. Proactively planning for and managing these risks is crucial to ensure smooth operations and minimize potential losses. Businesses that lack a legal plan or fail to understand legal frameworks in transactions are particularly vulnerable to legal risks.
Identifying Common Legal Risks in Business
Corporate legal frameworks are designed to regulate business activities in both internal and external relations. Legal risks generally fall into two categories: those originating from within the business and those resulting from external influences.
Internal Legal Risks: Internal legal risks usually stem from business management and operations, as well as the relationship between owners and employees. Issues in corporate governance can include disputes among shareholders or partners over capital contributions, asset valuation, share valuation, and capital contribution deadlines. Disputes may also arise between founders, owners, and managers over business operations, management disagreements, or actions exceeding authorized powers. Conflicts among businesses with multiple legal representatives can lead to significant legal and financial ramifications. Legal risks also emerge from the decision-making processes of member councils, boards of directors, or general shareholder meetings, such as decisions or resolutions that exceed authority or contradict legal provisions. Additionally, corporate regulations may not align with legal standards. In labor relations, risks include unilateral termination of employment contracts and disputes over rights and obligations between employees and employers, especially concerning social insurance or disciplinary actions, including dismissal.
External Legal Risks: External legal risks are diverse and often result in substantial losses. Prominent among these are disputes between businesses and external parties, such as partners or customers, regarding business cooperation contracts, sales contracts, or service agreements. Disputes frequently arise from unclear agreements or the omission of essential contract terms. Non-fulfillment or improper fulfillment of contractual obligations, as well as unforeseen or force majeure events not adequately accounted for in contracts, are common causes of contract disputes. Intellectual property rights also frequently lead to legal disputes, such as issues with trademark copying, logo duplication, or brand identity theft. Disputes over technology transfer, franchise agreements, and compliance with tax obligations are other notable examples. Additionally, legal risks can stem from failing to comply with government regulations on business registration, operational licenses, or other legal obligations, potentially leading to administrative penalties or criminal prosecution. Legal risks are also associated with engaging in unfair competition or conducting business activities that violate legal competition standards.
Minimizing Legal Risks in Business Operations
Thoroughly understanding the law is fundamental to avoiding legal risks in business, yet not all businesses will attempt to achieve this. Legal risks can arise from various aspects, including seemingly simple and unexpected factors. Thus, identifying potential legal risks and taking steps to control and minimize them is a mandatory task for businesses.
First, businesses must elevate their awareness of business laws, especially in international trade. Knowledge of legal provisions such as the 2014 Enterprise Law, the Investment Law, the Civil Code, and the Commercial Law will create a great foundation to developing appropriate business strategies. In case there is uncertainty regarding the legal safety of business activities, business should seek clarification from relevant governmental authorities.
Second, businesses should establish a professional legal department staffed with competent and knowledgeable employees capable of identifying potential legal threats that could lead to disputes or violations. Regular training and legal knowledge enhancement for both the legal department and the broader organization are essential.
Third, businesses should cultivate the habit of consulting with legal experts and attorneys, especially in international trade activities. This practice ensures that businesses receive optimal advice and solutions to reduce and manage risks in international commercial contracts. In the event of commercial disputes, arbitration can be an effective risk management strategy, as it offers a mechanism to resolve disputes through arbitration proceedings.
Fourth, businesses should pay closer attention to contracts. In particular, businesses should thoroughly review all legal aspects, carefully verifying the legal standing and financial capabilities of partners before entering into purchase agreements or other cooperative relationships, particularly with foreign partners. Many Vietnamese businesses have encountered risks in contract signing and import-export activities due to inadequate due diligence or lack of experience. Comprehensive information verification is a critical factor in avoiding and mitigating risks in international trade activities.
Fifth, to mitigate payment-related legal risks or breaches of payment obligations, businesses should select payment methods that protect their rights and interests, thereby avoiding financial losses. In international payments, Vietnamese businesses should utilize the international payment services offered by major domestic banks to conduct transactions with foreign partners. Additionally, businesses should have contingency payment methods in place in case the preferred payment method cannot be agreed upon with the partner.
Business activities always carry inherent legal risks, and businesses must recognize potential threats to implement timely solutions. Having a robust legal advisory team, focusing on legal training, and enhancing legal knowledge is key to ensuring the sustainable growth and development of the business.
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