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CHAPTER FIVE

LAW OF TRADERS AND BUSINESS ORGANIZATION

5. Introduction

In this era almost everything that we produce and consume comes out from a business. To
produce and distribute products, traders establish either sole business or business
organizations. As a business student it will inevitably be important to know the legal frame
work behind business, traders, business organization establishment, registration, licensing
and responsibilities. This will make the business students aware of the legal environment in
which they are going to engage after graduation.
The law has lots to say in connection with the way you carry out your commercial activities.
The way people do business is regulated by the law. The elements of business are identified,
defined and protected by the law. At present day it is becoming very difficult to imagine
doing business without the artificial persons that we call business organizations. This chapter
is about business and business organizations.
Learning Objectives:

After completing this study, you will be able to:

 Define traders and business organization

 Explain partnership agreement

 Identify different types of business organization

 Identify different types of company from partnership

4 INTRODUCTION

5.1. Traders

Who are traders under Ethiopian Law?

The legislative framework governing trade and traders in Ethiopia offers a number of
opportunities for organizing and conducting business activities. A business may be carried
out by an individual operating as a sole proprietorship, by two or more persons in a
partnership agreement or by a foreign company registered or incorporated abroad. A trader
as defined under Art. 1 to 26 of the commercial code as “any person who carries on any of
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business activities professionally and for gain or who dispenses services, or who carries on
those commercial activities designated as such by regulations issued by the Government.
This definition is composed of the following four terms.

 Person
 Business activity
 Professionally
 For gain

So, a sole trade is a business carried on by an individual acting in an independent way and
the person who conducts such business is sole proprietor. The business operation will be
treated as personal assets and liabilities of the owner. The owner is the ultimate employer
and manager, regardless of whether he or she lives in the country. In terms of the legislation
in force, before starting any commercial or investment activity, such a person must apply for
a registration.

5.2. Business Organization and its Formation

What is business organization?

Pursuant to article 172 of the revised Commercial Code of Ethiopia, a business organization
is an association established trough memorandum of association by persons who bring
together contribution for the purpose of undertaking a business activity in cooperation and
participating in a profit made. Generally, any business organization must be formed by a
contract known as partnership agreement. Article The Key elements in the definition are:
a. Business organization is an association of persons
A business organization is an association of two or more juristic or physical persons. The
minimum requirement of two persons is true for all business organizations except the share
company, for which there must be at least five and one man company which can be run by a
single individual. There is no general limit on the maximum membership size of business
organizations, except in the private limited company where it is fixed at fifty.
b. Intent to Join Together and Cooperate
c. Contributions
d. For the purpose of carrying out economic activities
e. Participating in the profits and losses arising out thereof
f. Business organization are formed via memorandum of association.
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A business organization established in such a way is a legal entity, except for the Joint
Venture, operating in its own right and obligation and has its own name, capital, principal
office, management and etc.

The laws that are applicable to business organizations are the revised Commercial Code of
Ethiopia; proclamations number 1243/2021 the Commercial Registration and Business
Licensing Proclamation, Trade competition and consumer protection proclamation
No.813/2005 and the Federal Government Commercial Registration and Licensing Council
of Ministers Regulatio. Before a business organization starts operation, it should be
registered in the commercial register kept by the Ministry of Trade and Industry or Regional
Trade Bureau. But as a one-stop shop, the Ethiopian Investment Authority serves as a trade
register to foreign investment pursuant to the power vested upon it by Proclamation No
67/1997 article 43.

The Commercial Code of Ethiopia defines seven forms of business organizations under the
category of Partnership and Company. These are:

A. General Partnership
B. Limited Partnership
C. Joint Venture
D. Ordinary Partnership
E. Share Company
F. Private Limited Company.
G. One man company
5.3. Partnership in General
What is General Partnership? What makes it different from other partnership types?
Partnership is a contract between two or more persons to cooperate and join together by
contribution for the purpose of carrying out activities of an economic nature and to participate
in the profit and lose arising thereof, if any. All forms of partnership except for the joint
venture shall be in writing. Publication and registration is also a requirement for establishing
partnership except for the joint venture. The base for establishing partnership is the
contribution of the parties. Contribution may be in money, debts, property or skill. Property
or use of property may be contributed. When the property itself is contributed, the contributor
will be considered as a seller and ownership will be transferred to the partnership whereas, if
use of the property is contributed, the contributing partner shall be deemed as a lessor and the
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risk shall remain with him. Partnership may be managed by one or more managers who are to
be appointed by the partnership agreement or by the decision of the partners either from the
members or out of the members and managers appointed in the partnership agreement
(statutory manager) may not be revoked, save for good cause. In the absence of appointed
managers, all partners will have a right to act as a manager. When there are several managers
and their duties have not been specified or if there is no indication to act jointly, each may
carry out acts of management. The word ‘acts of management’ is not defined in the
commercial code and the definition given in the civil code may not go in line with the duties
of a manager in commercial activities. But this lacuna may be filled in the partnership
agreement.
1. General partnership

General partnership is an agreement between two or more persons who are eligible for
entering into binding contract. The partners are personally, jointly, severally and fully liable
as between themselves and to the partnership for the partnership firm’s undertaking. General
partnership has no minimum capital requirements. It is left to the partners to decide on the
amount of the capital to be contributed. The partnership shall have a firm name consists of
the names of at least two of the partners followed by the words "General Partnership".

The memorandum of association drawn up by the parties has to be approved by public notary,
published in the news paper and finally be registered by commercial register. When these
requirements are fulfilled, it will get legal personality.

The management and administration of the company is determined by the agreement

concluded by the partners in the memorandum of association. The memorandum of
association can also provide voting procedures in which the partners make their decision as to
the assignment of ‘shares’. However the word ‘share’ used in partnership is confusing with
Share Company. There is no ‘share’ in case of partnership but contribution. So if parties want
to assign or transfer their contribution, all the parties shall agree on the same subject to
contrary agreement.

2. Limited Partnership

A limited partnership is a partnership with two types of partners namely, general partners
who are personally, jointly, and severally liable and limited partners who are only liable to
the extent of their contribution. A limited partnership shall have a firm name.
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The name of a limited partnership must consist of the names of the general partners followed
by the words "Limited Partnership". Where a limited partner allows his name to be included
in the firm's name, he shall be jointly and severally liable to third parties in good-faith as
though he were a general partner.

A limited partnership is managed by the general partners. Limited partners are not allowed to
participate in management. Otherwise they are to be held jointly and severally liable for all
the debts and obligations of the partnership arising from their activities. However, they can
require to be presented with a copy of the balance sheet and are entitled to inspect the books
of the firm.

3. Joint Venture
 Unlike other business organization, joint ventures are not required
to be formed in writing, is not registered and publicized. Nor does it
have a legal personality.
 A joint venture is not disclosed to third parties and its main
advantages constitute in this.
 The unlimited liability will come only when the existence of a
partnership is disclosed and the partner is known as a member.
 Otherwise, if the partnership remains undisclosed, then its liability
will be borne by the acting partner or the manager.
4. Limited liability partnership(LLP)
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5.4 Company in General

A company is an aggregate or collection of shares or capital. As a result, what is important is

legal personality of the company. Thus, the company may own property, make contracts, and
sue and be sued under its name. It is entirely distinct from its members. The company has
perpetual succession. As a result, death or insolvency of a shareholder does not affect its
existence unlike partnership. In a partnership firm, of paramount importance is personality of
the individual partner. This is so, because incapacity, death, or serious disagreement between
partners may result in dissolution of the partnership firm. Insofar as intimate personal
collaboration is expected of each partner, only persons who know each other very closely
may enter into a partnership agreement giving rise to a partnership firm. Here under is the
discussion on two types of companies.
1. Share Company
Share Company is a company whose capital is fixed in advance and divided into shares and
whose liabilities are met only by the assets of the company.

The establishment of Share Company requires at least five persons and there is no maximum
provided in the law as to the number of shareholders. Subject to the laws provided for the
establishment of banks and insurance, the capital of the company shall not be less than birr
50,000. The name of the share company shall not offend public policy nor the rights of third
parties and it shall include the words “Share Company".

The shares are either registered in the name of the shareholder or it may be to the bearer.
When Share Company is established between the founders, all the shares have to be allocated
among them and one-quarter of the par-value of the shares has to be paid up and deposited in
a bank in the name and to the account of the company. Public subscription is another
possibility for establishing a share company. In this case a notarized prospectus must be
drawn up and filed with the trade register in the appropriate authority. The trade register
certifies compliance with the Ethiopian legislation and authorizes the issuance of the
prospectus. One quarter of the capital raised by subscription shall be deposited in a bank
account opened for the company to be established.
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The article and memorandum of association which governs the operation of the company
shall be drawn up by the founders in accordance with the law.

The shareholders’ general meeting is the supreme managing body of the company.
Shareholders’ meeting may be general or special. General meeting may be of ordinary or
extraordinary. The company is generally managed by the board of directors. The day to day
operation of the company is governed by the general manager elected by board of directors.
The directors shall deposit as security such number of their registered shares in the company
as is fixed in the memorandum of association.

A) Board of Directors

Share Company being legal person cannot act by itself. It must act through some human
agency. The persons by whom the business of the company is carried on are, termed as
directors and group of directors as an institution is termed board of directors. The board of
directors is the managerial body on general issues. It is established by general assembly from
among the shareholders. The number of directors is set in the statutes, but must be not less
than three and not more than twelve; all directors must be shareholders of the company. They
must have the real ownership and deposit of certain number of share as may be fixed in the
statutes. Such share should be deposited in the company until directorship is ceased and
liability is discharged, if any /Art 349/. Individuals or legal entities can become directors. If a
legal entity is appointed as a director of Share Company, it must appoint an individual person
/Art 347/4/.

The first directors may be appointed in the statute. Their appointment shall be submitted to
the first meeting of subscribers for conformation. If the meeting does not approve the
appointment, other directors may be appointed. Subsequent directors are appointed by
ordinary general meeting of shareholders. The term of office of the director cannot exceed
three years provided that he can be eligible for re-election. The board of directors posses the
power to act in all circumstances on behalf of the company subject to the limit of the
company business purpose and to the powers which are expressly reserved by law to
meetings of shareholders (i.e. mainly approval of the annual accounts amendments of statute)
In practice, however, the business of the company is taken care of by the chairman and
general manager and the board of directors merely defines the general policies to be followed
by the company; takes or approves strategic decisions and controls the chairman of the board.
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The following are some of the duties of the board

- Organizing management and meeting records

- Keeping of accounts and books
- Calling shareholder’s meeting each year after closing of the fiscal year in order to
approve management report, account and allocation of profits also meeting should be
called where three quarters of the capital are last.
- Establishing reserve fund required by the law and statutes
- Applying to the court where the company is unable to pay debt with the view of
composition, bankruptcy or winding - up.

B) Auditors

Auditors are appointed by shareholders and are entrusted with the external control of the
company. Their main functions are to audit the accounts of the company, certify certain
information provided to the shareholders, and prepare reports which must be submitted to the
shareholders.

Company may elect one or more auditors and one more assistant auditor. The first auditors of
the company shall be appointed by the subscribers of the company and subsequently be
appointed by the general meeting of the company (Art 369/1/). The auditors appointed by
subscriber shall hold the office until the first annual general meeting. Auditors elected at
annual general meeting may hold office for three years (Art 369/2/).

The following person are prohibited to be elected as an auditor (Art 370)

(a) the founders, contributors in kind, beneficiaries enjoying special benefits

/preferred rights/ directors of a company or one of its subsidiaries or its
holding company,
(b) the blood relatives or in-laws of any person mentioned in (a)
(c) persons who receive from persons mentioned in (a) a salary or periodical
remuneration in connection with duties other than those of an auditor,

In addition, the law prohibits auditors not to be appointed as a directors or managers of the
company which they audit, nor of one of its subsidiaries of its holding company within three
years from the date of the termination of their function. Art 371 of commercial code states
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that auditors may be removed by general meeting at any time subject to demand
compensation, if they are removed not for good cause.

C) Dissolution and winding up

There are many causes of dissolution of a company /or partnership/. Causes common to all
kinds of business organization /Art 217-218/ are the application of rules of law, provisions in
the statutes of the company/ partnership, the common agreement of the members to dissolve
or a judicial decision dissolving the companies for just cause.

2. Private Limited Company (PLC)

A private limited company is a company whose partners are liable only to the extent of their
contributions. The maximum number of the partners is fifty while the minimum is two. The
company shall not issue transferable securities.

The company has a minimum capital of Birr 15,000 which must be paid up on registration.
The capital contributed by the partners may include in kind contribution which is subject to
valuation. The registered capital is divided into shares. Shares may be transferred among
shareholders as provided in the memorandum of association, but they can be traded with third
parties only after seeking the approval of shareholders owning at least three quarter of the
capital. This characteristic of PLC makes it a hybrid of Share Company and Partnership. On
one hand, its member’s liability is limited to the extent of their contribution; on the other
hand shares are not freely transferred to the outsiders, which is chief chrematistics of
partnership. Thus, this company is middle way between Share Company and partnership.

The company may have one or more managers. They must be individuals appointed by the
shareholders, but they need not be shareholders. Although the memorandum of association
may provide limitations on a manger’s power, these limitations are not binding on third
parties. The appointment of auditors is compulsory if the number of shareholders exceeds
twenty. In such cases the company should have at least three auditors.

The name of the private limited company may contain a disclosure of the nature of its activity
and must include the words “private limited company". The firm-name and the amount of
capital of the company shall appear on all of the company documents, invoices, publications
and other papers.
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Nowadays, most of the companies established in Ethiopia by foreign or domestic investors

are private limited companies.

Partnership vs companies

By way of summary the following are some of the points of differences between partnership
and company. These are;

a. Liabilities of associates- in case of partnership the partners are not beneficiaries of

limited liability whereas in case of companies the share holders have immunity from
unlimited liability.
b. Companies focus on contribution than personality of the associates- commonly in
case of companies the organization is concerned about contribution without bothering
about identity of the share holder’s whereas partnership give mach emphasis about
personality of partners. This may consequently bring- non free transferability of
shares, short life duration of the partnership and decision by majority vote than
proportion of share.
c. Management- in case of partnership the task of partnership abundantly falls up on the
partners themselves and the law is much more flexible whereas in case of companies
the management task can be carried out by different organs like, shareholders
meeting, board of directors, managers and auditors.
d. Capital- commonly companies are managing a large amount of capital and minimum
requirement of capital is provided whereas partnership manages relatively small
amount of capital and no minimum capital requirement is provided for partnerships.

Summery

Ordinarily the word business is used to connote every activity of a person. But legally
speaking business is any activity that seeks profit by production and supply of goods or
services to satisfy the needs of consumers.
Normally business can be carried out by an individual as a sole proprietor and/or business
organization. Business by an individual, usually called sole proprietorship, is an easy way of
doing business. To do business in this form, registration is a legal requirement. Sole
proprietorship does not have legal personality and as a result there is no distinction between
the business's and the owner's liabilities.

The second form of doing business is in the form of business organization. Business
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organization, by definition is an association of two or more persons for the performance of

business activities with the ultimate objective of sharing profits. There are six forms of
business organization: ordinary partnership, joint venture, general partnership, limited
partnership, Share Company, and private limited company. The Commercial Code provides
common provisions to business organizations and special provisions for each. Under the
common provisions, with the exception of joint venture, business organizations must be
formed in writing must be registered, and they have legal personality. All business
organizations carry out their legal activities through agent. With few exceptions, the profits
and losses coming out of the business must be shared among all partners. Generally business
organizations may come to an end by agreement of the partners, or in accordance with the
provisions of the law, or by court decision to be made for good cause.

As to the special provisions, an ordinary partnership is formed for professional services. The
partners assume unlimited liability and ownership interest is not easily transferable. As to
joint venture, it does not have legal personality; it must not be divulged to third parties; and it
must not be registered. As to general partnership, it is the common form of partnership
business organization. The partners assume unlimited liability and, like other partnerships,
ownership cannot be easily transferred. As to the limited partnership, it is almost the same
with general partnership. But there is one big difference. In limited partnership, there are two
categories of partners: general partners with unlimited liability and limited partners with
limited liability. It is only the general partners that can manage the affairs of the partnership.

Share Company is different from the other forms of business organization in many aspects.
The liability of the owners is limited. The government control of the business is strict. The
minimum capital and the number of members required are birr 50,000 and 5 respectively. As
to the private limited company, it is a compromise between company and partnership. Like a
company the owners' liability is limited. And like partnership it is established by few
members (maximum being 50) and ownership interest is not freely transferable. The
minimum amount of capital required to open up private limited company is 15,000 birr.