Ethiopian Law of Traders, Business and

Business Organizations

An Introduction

Samuel Maireg
Business Law Business, Traders and Business Organizations

Ethiopian Laws of Business, Traders and Business Organizations: A

Brief Overview

1. Business
1.1. Definition of Business
In its rough or popular sense, business may be defined as the property of a trader or a
business person on which it may exercise the widest rights of ownership. It is precise
from the dictation of article 1204 of the civil code that, ownership is the widest right
that may be had on a corporeal thing. This implies that, if a trader owns a business s/he
may exercise the various rights of ownership that may be had on such business. For
instance, mortgage the business1, hire the business2, sale or transfer the business3,
contribute the business to a business organization,4 constitute a usufruct on it5 and so
on.

However, the technical definition of business is broader. Per Article 124 of the com.
Code,

Business is an incorporeal movable consisting of all movable properties brought together and
organized for the purpose of carrying out activities of an economic nature [emphasis added].

This definition consists of two basic concepts- the constituent elements of a business
and the elements should be used to operate an activity of economic nature.

Accordingly, there are two basic constituent elements of a business. These are corporeal
movable properties6 and incorporeal movable property.7 The corporeal elements of the
business mainly constitute the equipment, goods, raw materials, things in stock and so

1
Read Arts. 171-193 of the com. code
2
Read Arts. 194-205 of the com. code
3
Refer to Arts. 150- 170 of the com. Code of Ethiopia
4
Refer to provisions of the com. Code from Art. 206 to 209
5
Read Art. 125 (3) of the com. code
6
Art. 1127 of the civil code defines corporeal chattels as, things which have a material existence and can move themselves
or be moved by man without losing their individual character.
7
Incorporeal are those properties that lack physical existence (unperceivable) but can still be appreciated in terms of money
or property.

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on.8 On the other hand, the incorporeal elements9 (in which the main essence of a
business lays) mainly include the business’s, Goodwill, Trade-name, the special
designation under which the business is carried on, the right to lease the premises in
which the trade is carried on, patents and copyrights or other intellectual property
rights.10 The other of such elements is prohibition of the seller of a business from unfair
competition with the buyer in the last five years of the sale.11

Issue for Discussion

Now, bearing in mind that property can be generally divided into two as movable and immovable
property.12 Do you think that the immovable properties are the constituent elements of the
business, nevertheless they are owned by the trader himself (i.e., the land on which the premises
of the business lays and the building in which the business is carried on)? Why or why not?

This being the case however, one should still ask a question as to what is the legal effect
of being the constituent element of a business. As it is inferable from the provisions of
the commercial code, unless there is an otherwise agreement to that effect, the sale of a
business implies the sale of all the constituent elements of such business. For instance, if
somebody sold his business, it is also his obligation to enable the buyer to take over the
goodwill of the business by handing over to him all the necessary documents and
information.13

Finally, it is also a requirement that these elements of the business shall be organized
for the sake of operation of an activity of an economic nature (economic enrichment in
this case).

8
Refer to Art. 128 of the com. code
9
Read Art. 127 of the com. code
10
For a detailed knowledge refer to Arts. 130-134; 135-139; 140-147; 145-147, and 148-149 of the com. Code respectively.
11
Refer to Arts. 158-59 of the com. code
12
Refer to Art. 1130 of the civil code
13
Read Art. 155 of the com. Code; even an assignment of a business may entail the assignment of its trade name with it-
read Art. 139 of the same code

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2. Traders
2.1. Definition of Traders
It should be a preliminary fact that business (in general) can be operated by both
physical (traders) and Artificial (business organizations) persons. However, sole-
business or proprietorship can only be operated by natural persons.

From this we can derive the literal definition of a trader as, a natural person who
operates a sole-business (an individual business).

That means, artificial persons may not operate a sole-business in Ethiopia. The
prohibition goes with their very nature that, formation of a business organization
necessarily requires the signing of a partnership agreement, which on its part requires
the existence of at least two persons as a signatory.14

In the technical sense however, the definition of the notion trader requires the
fulfillment of two basic conditions- the General and Special conditions.

According to the general condition, three sub conditions shall be complementarily

fulfilled. These are:

(1) The existence of a ‘business’: every trader should operate a business. Or

otherwise stipulated, there is no trader that does not operate a business. The
manner of operating it does not actually matter- it can be operated as an owner, or a
lessee, or a usufructuary of the business, but the trader is the one who is practically
operating it.15

(2) The professional nature of the operation: this requires the trader to operate the
business as a principal means of calling or vocation or livelihood in addition to the
professional engagement of the trader.16 And,

(3) The existence of profit-motive: the main object of the trader should be
maximizing profit or it should be operated for an economic gain (enrichment) i.e., as
different from gratuity or charity.17

14
Cross read Arts. 210 (1) and 211 of the com. code
15
Read Art. 125 of the com. code
16
Read Art. 5 of the com. code

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The special condition on the other hand, in addition to the fulfillment of the general
condition requires that the ‘business object’ of the undertaking should relate to one or
the activities enumerated under Article 5 of the com. Code as acts of commerce or
trading activities.18

Bear in mind that, any activity other than those enumerated under Article 5 of the com.
Code is excluded from being an object of a trading or economic activity and it is not in
the nature of government to negotiate on them.19

Issues for Discussion

(1) Do you think that the list under Article 5 should be exhaustive or enumerative? And
(2) Should all professions or activities or professionals in a country be considered as a
trading activity? Why or why not?

2.2. Rights and Duties of Traders

Traders, as mentioned above, are natural persons who are the subject of rights and
duties from their birth to their death. In addition, as a person, they are presumed to be
capable unless expressly declared incapable by law. However, as different from the
natural sense as an ordinary person, traders have special rights and duties as a
professional person operating trade. The following are the major ones:

2.2.1. Rights of Traders

Traders have the right to engage in a trading activity of their choice as a means of
subsistence or livelihood so far as they do not defy those prohibitions and
incompatibilities set by the law.20

In addition, traders have also the capacity to engage in a trading activity either as an
individual or as a couple or as if they are unmarried at all. However, if a person acts as a
trader individually where he was married, it is possible but the law reserves to the

17
Ibid
18
Refer to Art.5 and its all sub-articles
19
This is one of the ‘prohibitions’ imposed on traders by the com. Code per Arts. 22-26 of the same
20
Refer to Arts. 41 of the FDRE constitution and Art. 22 of the com. code

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other spouse the right to an opposition if it is found to be in the interest of the

household.21

Finally, traders have the right to become beneficiaries of any government flexibilities to
traders or traders of a certain type and so on. A good example can be tax-exemption.

2.2.2. Duties of Traders

On the other hand, the following are the main duties of traders:

a. Commercial Registration: traders should be registered in the commercial register.22

Unless they are registered their will be no legal personality.23

What do you think are the effects of failure to register and cancellation of
register?24

What if a trader sold his business or is unable to operate his business or died, but
s/he failed to cancel or re-register it?25

b. Maintaining Books and Accounts: every trader should maintain various books and
accounts of the business s/he is operating.26 The notion books and accounts includes,
among other things, the journals, inventories and balance sheet, and correspondences of
a trader.27

What is the effect or essence of keeping books and accounts? Do you think it has
something to do with evidence? Against whom the books testify?28

c. Prohibitions and incompatibilities: every trader has the duty to respect such
prohibitions or lawful restrictions or incompatibilities attached by the law. 29 The

21
Cross refer Arts. 16 of the Com. Code and Arts. 645 of the civil code
22
Refer to Arts. 86-124 of the com. code
23
Read Art. 117 of the com. code
24
Read Arts. 118 and 112-114 of the same code
25
Refer to Art. 119 of the com. code
26
Consult Arts. 71-85 of the com. code
27
Read Arts. 66- 70 of the same code
28
Read Arts. 71-72; 92 and 155-57 of the commercial code
29
Arts. 22-26 of the code

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prohibitions basically refer to the duties related to preserving free competition in the
market place. For instance, anti-competitive agreements (vertical or horizontal), anti-
competitive mergers, and abuse of dominant position are prohibited.30

The incompatibilities are mostly related to the requirements of sex, age, nationality,
license and qualifications attached by law in respect of particular trades. For instance,
minors may not operate trade31; partnerships and private limited companies may not
operate high-profile businesses;32 foreign nationals may not operate banking or
insurance business in Ethiopia33 and ‘associations’ may not carry on trade in Ethiopia.34

d. the obligation to pay tax and others obligations

3. Business Organization

3.1. The need for business organizations

Before going to the main issue of this section, it is good to ask a question that why we
are in need of business organizations where we can individually engage ourselves in a
trading activity? The following can be the main justifications behind the need for
business organizations:

- The need to raise huge capital and chains of business enterprises: briefly, four
individuals with 10,000 ETB each can join together and raise 40,000 ETB which
enables them to better engage themselves in a medium-profile business. Moreover,
it will be a wonderful combination of money, knowledge and experience.

- The need to share or shoulder losses together: economic losses are unavoidable.
But their consequence would be more unbearable to a single individual than plural
business partners. A single blow can bring a trader into a break-even point but the
impact is lesser in a business organization.

30
Read Arts. 5-10 of the trade practice proclamation no. 329/2003
31
Read Art. 11 of the com. code
32
Read Arts. 26 and 513 of the com. code
33
Read the banking business proclamation no. 592/2008
34
Read Arts. 25-27 of the com. code

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- The veil of limited liability: when a business organization is established, it will

acquire its own distinct legal personality, i.e., as different from its members or
shareholders. Among the features of such personality is the ability to pay its own
debts by itself. Hence, as different from the ‘joint and several liability’ in case of
traders, shareholders of a company are liable to the debts of the company only to the
extent of their contribution or shareholding. This implies that the debts of the
company shall be satisfied from the assets of the company itself not from the
personal property of the shareholders.35

3.2. Definition of Business Organizations

According to Article 210 of the com. code, a business organization is an association
arising out of a partnership agreement. Here, the term ‘association’ should be taken in
the literal sense as groupment.

Such aggregate may be broadly divided into an aggregate of persons- partnerships

(where the personality of each partner is more important) and an aggregate of capital
or shares- companies (where the subscription of the capital is more important than the
personality of shareholders). Besides, such association (of person/capital) should be for
the purpose of carrying out economic activities.

Article 211of the same code defines a partnership agreement as,

an agreement whereby two or more persons, who intend to join together and to
cooperate undertake to bring together contributions for the purpose of carrying out
activities of an economic nature and of participating in the profit and losses arising
thereof, if any.36

In order to establish a business organization there should be more than one person
(except the case of share companies where the floor requirement is 5 persons).
However, the ceiling requirement of membership is yet undetermined except the case of
private limited companies which is 50.

35
Read Art. 304 of the com. code
36
Refer to the ff. provisions and try to understand the bolded- elements of the definition: Arts. 1675 of the civil code, 229,
5, 229(3), 212 (2), 270, 251-52 and 270 of the com. code

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These persons should at least have the intention to work together diligently and should
owe special confidence and commanding trust among themselves. For instance, if there
is a serious disagreement among them it will be against Article 211 of the code.37

Cooperation would be meaningless without contribution; hence, everyone should

bring something to the table or subscribe contributions.

In the absence of an otherwise agreement, contributions are presumed to be equal.

Contribution may be: in cash, in kind (property), the use of a property, skills (services),
intangible property, debts owed from others, and business.38 However, in case of share
companies the only accepted forms of contribution are cash and in kind contribution.

The other determinant aspect of the agreement is the share of both profits and losses by
all the partners. Unless it is otherwise stipulated, the share (of profits/losses) is
presumed to be equal.

Moreover, what is strictly prohibited is the ‘giving of all the profits to a partner’ or the
‘relieving of a partner from only the losses’. Otherwise, respective proportions of each
partner (in profit or loss) can be determined by an internal agreement of the partners.39

Finally, the purpose of this agreement should be for the carrying out of activities of an
economic nature. Any other object other than this shall be out rightly unacceptable for it
will escape to the realm of other civil organizations whose motive is obviously non-
profit oriented.40

Do you think that the signing of a partnership agreement suffices for establishing
a business organization?

3.3. Types of Business Organizations

Business organizations in Ethiopia can be basically categorized based on the following
two parameters- form wise and object wise.

37
Read Art.218 of the com. code
38
Read Art. 229 of the same code
39
Read Art. 215 of the com. code
40
Consider associations and cooperative societies

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Form wise, there are two broad categories of business organizations (partnerships and
companies) and/or six sub-categories of them- ordinary partnerships, general
partnerships, limited partnerships, joint ventures, share companies and private limited
companies. Object wise, there are two types of such organizations- commercial and non-
commercial business organizations. Now let’s shade a light on them one by one.

The following are the six types of business organizations in Ethiopia:

a. Ordinary Partnerships
This can be said the simplest form of partnership in Ethiopia. It seems because of this
that the com. code does not have a conclusive definition of it. Per Article 228 of the code,
it is a partnership created where property is held by several persons for reasons outside
their control. By this we mean, in case several persons become the joint owners of a
property, let’s assume due to a succession, and the joint owners agree to create a
partnership for the management of the property jointly owned.41

Otherwise stipulated, a certain business organization is deemed to be an ordinary

partnership if it does not have characteristics, which make it a business organization
covered by the com. code of Ethiopia.42 Finally, such partnerships are always non-
commercial in nature.43

b. Joint Ventures
It is a secret (discreet) or clandestine type of partnership in that the joint venture
agreement as among the venturers lacks the characteristics of divulgation or publicity
or registration or transparency to third parties. It is only one of the partners (the
manager) who is only known to the public as if he is doing his own individual business.
Otherwise, the agreement between the manager and the rest of the venturers or the
venture per se does not have legal personality. It can be considered as a partnership
because it is subjected to the general principles of partnerships per Article 271 of the
code.44

41
Read also Art. 112-13 of the same code
42
Read the provisions of the com. code from Art. 227 to 270
43
Read Art. 10 and 213 of the same code
44
Refer to Arts. 271-280 of the com. code

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Why do you think the law allowed such clandestine type of business
organization?

c. General Partnerships
As far as partnerships are concerned, this are the typical types of partnerships in that it
is commercial in nature and is established by partners who are jointly and severally
liable as between themselves and to the partnership firm’s undertakings. External
liability of the partners (towards) third parties is unlimited but the partners can settle
their internal liabilities by agreement. It fulfills all the requirements expected from a
commercial business organization in that it should be registered, publicized and it is
subjected to bankruptcy and it is equipped with better management. Moreover, it
exercises the attribute features of legal personality, such as names and the legal
obligation of taxation.45

d. Limited Partnerships
This is a partnership that consists of two types of partners: general partners (active
partners, who can be managers and whose liability is unlimited) and Limited partners
(passive partners, who cannot be a manager and whose liability is limited to the extent
of their contribution). Other than this all the provisions of general partnerships is
applicable on them.46

e. Share Company
Compared to the rest of business organizations in Ethiopia, this is the most modern and
well organized corporate form. Per Article 304 of the com. code, a 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 concept of limited liability of
shareholders is well practiced here than the rest of the business organizations in that
shareholder are liable only to the extent of their contribution or shareholding. They are
always (by their very form) commercial in nature.47

It is only such companies in Ethiopia that can participate in a high profile business such
as banking and insurance. They have professional management, such as Board of

45
Refer to Arts. 280-295of the com. code
46
Read Arts. 296- 303 of the com. code
47
Read Art. 10 of the com. code

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directors, General Managers, Secretaries, and Auditors, which is different from

ownership (shareholders). Unlike partnerships, their existence is perpetual than
contingent. They are guided by their own statutes (the memorandum of association and
articles of association) in addition to the law and the general meeting of the
shareholders. It is only share companies in Ethiopia that can issue negotiable securities,
such as equity instruments (shares) or debt instruments (debentures).48

f. Private Limited Company

This is the other variety of company in Ethiopia. But viewed under a microscope it is a
hybrid of a general partnership and a share company. For instance, on the one hand, like
partnerships it cannot operate in a high-profile business; it cannot even issue negotiable
securities, and there is no ease of transfer of shares to a third party.49

On the other hand, like share companies there is the concept of limited liability of
partners. In terms of the ceiling requirement of membership (which is 50) and the
initial capital in need to be subscribed (which is 15,000 ETB), it differs from share
companies (where there is no ceiling requirement of membership and initial capital is
50,000 ETB).50

On the other hand, from the perspective of their ‘object of incorporation’, business
organizations in Ethiopia can be sorted as commercial and non-commercial.

The following are the major merits of companies:

- Financial Resourcefulness: If a business venture is to be promoted on a large
scale, none of the partnership or sole proprietorship form of business
organization can prove equal to the task of raising funds to the required level. It
is only the company forms both private limited company and share company,
which can mobilize huge funds, required by big business.

- Limited liability: company became more popular with investors these days it is
largely because of its limited liability clause only. Other factors like profitability
of the business venture and confidence in the management etc.
48
Read Arts. 304-509 of the com. code
49
Read Arts. 510 (3), 513, 523 of the co. code
50
Read Arts. 510-543 of the com. code

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- Scope of growth: unlike the partnership and sole proprietorship forms of

business organization, where the growth is stunted for lack of adequate funds,
the company form of organization need not suffer for lack of financial resources
with a huge capital at its disposal, collected from investors spread all over the
country and even abroad also, the company can grow and expand at a rapid pace
and reach the break-even point faster than expected.
- Professional management: in order to achieve the targeted rates of growth and
expansion of a company, competent and professional management of the
company is no less important than the availability of adequate finance. One great
advantage of company form of organization is that it allows for insulation of
management from ownership.
- Stability of the company: for the success of any business venture, continuity
and stability of business are equally important and neither can be self-
supporting without the other.
- Positive social benefits: a company is beneficial not only to its members,
creditors and employees but also to the public at large. It supplies goods and
services at a competitive rates by introducing new and sophisticated
technologies and by exploiting the natural resources in a most efficient and
economic manner. That part, it provides employment opportunities both direct
and indirect to the needy and competent persons in the society.

3.4. Nature of Companies

The following are the main characteristics of Companies in Ethiopia:
- Limited liability: limited liability of members is one of the most common
characteristics of Share Company. Share Company is a separate legal entity. It is
the owner of its assets and liable to pay its liability (Art 304(1)). In other words
liability of the members is limited. No member is liable to contribute anything
more than the nominal value of the shares held by him.
- Perpetual succession: unlike partnership Share Company will not be dissolved
by the death or incapacity of its members. It is an entity with a perpetual
succession. Its life is not measured by the life of any member. It is independent of
the lives of its members. Members may come and members may go, but the
company continues its operation unless it is wound-up.

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- Transferability of shares: Even though it is possible to restrict free transfer of

shares in the articles of association (Art. 333(1). As a general principle shares of
Share Company are freely transferable and can be sold or purchased in the share
market. This is one of the reasons why people prefer to form companies than
partnerships.
- Transferability of company shares is an added advantage both to the institution
of the share company as well as to the investor.

3.5. Partnerships Vis-a-Vis Companies

Business organizations may be classified into two basic types according to the general
characteristics they share in common: partnerships on the one hand and companies
on the other.

i. Partnerships
- A partnership is an aggregate or collection of individual members.

- Thus, 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.

- 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.

- Partnerships are suitable for small business involving a relationship of mutual trust
and special confidence.

- The partners are agents for each other.

- Therefore, they are normally jointly and severally liable for the acts of each other
and the liability of each partner to third parties is unlimited, although they are
liable to contribute to each other’s liability and entitled to claim to an indemnity
from the partner at fault.

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- In the absence of a contract to the contrary, comes to an end when a partner dies or
becomes insolvent. Hence, the length of existence of the partnership firm is
generally considered as contingent.

- A partner cannot transfer or assign his interest in the firm to an outsider or third
party and make the transferee or assignee a partner without the consent of all the
other partners. Difficulty of transfer of share.

ii. Companies
- A company is an aggregate or collection of shares or capital. As a result of capital,
importance is legal personality of the company. Thus, the company may carry on
juridical acts by its own name. Hence, 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.

- With respect to transfer of shares, shares in a company are freely transferable

unless the company’s articles of association otherwise provides. Thus, a shareholder
can transfer his share and ordinarily the transferee becomes a member.

- Members of a company are not entitled to take part directly in the management of
the company unless they become directors. That is to say, a shareholder of a
company acting in his individual capacity cannot bind the firm by his acts. (There is
separation of management and ownership (shareholding)).

- A company is managed by a board of directors, general manager, shareholders’

meetings, and auditors.

3.6. Distinction between Private Limited and Share Company

i. Membership: only two persons are required to form a private limited company while
a share company requires a minimum of five members to start with. There is no limit on
the maximum number of members in Share Company, whereas a private limited
company can have only 50 members at most.
ii. Initial Capital: a share company is established by an initial capital of 50000 ETB. But
a Private Limited Company is established with an initial capital of only 15000 ETB.
iii. Directors: A private limited company is managed by one or more managers while
Share Company is managed by directors whose minimum number shall be three.

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iii. Public subscription: while a share company can invite public to subscribe to its
shares and debentures, a private limited company cannot go to public to raise its capital.
iv. Prospectus: A share company which goes to public to raise its capital is required to
file a prospectus while a private limited company is exempt from this requirement
because it cannot invite public to subscribe to its capital.
v. Minimum subscription: in Share Company all capital must be subscribed and 25%
of the capital must be paid-up before registration. Private Limited Company is
registered by fully paid-up capital.

16