Business Law Lecture Notes by Girma G.

(Ambo University, School of Law, 2018/19)

Unit Three
3. Law of Traders and Business Organizations

The law of traders and business organizations is one of the important subject for business
students. It deals with who are considered as traders, the conditions in operating business
activity in Ethiopia, obligations of traders, the different types of business organizations
(formation requirements, business they can venture in and dissolution of same). It has thus two
parts: dealing with traders and business organizations. Let’s see first the law and principles
governing traders.
3.1. The law of traders
3.1.1. Who are traders?
The law is interested in differentiating persons engaged in trading and non-trading activities as
traders have certain duties under the law. The law of trader is governed by the commercial code
of 1960, other proclamations and regulations.
Traders are persons who professionally and for gain carry on any of the activities stated in Art. 5
of the Com. Code. Art. 5 of the Com. Code enumerates 21 activities. If any person carries on
any of these activities professionally and for gain, s/he will be taken as a trader. Few of these
activities include:- dealing with movable and immovable items; exploitation of mines, quarries,
construction activities; carriage; publishing; and printing, publicity and tour operation, operating
financial activities, operating entertainment (radio, television), operating hotel and café services,
etc.
All persons who operate a given task for profit may not necessarily be considered as a trader.
Persons who undertake agriculture, forestry, fishery, cattle breeding, persons who operate any
activity at hand craftsman level are not considered traders. If a farmer sells his sheep breed
mainly from the resources of the land while he uses, he cannot be deemed as a trader. But if he
sells products of agriculture (e.g. mute) by processing through agro- industry, he is considered as
traders. So when a person (s) engage in any activity beyond the usual practice of their business
at a commercial level, they will be considered as trader.

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3.1.2. The right to operate business

In principle every person is free to engage in any type of activity in any part of the country. This
is a constitutionally guaranteed right (Art. 41 cum 32 of the FDRE constitution). The
constitution guarantees the freedom to engage in any trade of one's choice. Nonetheless, as all
freedoms are not absolute, freedom to operate business activity is not also absolutely free. There
are certain restrictions imposed by the law.
a) Incapable persons
As you remember our discussion on incapacity, incapable persons cannot perform juridical acts.
As trade activities are juridical acts, minors and interdicted persons are not free to carry on
commercial activities. Art. 11 of the Commercial Code states: "Persons incapable under the
civil. code may not carry on any trade. Minors and interdicts cannot even carry on trade activities
even by tutors (Art. 12).
However where a minor is registered as a trader concealing his true age, his minority cannot
affect third parties unaware of the true age (Art.121). Likewise, if incapacity of interdicted
persons is not registered, the incapacity cannot affect rights of innocent third parties.
b) Married persons
Though it seems simple case of restriction, married persons are not as free as bachelors. S/he has
to obtain the consent of the other spouse in order to carry on trade. Failure to secure consent will
not impede the trading activity of the spouse. The effect is that when the objection is registered,
debts contracted by the trading spouse will not be considered as common debt of spouses and
cannot be recovered from the common property of same or personal property of the objecting
spouse. It can be recovered from personal property of the trading spouse as personal debt (Art
20).
c) Foreigners
Foreigners are not free to venture trade in Ethiopia. Before they operate trade, they need to
obtain residence permit, work permit, investment permit and so on. Certain fields of trade are
entirely reserved for nationals and non-nationals cannot at all engage on them. E.g. insurance
and banking business.
d) Associations
Associations are organizations established to carry on non-profit making activities. Some
examples of associations are religious organizations, political associations, civic /professional a

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Business Law Lecture Notes by Girma G. (Ambo University, School of Law, 2018/19)

ssociations, NGOs, social associations, etc. The memorandum of association that established
such organizations cannot contain trade activity. And whenever they operate trade activities, it
may be ground for dissolution. (art. 25).
e). Business organizations
Business organizations are grouping of people established to carry on trade activities for profit.
They can however carry on only activities stated in the purpose clause of the memorandum of
association - that they cannot venture on a commercial activity for which they have not business
license. (Art 26).
3.1.3. Obligation of traders
Traders have certain obligations imposed by the law. These are:
 The obligation to keep books and accounts
 The obligation to be registered
 The obligation to obtain business license
a) Obligation to keep books and accounts
The Com. Code requires commercial business organizations and traders to keep books and
accounts in accordance with the business practice, regulations and importance and nature of trade
carried on. Petty traders however are exempted from such an obligation. What do you think is
the importance of such obligation?

b) Obligation to be registered
All commercial business organizations and traders have duty to be registered in the commercial
register before commencement of their activity. The process of registration is regulated by
proclamation No. 67/1997 and regulation No. 13/1997 and amending laws. Thus, registration is
mandatory to all traders having permanent work place (Art 5 & 3(3) of the proclamation &
Regulation respectively).
The proclamation has established three types of commercial registers managed by regional
bureau of trade and industry, ministry of trade and industry and a central commercial register.
c). The obligation to have business license
Business license is an authorization / permission given by an appropriate authority to carry out a
certain commercial activity. It is a mandatory requirement for traders to have permission before

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they venture in to the business. The purpose is to check the respect of laws, enacted to safeguard
the interest of the public, by the trader in his activity.
3.2. The Law of Business Organizations (BOs)
3.2.1. General
A person may carry out business or trade activity individually or in group with similar people.
When a person opts for the latter scenario, they should establish business organizations.
What do you understand by the term "business organization"? Art.210 defines BOs as: -“…any
association arising out of a partnership agreement.” Association here refers to grouping of
business persons and it doesn't refer to non-profit making activities. Thus business organization
is grouping of business persons arising out of partnership agreement. What do understand by
"Partnership agreement"? The com .code defines partnership agreement as follows:
"A partnership agreement is a contract where by 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 profits and losses arising out here of,
if any (art. 211 com. code)."
Let's briefly see the elements of the definition for clear understanding.
In the first place, partnership agreement is a contract. As it is a contract it should fulfill all the
elements of a valid contract. The parties should be capable to enter into partnership contract.
They should be of age, sound mental condition and not interdicted. The business persons should
give their consent freely to form the organization. The object/purpose of the formation of the
business organization must be well defined, lawful, possible and moral. If it has undefined,
illegal etc. purpose, it will not acquire legal personality. The agreement for the formation of the
business organization should also follow certain formality requirements. The agreement must be
entered in to in writing for it to be legally recognized as business organization (Art. 214). The
other formality requirement is registration in the office of registration. In order to be registered,
there must be drawn memorandum of association and articles of association that contains the
agreement of the partners and the specific rules governing the operation of the organization.
Then after the business organization will acquire legal personality.
Secondly, as partnership agreement is a contract there must at least be two persons. The
commercial code in majority of cases requires the agreement of at least to persons. In case of
share companies, however the law requires agreement of at least five persons. on the other hand,

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the law doesn't fix the maximum number of parties except for private limited company in which
case the number cannot exceed 50 members (Art 510(2) com.code).
The parties to the partnership agreement should be willing to work together for common goal.
They must also be willing to make contribution to the business organization. The contribution
may be in form of cash, skill (e.g. to work for the business organization in consideration of being
a partner) or in kind (e.g. giving house). Contribution in skill is allowed only for partnerships.
Parties to companies must contribute either in cash or in kind.
Fourthly, the parties must join together in order to carry out activities of economic nature.
Business organizations are established in order to carry on activities profit-making activities. It
cannot be established for non-profit making activity. Hence all the parties are entitled to
participate in the profit gained and are duty bound to share the losses incurred from the operation
of business. Any agreement to give all the profits to one partner or to relieve one or more partner
from losses is of no effect. However a partner in ordinary partnership who contributed skill can
be validly excluded from sharing losses.
3.2.2. Types of Business organizations
The Ethiopian law recognizes six types of business organizations. These are ordinary
partnerships, joint venture, general partnership, limited partnership, Share Company and private
limited company. Broadly they can be categorized in to three partnerships, one joint venture and
two companies. A brief discussion on each of the BOs is herein after: -
3.2.2.1. Ordinary partnership (O/P/P)
Art 227 of the com. code defines ordinary partnership as follows: -
“A partnership is an ordinary partnership where it does not have characteristics which make it a
business organization covered by another title of this code.”
A business organization that does not possess the features of any other business organization is
deemed as ordinary partnership. This is its unique feature that O/P/P is always non-commercial.
It can thus be formed to carry on activities of the type under arts. 6 or 8 of com. code or others
that do not amount to trading activities under Art 5. But when such business organization
ventures on activities under Art 5, its nature will be changed in to general partnership by virtue
of Art.215.of the code.
All members of ordinary partnership hold the same position:- the same rights and obligations.
Unless there is contrary agreement, the partners are jointly and severally liable for all debts and

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responsibilities of the partnership where the partnership’s assets are not sufficient to settle the
demands of creditors. Partners can exclude joint and several liability by express stipulation. This
however benefits them when such stipulation is known to third parties and will not benefit
partners who represented the partnership in the transaction that brought liability.
3.2.2.2. General partnership (G/P/P)
Art. 280(1) of the commercial code defines the nature of general partnership “A general
partnership consists of partners who are personally, jointly, severally and fully liable as between
themselves and to the partnership for the partnership’s undertakings. Any provision to the
contrary in the partnership agreement shall have no effect with regard to third parties.
General partnership is a commercial business organization, unlike ordinary partnership, where all
the partners occupy the same status as a trader. Partners of general partnership cannot exclude by
agreement joint and several liabilities or such exclusionary provision cannot affect the rights of
third parties (Art.280). The creditors however can demand payment from personal property of
partners only after the partnership asset is exhausted except for payment of factious dividends-
sharing of the capital even where there is no profit. Creditors can demand payment of all or parts
of their claim from personal property of one or more of other partners. Such a partner can then
proceed against other partners to share the burden. This is the concept of joint and several
liability. All members of G/P/P can be appointed as manager. Non-partners can also be appointed
as manager.
3.2.2.3. Limited partnership (L/P/P)
Art 296 of the com. code defines the nature of limited partnership “A limited partnership
comprises two types of partners:- general partners in full liable personally jointly and severally
and limited partners who are only liable to the extent of their contribution.
Limited partnership has two categories of partners- general and limited partners with different
rights and responsibility. General partners have the same rights and obligations like partners in
general partnership. They have joint and several liability to the creditors of the partnership where
the latter’s asset are insufficient to pay the debts of the partnership. They are also the one to
serve as manager. Limited partners, on the other hand, have no such liability. Their liability is
limited to the extent of their contribution to the partnership. Creditors cannot proceed against
their personal property unless they did not fully subscribe their contribution. They cannot also
participate in the management of the affairs of the partnership even under the power of attorney

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i.e. they cannot be appointed as manager. That is why they are usually referred to as sleeping
partners. If one acts as a manager, he shall be fully, jointly and severally liable for any liabilities
arising out of his activities and in some cases to some or all the firm’s undertakings.
3.2.2.4. Joint Venture
Joint venture is defined under Art 271 of com. code as an agreement between partners on terms
mutually agreed and is subject to the general principles of law relating to partnerships.
Joint venture is formed by partnership agreement that is not required to be in writing. The
formalities of registration and publicity are not also required. The effect is that the organization
will be kept secret and does not have legal personality. What is known or disclosed to third
parties is its manager who is responsible for all faults and commitments arising out of the
business. In fact the liability of other members will be determined in the mutual agreement
3.2.2.5. Share Company
The code under Art 304 defines share company as follows:-
1) A share company is a company whose capital is fixed in advance and divided in to shares
and whose liabilities are met only by the assets of the company.
2) The members shall be liable only to the extent of their share holding.
Have you observed some unique features of this type of business organization in particular and
companies in general?
A). Formation of share companies
Share companies can be formed in two ways: - formation as between founders and formation
by public subscription. When companies are to be formed by public subscription, an offer for
subscription shall be made by a prospectus signed by all founders. The prospectus contains par
values of shares, total shares issued, date and place of subscription and other details under Art
318. Up on expiry of the time for making subscription founders shall call general meeting of
subscribers that among other things, draw final text of memorandum and articles of association,
verify fulfillment of formation formalities, make required appointments. After registration and
publicity is made, the company acquires legal personality.
In case of formation as between founders, share will not be offered for public subscription.
Rather all shares will be allocated as between founders. Other procedures are similar
B). some aspects of share companies

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Limited liability- unlike partners in partnership, members in a share company as well as private
limited company have limited liability. The concept of limited liability is that partners’ liability
is limited only to the extent to their contribution made to the company. Partners cannot be
personally liable for the debts of the company i.e. creditors of the company cannot proceed
against personal property of share holders when the company’s asset are insufficient to pay of its
debts. Hence, company debts can be paid only from the company’s asset and if it is insolvent,
creditors will be losers.
Issue shares- The other important features of share companies is that their capital is divided
into shares. Unlike partnerships share companies and of course private limited companies issue
shares to their members. The partners in Share Company are called share holders. Shares are
simply small units in to which the capital is divided into equal parts. Look at the following
example: - Access Bank is Share Company established by public subscription. The bank has
issued a total of 200,000 shares with par value of 1,000 birr. Can you know the total capital of
the bank? The capital is calculated by multiplying numbers of shares by the value-of shares-
200,000x1000=200,000,000. Share companies issue share certificates that evidence the person is
share holder and the number of shares he holds.
Commercial business organization- unlike partnerships, share companies are always
commercial business organizations (Art 10) (2). This is also true for private limited company.
Share companies cannot be established to undertake non-profit making activities or activities that
cannot be regarded as trade activities.
Minimum number of members and amount of capital- in order to form all other types of
business organizations, the existence of at least two persons is sufficient. This is not however
possible in case of share companies. At least five persons are required to form Share Company.
Likewise the law under Art 306 stipulates the minimum amount of capital needed to form Share
Company. The minimum capital is 50,000 birr and the par value (individual share price) of
shares cannot be less than 10 birr. This amount of capital is very negligible to operate viable
business in Ethiopia today.
3.2.2.6. Private limited company (PLC)
A). Formation
Private Limited Company can be formed by issue of shares. However, all the shares must be
shared among the persons forming the company. That means, it cannot subscribe shares to the

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public to raise fund. Thus is principally because the individual personality of members is more
important in cases of private limited company than share companies. Usually such kind of
company is formed as between family members, Relatives and friends who know each other very
well. In order to form PLC, there must exist at least two persons. The law however limits the
maximum number of members not to be more than 50.
B). Important aspects of PLC
Generally, PLC, as they are companies, has similarity with share companies in many respects.
Members of PLC have limited liability- only to extent of their initial contributions. PLC can also
issue shares to their members. However the nature and class of shares in PLC are different from
that of shares. PLC can only issue registered shares i.e. shares registered in the name of the
member while share companies can issue both registered and bearer shares. PLC cannot also
issue different classes of shares i.e. shares with different par value and preferential rights.
PLCs, like share companies, can be established to carry out commercial activities. It cannot be
established to perform non-profit making activities or activities reared as non-trading ones.
Finally, PLCs cannot venture into financial activities such as banking and insurance. The
restriction is made to safeguard the interest of the public taking in to account the nature of the
business itself. Banking and insurance business requires hung capital whereas PLCs can be
established with a minimum capital of 15,000 birr which is very negligible. In addition, if PLCs
are allowed to be formed with this minimum capital fraudulent persons may easily defraud the
public.
3.2.3. Dissolution of business organizations
Business organization may be dissolved due to various causes. The general grounds for
dissolution are stated under article 217 & 218. Business organizations may be dissolved by
operation of the law, by agreement or by court order.
Partners may dissolve the business organization by agreement when the purpose of the business
is achieved or cannot be achieved or when the term has expired and so on. Business
organizations shall also be dissolved when there is death, incapacity or withdrawal of partner or
bankruptcy of the business. BOs can be dissolved by court order when there is serous
disagreement between partners or serious breach of duty. When business organizations are
dissolved, they have no more legal existence /personality and cannot perform any act of legal
nature. Finally what comes is the process of liquidation and winding up of the remaining assets
and liabilities of the organization.

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