CHAPTER SIX: LAW OF TRADERS AND BUSINESS ORGANIZATIONS

PART I: DEFINITION, RIGHTS AND DUTIES OF TRADERS

Definition of Traders: The understanding of definition of traders is of great importance in the

operation of business because there are rights and duties that the law attributes to the traders. As
manager or accountant we need to know at least the definition of traders from perspective of law
to decide the nature of our action in line with the concept. Definition given for traders under
Ethiopian law is found scattered in different laws like the 1960 Commercial Code, Trade Practice
and Consumers’ Protection Proclamation No. 813/2013 and Commercial Registration and
Business Licensing Proclamation No. 980/2016.

Accordingly, trader can be defined as “any person who professionally and for gain carries on any
of the activities specified under Article 5 of the Commercial Code, or who dispenses services, or
who carries on those commercial activities designated as such by law” Art. 5 of the Commercial
Code lists about 21 activities to be treated as trade activities and a person becomes a trade when
he performs one or more of such activities professionally and for gain. Professionally means as his
usual practice or the person performs the activity as his regular work or activity. For gain means,
while doing the activity the person should have intention to generate or maximize profit. In this
case, persons working for humanitarian or other purpose are excluded from definition of traders
because they do not work for profit. A person who performs activities not listed under Art 5 of the
code both professionally and for gain becomes a trader according to proclamations cited above
when the activity he engages in is designated as trade activity by law. A person who dispenses
service for another as his usual business is also a trader when he acts for profit.

Rights and Duties of Traders

It has been mentioned above that defining traders is important as the law imposes certain duties on
traders and also gives some rights for those who fall in the jurisdiction of trade laws. The
implementation of trade related laws requires clear understanding of the definition of trade and
rights and duties of traders. As it is impractical to list all rights and duties of traders in this material
we only see highlight lists as follows:
Obligations of Traders:
 Registration: all traders must register in the commercial register. The process of registration is
governed by the Commercial Registration and Business Licensing Proclamation No. 980/2016.
 Obtaining business license: License is a permission given by appropriate authority to undertake
commercial activity. No person can carry on a commercial activity without obtaining a valid
business license. To be valid a license should be issued with competent authority and renewed
on time. Failure to obtain license may lead to closure of the business in addition to other
penalties provided for by law.
 Keeping books of accounts: every trader is required to keep a journal in which his daily
activities are recorded and such books recordings can be presented as evidence before court in
case dispute arises and can also serve as a source of information for purposes of calculating
tax liability of the trader and for research studies.
 Obligation to pay business tax and to withhold sales taxes like Value Added Tax and Turn over
Tax: Traders are under duty to pay business tax according to Income Tax Proclamation No.
979/2016. Additionally, a trader is under duty to register for VAT if his annual income from
the business is more than birr 500, 000 (five hundred thousand). Traders who obtain annual
return less than this may register for VAT if he wants. But they must register for Turn Over
Tax (TOT).
 All other duties that are imposed on traders by relevant laws like tax laws and competition laws
can also be summed under the obligations of traders. Generally, obligations of traders are found
in different laws of the country applicable to traders.

Rights of traders, on the other hand, include the right to:

 Operate his business within the scope of the license obtained and the limitation imposed
by the law.
 Participate in trade promotion and exhibitions and to obtain educational and professional
support that government is expected to give for traders.
 Protection against unfair competition and any right given for traders in different applicable
laws.
 PART II: THE CONCEPT OF BUSINESS AND ITS ELEMENTS

In its legal sense, business is defined Article 124 of the Commercial Code as: “an incorporeal
movable consisting of all movable property brought together and organized for the purpose of
carrying out any of the commercial activities specified in Art.5 of the Code.” Thus, business is
incorporeal thing that cannot be seen or touched irrespective of the existence of corporeal elements.
Business is an incorporeal movable which consists of corporeal and incorporeal elements.

Elements of business consist of:

Goodwill: The commercial reputation that a business has towards its customers is, in legal term,
referred to as the good will of the business. This good will or reputation generally focuses in the
public's attention in the form of a trademark, trade name, product appearance or configuration, and
trade secrets. Goodwill is another name for reputation, credit, honesty, fair name, reliability of a
business towards its customers and generally refers to any type of positive understanding on part
of customers towards the quality or nature of goods or services provided by the business. Goodwill
forms an important incorporeal element of business and has value in the operation of business
which is the advantage arising from the reputation and trade connections of a business, in particular
the likelihood that existing customers will continue to keep intact with the business in the future.

Incorporeal elements: there are other incorporeal elements of business other than goodwill which,
among other things, includes trademarks and trade names, intellectual property rights, the right to
lease of premise and other similar elements.

Corporeal elements: all movable properties and equipment used in conducting a business are
elements of business. Therefore, all resources put together by the trader to perform his trade
activity are elements of his business.

From discussion on elements of business above, we understand that immovable properties, land
and the premise in which the business is conducted, do not form part of business. The only aspect
of immovable property that becomes element of business is the right to lease of the premise in
which the business is conducted if it is leased from another person.

PART III: BUSINESS ORGANIZATIONS

In a free market economy, business organizations are a familiar part of everyday life. Business
organizations run the supermarkets from which we buy our foods and dresses; they supply water,
gas, and petroleum products we depend on; they publish the books and newspapers we read. We
deal with them so often as consumers of their products and services. The image which the phrase
“business organizations” brings to mind is usually of entity concerned with marketing and
collecting payments for products and services which they offer for their customers.

Generally, business organizations refer to the way we put our resources together for purpose of
conducting certain business. A person who performs trade activity with his own resources alone is
called “sole trader” and it not counted as one form of business organizations. Business
organizations are formed by agreement called “partnership agreement” made between those who
want to work together. Article 211 of the Commercial Code defines the partnership agreement as:
“A contract whereby two or more persons 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 thereof.” The key elements of this definition
are explained in detail in this material under another topic.

Classification of Business Organizations

1. Partnerships and Companies: Business organizations may be classified into partnerships and
companies depending on the general characteristics they share in common.

(I) Partnerships: 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. 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. Consequently, partnerships are suitable for small business involving a
relationship of mutual trust and 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. Nevertheless, though partners are liable to contribute to each other’s
liability, they are entitled to claim an indemnity from the partner at fault.

With respect to its length of existence, the partnership firm, 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. In other words, a partner can transfer his share in the
firm, but the assignee does not thereby become a partner and is merely entitled to the assigning
partner’s share of the profits. He becomes partner only if there is agreement of other partners.

(II) Companies. A company is an aggregate or collection of shares or capital. As a result, capital

is of great importance in operation of company. Company has legal personality and thus, it may
own property, make contracts, and sue and be sued under its name. It is also entirely distinct from
its members. The company has perpetual existence. 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 company by his acts. A company is managed by a board of directors,
general manager, shareholders’ meetings, and auditors.

2. Commercial and Non-Commercial Business Organizations: Just as the individual may be

classified by Ethiopian law as either a trader or non-trader, business organizations may be either
commercial or non-commercial. Article 10 (1) of the Commercial Code defines a commercial
business organization as one in which the objects under the memorandum of association or in fact
are to carry on any of the activities specified in Article 5 of the Code. Article 10 (2) stipulates that
“share companies and private limited companies shall always be deemed to be of a commercial
nature whatever their objects.” Article 212 says that all business organizations may be commercial
except for an ordinary partnership. Hence, an ordinary partnership may not be a commercial
business organization, and, as such, may not engage in any of the activities listed in Article 5.
Share companies and private limited companies are always commercial, whether or not their
objects include any of the commercial activities listed in Article 5. General partnerships, limited
partnerships and joint ventures may or may not be commercial, depending on whether one of the
objects under the memorandum of association or in fact is to carry on any of the activities listed in
Article 5. As per Article 213 (2), if a commercial business organization is formed in the form of
an ordinary partnership, or if its form is not specified, the organization is deemed to be a
commercial general partnership. Ordinary partnerships are prohibited from engaging themselves
in the commercial activities listed under Article 5.

The general distinction between commercial and non-commercial business organizations results
in several legal consequences. Accordingly, business organizations are subject to different
treatment of the law depending on whether they are commercial or non-commercial.

Forms of Business Organizations

Though the main classification is between partnerships and companies, partnerships can be further
broken down into four legal forms: (ordinary partnership, joint venture, general partnership, and
limited partnership.) Companies comprise of two legal forms (Share Company and private limited
company.) Totally, there are six legal forms of business organizations provided for in Article 212
of the Commercial Code: (1)Ordinary partnership (2)Joint venture (3)General partnership
(4)Limited partnership (5)Share Company (6)Private limited company

Formation of partnerships: Generally, any business organization must be formed by a contract

known as partnership agreement. Article 211 of the Commercial Code defines the partnership
agreement as “a contract whereby two or more persons intend to joint 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 thereof.” The Key elements in the
definition of the partnership agreement are:
Firstly, the partnership agreement is a contract concluded between at least two persons who wish
to carry on an enterprise in an organized manner. Because it is a contract it has to fulfill all validity
requirements for a contract such as capacity, consent, object and form, if any.

Secondly, two or more persons, physical or juristic, can be parties. Nothing prevents a business
organization from becoming a member of another business organization. The minimum
requirement of two persons is true for all business organizations except the share company, for
which there must be at least five. The automatic effect of the operation of the rule on the minimum
number of persons who can enter into the partnership agreement is the exclusion of sole
proprietorships from the Law of Business organizations. Put differently, one person cannot form a
business organization by himself. On the other hand, a question arises as to the maximum number
of persons who can be members of a business organization. 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.

Thirdly, for a partnership agreement to be valid, the parties to it must have had the intention “to
join together and to cooperate.” In effect, this is to mean that the parties to the partnership
agreement acted in the way they did with a view to forming a business organization. In addition,
they must have intended to collaborate on an equal footing though they all need not intend to
participate in the management and control of the business organization. The degree of
collaboration expected from members varies from one form of business organization to another.

Fourthly, the parties must undertake to bring in contributions in order that a contract subsists as a
valid partnership agreement. Contributions can be made in cash, kind, or services. In all business
organizations, except in a share company and private limited company, they should be made in
cash or kind. Capital contribution includes intangible property like copyrights, patents, trademarks,
service marks, and trade secrets, including debts owed to and the use of property belonging to the
contributor.

Fifthly, the objective of the parties to a valid partnership agreement must be to engage in economic
activities. Economic activities include, but not limited to, all of the commercial activities
mentioned under Article 5. All non-economic activities are excluded by the requirement of
economic activities.
Sixthly, every party to the partnership agreement must have the intention to share in the profits and
losses. Profits and losses will be distributed between the members in the proportion stipulated in
the partnership agreement. In the absence of such stipulation, every partner shall have an equal
share in the profits and losses, irrespective of his contribution [Article 252 (1)]. Any stipulation
giving all the profits to one partner or relieving one or more of the partners of his share in the
losses is null and void (Article 215).

ORDINARY PARTNERSHIP: An ordinary partnership is one of the various forms of

partnerships. The major distinction between an ordinary partnership and other partnership forms
is that it is always noncommercial business organizations and commercial organizations cannot
adopt this form of business organization. Article 213(2) of the commercial code says that “where
a commercial business organization is created in the form of an ordinary partnership or where the
form of the organization is not specified, the commercial business organization shall be deemed to
be a general partnership.” The ordinary partnership, as form business organization is a partnership
which lacks legal characteristics that make it a commercial partnership. Therefore, it cannot engage
in commercial activities (i.e., those listed in Art.5) but there are many other economic activities
which the ordinary partnership may legitimately carry out. As a rule ordinary partnership cannot
carry out commercial activity and if it violates this rule and carries on such activity it will be
changed to commercial general partnership.

The rules governing ordinary partnership are flexible and informal giving wider option to partners.
For instance, parties can avoid the requirement of joint and several liability by agreement. But the
provision that excludes joint and several liability cannot protect partners if it is not known to the
third party and it also doesn’t guard a partner who represented the partnership in the transaction
that brought liability. (Art. 255(3))

JOINT VENTURE: A joint venture is a grouping of people arising out of a partnership agreement,
which is also known as a joint venture agreement in which two or more persons combine their
labor and/or capital for the purpose of carrying out economic activities and participating in the
profits and losses arising out thereof (Art.271 and 211 of commercial code).

The joint venture is the simplest form of business organization. It, more often than not, is used for
a single transaction or project, or a related series of transaction or project. Although joint ventures
can hardly be adapted to industrial enterprises, commercial transactions in which great amount of
capital are involved are often dealt with by joint ventures. Large organizations often investigate
new markets or new ideas by forming joint ventures. A joint venture, being one variant of
partnerships, is subject to the general principles of law relating to partnerships [Art.271].
Exceptions to the application of partnership principles to joint ventures include the following:

1. A joint venture is not made known to third parties. Third parties know only the manager with
whom they transact and, therefore, the manager takes all liabilities that may arise from the
business. The power of manager and the liability of other partners is determined by their mutual
agreement. What is more, a joint venture agreement need not be in writing and is not subject to
registration (Art.272)

2. A joint venture does not have legal personality [Art. 272(3)]. Thus, it is not going to be
considered as a legal entity. That is to say, a joint venture may not have a firm-name; may not
enjoy ownership right over the capital; may not incur liabilities; may not have a head office; cannot
sue or be sued in its firm-name; cannot be declared bankrupt. It is a secret business organization
that can be created to perform any kind of activity.

LIMITED PARTNERSHIP: A limited partnership consists of at least one general partner and one
or more limited partners. The general partners assume management responsibility of the
partnership and, as such, have full responsibility for the partnership and for all the debts of the
partnership. In other words, the general partners, unlike limited partners, are personally liable to
the partnership’s creditors. Thus, at least one general partner is necessary in a limited partnership
so that someone has personal liability. [Art. 296 and Art 300] The formation of a limited
partnership must be by a written memorandum of association signed by the partners and registered
by the official in charge of the commercial register.

Article 30(1) provides that the creditors of the partnership may have a direct action against the
limited partners to require them to pay up any part of their contribution which they have not yet
paid. Sub-article (2) of the same exempts the limited partners from having to repay fictitious
dividends received in good faith on the basis of an approved balance sheet. The concept of good
faith has a prominent place here, as long as limited partners remain in the dark, without a voice in
the management and being likely to be misled by the managers, and being without the means to
check any of the statement made by them. When the balance sheet is prepared regularly they can
legitimately believe that the profit shown is a real profit and that the dividends they receive are not
fictitious.

Sub-articles (3) (4), and (5) of the same provide that limited partners may never take part in
external management and give third parties the illusion that they are dealing with partners who are
fully, jointly and severally liable. The reason why a limited partner is prohibited from acting as a
manager even under a power of authority is that it is dangerous to allow them to act as a manager,
because it leads to confusion as to the legal status of the partner in his relations with third parties.
Sub-article (4) provides us with a list of acts which the legislature deems to be not acts of
management and, as such raise no question as to the status of the limited partners. If any of the
limited partners perform one or more of acts of management he will be liable for any responsibility
that comes when the partnership cannot discharge it. There is no difference between the rights and
obligations of general partners of limited partnership and partners of general partnership.

GENERAL PARTNERSHIP: A general partnership is the typical partnership form. Partners in a

general partnership are personally, jointly, severally and fully liable as between themselves and to
the partnership for the partnership firm’s undertakings. Any provision to the contrary in the
partnership agreement shall be of no effect with regard to third parties. Thus, it can be argued that
a statutory clause relieving the partners or some of them from joint and several liability may only
be effective as between themselves.

Partners in a commercial general partnership have the status of traders. General partnerships shall
have firm-names. The firm-names must contain at least the names of two of the partners
accompanied by the phrase “General partnership.” The firm-names may not contain names of
persons who are not partners. If a person, whose name is mentioned in the firm name stops to be a
partner and or, without being a partner, allows his name to be mentioned in the firm-name, the
person is going to be liable as a partner. The partners must make contributions, which can be in
cash, kind, debt, and skill. If a partner wishes to make property (corporeal thing) contribution, he
can either convey the corporeal good or its use only, while retaining his title. This has to be
specified in the partnership agreement.
In principle, a vote of the partners is required in order that a share belonging to a partner is assigned
or transferred to an outsider and thereby he becomes a partner of the general partnership firm.
Nonetheless, a share may be transferred or assigned to a third party and thereby the latter is
rendered a partner in the strictest sense of the term by virtue of a decision taken by a majority vote
of the partners to the same effect.

Beneficial interests in shares may be assigned or transferred, in exchange for a value or for free,
to a third party without the partners’ unanimous or majority vote requirement as the case may be.
The transferee or assignee, for example, being creditor or the partner, is entitled to receive only
the share in the profits belonging to the debtor partner. Since such transfer or assignment does not
render the transferee or assignee a partner he has none of the rights of a partner like right to check
the state of the firm’s business, to consult the books and papers of the partnership and to draw up
a statement of the financial position. In addition, a partner has the right to require the management
report to be prepared.

In general partnership all partners occupy the same position. All of them can be appointed as
managers of the partnership. Creditors cannot demand from individual partnership before
exhausting all possible remedies against assets of the partnership.

COMPANIES: The company form is the right answer to overcome the short comings or
limitations of the sole proprietorship and partnership both of which cannot be expected to exploit
the vast business potential thrown up by the tremendous technological progress in all fields of
human activity. In Ethiopia there are two types of companies, namely Share Company and private
limited company. The share company is fundamentally different from the other forms of business
organizations because all of its members enjoy limited liability. It is the form of business
organization usually chosen to operate enterprises which require huge amount of money. Persons
who sign the memorandum of association and subscribe the whole of the capital shall have the
legal status of founders. A share company shall not remain in business for more than six months
after the number of members is reduced to less than five.

Share Company: is defined an organization (a) whose members are liable only to the extent of
their contribution (b)which does not have restriction on maximum number of members (c) is
capable of inviting public to subscribe for shares or debentures of the company (d) and in which
shares are freely transferable. A minimum of five persons are required to form a share company
and the initial capital of should not be less than 50,000(fifty thousand) birr and at least one-fourth
of the capital of the company should be paid at the time of registration. Share Company is
fundamentally different from the other forms of business organizations because all of its members
enjoy limited liability. It is the form of business organization usually chosen to operate enterprises
which require huge amount of money. Persons who sign the memorandum of association and
subscribe the whole of the capital shall have the legal status of founders. A share company shall
not remain in business for more than six months after the number of members is reduced to less
than five. Share Company can be formed through two ways. First persons whose number are not
less than five can come together and form the company as between themselves without inviting
other persons. The second possible way of formation is by public subscription in which founder
prepare the memorandum of association and invite the public to buy shares and become member
of the company.

Private Limited Company: is a company form in which (a) there is restriction on the right of its
members to transfer their share to a third party who is not member of the company. The
requirements for formation of PLC are: (1) the number of members should not be less than 2
persons and it should not exceed 50 persons to the maximum. (2) the initial capital should not be
less than 15,000 (fifteen thousand birr) and the capital should be fully paid at the time of
registration of the company. This organization is the mixture of the share company and the
partnership. It is like the share company in that all of its members enjoy limited liability: it is like
the partnership in that there is restriction on free transfer of shares and it usually has a small number
of members. Private limited company shall not undertake banking, insurance or any business of a
similar nature. PLC cannot invite the public to subscribe for its shares and thereby become
member. A minimum of two members are required to form a private limited company.
 Difference between Private Limited and Share Company

1. 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.
2. Management: A private limited company is managed by one or more managers while Share
Company is managed by board of directors whose minimum number shall be three and doesn’t
exceed 12 to the maximum. Share company should conduct shareholders meeting at least once
a year and shall have auditors. But PLC is required to conduct meeting and appoint auditors
only when its members are more than 20.
3. Public subscription: while a share company can invite public to subscribe to its shares and
debentures, a private limited company cannot call the public for subscription to raise its capital
by increasing number of members. A share company which goes to public to raise its capital
is required to prepare a document called prospectus which contains detailed information about
the company to help persons who want to buy share and become member. Private limited
company is free from this requirement because it cannot invite public to subscribe to its capital.
4. Minimum capital and subscription: capital required to form Share Company is 50,000 birr
while only 15,000 birr is enough to form PLC. In Share Company all capital must be subscribed
and 25% of the capital must be paid-up before registration. Private limited company can be
registered only by fully paid-up capital.
5. Activities they perform: There is limitation on activities for which PLC can be established
because it cannot engage in financial transactions like banking and insurance or credit and
saving institutions. Share Company can be established to perform any type of economic
activity.