UNIT six

LAW OF BUSINESS ORGANIZATIONS

6.1 INTRODUCTION
This Unit deals with some types of business organizations. It provides a definition as to what a
business organization is and how it comes in to existence. It considers the rules, which are
applicable to most of the business organizations. It dwells with some types of business
organizations and tries to look in to their distinctive features.
6.2 BUSINESS ORGANIZATIONS
A business organization is any association arising out of a partnership agreement. A partnership
agreement is a contract 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 profits and losses arising out thereof, if any. As a contract, it needs
to fulfill the requirements for a contract considered earlier. The contract relates to carrying out
activities of economic nature with a view to share in the profits and losses. Thus, any provision
giving all the profits shall be void. In addition, reliving one partner from his share in the losses shall
also be void. However, by way of exception a partner who contributes skill may be entitled to
shares in the profits only and not in the losses.
There are six different kinds of business structures: ordinary partnership, joint venture, general
partnership, limited partnership, Share Company and private limited company. With the only
exception of ordinary partnership, all the other business structures are considered to be commercial
business organizations i.e. organizations engaged in trading activities. A business organization has a
completely different personality from the individual members. Except joint ventures, all the others
are considered legal persons. Such organizations are granted legal personality where they meet two
requirements i.e. publicity and registration in the commercial register. The formation of a business
organization except that of a joint venture shall be of no effect unless it is made in writing. Thus,
the partnership agreement must be in writing. It is a requirement of validity and not only that of
proof.
A business organization can be dissolved for a variety of reasons. It can be dissolved where its
purpose has been achieved or cannot be achieved, where the partners agree to dissolution prior to
the expiry of the term for which the business organization was formed and in cases where the term
for which the business organization was formed expires, unless the partners agree to continue the
business organization. In addition, the organization can be dissolved by the court for good cause.
There is good cause to dissolve the business organization where a partner seriously fails in his
duties or becomes incapable of carrying out his duties or in the event of serious disagreement
between the partners. Once dissolved, the business organization will be cancelled and is no longer a
legal person before the eyes of the law.
6.3 TYPES OF BUSINESS ORGANIZATIONS
6.3.1 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 firms undertaking. 1 When a partnership is
created, the parties often draw up a memorandum of association which covers such matters as the
business purpose of the firm, the contributions of each partner, their value, the services required of
persons contributing skill, the share of each partner in the profits and in the losses, the period of
time for which the partnership has been established. A partner in a commercial partnership is
considered as a trader.The general partnership needs to have a firm name consisting of the names of
at least two of its partners and followed by the words 'General Partnership'. He can assign or
transfer his share in the partnership on condition that all the partners agree.However, the partnership
agreement can provide that the approval of the majority of the partners shall be sufficient.
General partners do not have limited liability. They are instead, as stated above, jointly and
severally liable for the partnership's debts and liabilities. Creditors can sue the partnership in its
name, but then can enforce the full judgment against any one of the partners.This means, if the
partnership owes 100,000 birr to Abebe, then Abebe can sue the partnership in its name. Once
judgment is given in his favor, he can enforce the full amount against any one of the partners or
from all the partners.
The partnership may is administered by one or managers who may or may not be partners. If no
manager has been appointed each of the partners are considered as managers. In cases where all the
partners are managers they may carry out only acts of management.Acts of management refer to
such acts such as for the preservation or maintenance of property, leases for terms not exceeding
three years, the collection of debts, the investment of income and the discharge of debts. The
managers can act on behalf of the partnership and bind the firm. Where the manager acts in the
firm's name for his own profit, the partnership shall be liable for third parties in good faith. Thus,
the partnership will not be bound only where the third knows that the manager was acting for his
own profit. It would be only the manager who will be liable. The manager appointed in the
memorandum of association may be dismissed by court for good cause. However, if he is not
appointed in the memorandum he may be dismissed by the partners with out the need to go to court.
General partnership is dissolved where its purpose has been achieved or cannot be achieved,
where the partners agree to the dissolution prior to the expiry of the term for which it was
established, or the term for which it was established expires unless the partners agree to continue
the partnership.
6.3.2 Limited Partnership
Limited partnership differs from general partnership in that it comprises two types of partners’
i.e. general partners who are fully, jointly and severally liable and limited partners who are only
liable to the extent of their contributions only. Unlike general partnership, some members can have
limited liability. As a result, the limited partners are not liable for the debts of the partnership
beyond the funds they contributed. 2 The limited partnership needs to have a name consisting of the
general partners and followed by the words 'Limited Partnership'. The limited and general partners
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draw up a memorandum of association covering such matters as the business purpose of the firm,
the contributions of each partner, the services required from those partners contributing skill, the
managers and agents of the firm, the period of time for which the partnership is established, etc.
The limited partnership is granted personality where it fulfills the requirements of publicity and
registration.
In limited partnership, only the general partners can be appointed as managers. A limited
partner takes no part in the management. If they do then they will be considered as general
managers and become jointly and severally liable for the firm's debts. But merely consulting with
other partners, dealing with the firm, investigating managerial acts, giving advice and counsel to the
firm giving permission to do acts outside the manager's power does not amount to acting as a
manager.

6.3.3 Share Company

In share companies one holds shares issued by the company in return for payment. The liability
of the shareholders is limited to their shareholding. Those who form the company are called
founders. They must not be less than five in number. 3 They initiate the plans and facilitate the
formation of the company. The main tasks of the founders include to prepare various documents
and to submit them to the relevant government authorities. The memorandum of association covers
such matters as the company's name, the objects for which the company is formed, the par value of
the shares, the amount of the capital subscribed and paid up, the period of time for which the
company is to be established, etc. The articles of association, on the other hand, regulates the
internal management, the rights and duties of the shareholders vis a vis the company, etc.
It takes money to set up a business. In share companies, the money is raised by issuing shares in
the company. A share is a part of the total ownership interest of the company. A shareholder must
pay the company for each share allotted to him. The memorandum of association must state the
capital. The capital shall not be less than 50,000 birr. The amount of the nominal value (par value)
of the shares cannot be less than 10 birr. The share company is formed where the capital has been
fully subscribed. Subscription refers to offers to purchase shares of the prospective company at an
agreed price payable in the future. In addition, at least one fourth of the par value of the shares
must be paid up and deposited in a bank. Requirements of registration and publicity must also be
satisfied.
Once the capital has been fully subscribed and at least one fourth of the capital paid up, the
articles of association and memorandum of association drawn up and filed, the shareholders come
together in an organizational meeting. The purpose of the meeting is to ensure whether the
requirements for the formation are complied with, to draw up the final text of the memorandum of
association and articles of association, to approve contributions in kind and to make appointments
required under the memorandum of association.
6.3.4 Private Limited Company

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 In private limited companies the members are liable only to the extent of their contribution. 4 It
needs to have a firm name followed by the words 'Private Limited Companies'. The membership
cannot be less than 10 and more than 50 persons. 5 As opposed to share companies, the securities
issued by private limited companies are not freely transferable to outsiders who are not associates in
the company.6 The capital of a private limited company cannot be less than 15,000 birr. The amount
of the share, on the other hand, cannot be less than 10 birr. A private limited company cannot
engage in banking and insurance activities. However, such business activities may be undertaken by
share companies only.
Drawing a memorandum of association and articles of association is a formation formality. It
must also satisfy requirements of publicity and registration so as become a legal person. There are
three characteristics, which distinguish private limited companies from share companies. They are
easier to organize. They can be managed more informally and they readily permit the exclusion of
an unwanted owner by the current owners.
Check Your Progress Questions
1. What is the meaning of a partnership agreement?
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2. Explain the major distinction between limited partnership and general partnership.
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SUMMARY
It has been stated that a business organization arises from a partnership agreement. This
partnership agreement must be made in writing except in case of a joint venture. The law provides
six types of business organizations. Except joint venture, the rest have legal personality. This means
they have legal existence distinct from their members. In general partnerships, the partners are
liable to the debts and undertakings the partnership jointly and severally. Their liability is not
limited to their contribution in the partnership but extends beyond their contributions. In addition, in
such partnerships a partner may transfer his share provided that all the other partners agree. On the
other hand, in the case of limited partnerships, there are both limited and general partners. The
general partners are liable to the debts and undertakings of the partnership jointly, severally and
personally. However, the limited partners are liable only to their contribution and no more. Unless
otherwise agreed, a shareholder can freely transfer his share to a third person or outsider freely.
However, in private limited companies, shareholder may transfer his share only where the other
associates are agreed.

QUESTIONS

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1. What are the advantages of a private limited company?
Explain the causes of dissolution of business organizations.