CHAPTER - THREE

Business & Business Entities

 What is a business?
• For different set of reasons defining the term business in precise form is
difficult. This may be : Since business is always at transformation, lack of
uniformity through different places, the term business itself may either be
referred as the platform or otherwise.
• A combined readings of Commercial Code of Ethiopia defines business as
“A PLATFORM WHEREBY ONE COULD BROUGHT TOGETHER
CORPOREAL AND INCORPOREAL THINGS FOR THE PURPOSE OF
CARRYING OUT ANY OF THE COMMERCIAL ACTIVITIES WITH THE
AIM OF GENERATING INCOME.
• Example : - Caterpillar is a company established for manufacturing
engineering machineries. The company render business by combining
together the plant (manufacturing plant), the business method or strategies,
electro-mechanical inventions and creativity, skills of professionals, the
trade name Caterpillar, Good business reputation (Good Will),
• ‘Corporeal Things’ includes things with body or form which includes
Movables (those tangible things which could either move by themselves
or by third party agent without losing their identity or character) and
Immovable (those tangible things which could either be land or house)
• Incorporeal things without body or form which includes Patent ( exclusive
or a monopoly ownership for industrial invention which is new), Copyright
(exclusive ownership for artistic and literary works or trade secrets), Trade
Mark ( a designated mark for goodwill on business good reputation).
• Business Person
Article 2(2) of Proclamation 980/2016 defines business person as :
“business person” means any person who professionally and for gain
carries on any of the activities specified in the Commercial Code (Article
5) or who dispenses services, or who carries on those
commercial activities designated as such by law;
How are we going to decide form of doing business?
The essential question that any business person should ask is
designating a type of entity structure would optimize performance and
maximize profit? There are four modalities of doing business available
under Commercial Code of Ethiopia. These are :
SOLE PROPRIETORSHIP (owner of a business) is a form of doing
business whereby one carrying-on business on his or her own name or
business name. Here, an individual owns, manages, and controls all
activities of the business. If you are operating the business by your self
you are operating as a sole proprietor. Ex. Eldad Barber. Here you are
not simply operating through trade name it does not mean that you have
established any form of business entity. Thus all of the income shall be
taxed as an income to business owner. Annual tax base for sole
proprietorship is 7,200 Birr. (Art. 19(2) Fed. Inc, Proc.). For 130,800 Birr
and above annual income the tax rate shall be flat rate 35%.
 Sole Proprietorships
Because the business and the person are one and the same, the sole
proprietorship brings with it three key implications, as set out in
The sole proprietor is legally responsible:
1. To complete all contracts entered into by the business.
2. For any torts committed in the course of undertaking business activities,
including being vicariously liable for the torts of employees.
3. For the income/losses of the business for tax purposes.
Thus, the main disadvantage of the sole proprietorship is unlimited personal
liability, which means that third parties are entitled to take the sole proprietor’s
personal assets, as well as the assets of the business, to satisfy the business’s
obligations.
Features of Sole - Proprietorship

• The owner and the business is one and the same.

• The major draw back for sole proprietoris the fact that there is
no liability protection. If the capital of the business can not cover
the debt of the business, then the creditors can collect it from
personal assets of the owner.
• The owner can take all the profit and loss.
• Only physical persons can do business in sole proprietorship.
II. PARTNERSHIP : -
• PARTNERSHIP IS A RESULT OF PARTNERSHIP AGREEMENT BETWEEN TWO OR
MORE PERSONS TO CARRY ON BUSINESS ACTIVITIES LEGALLY PERMITTED, AS
CO-OWNERS FOR THE PURPOSE OF GENERATING INCOME.
Elements of Definition
• Partnership may either be established through an association of juridical
persons or physical persons or the union of both type.
• It is always a result of partnership agreement as between co-partners
manifested by words. As opposed to this companies may also be a result
of a statute. N.B. No agreement shall be valid if it allocate all of the profit
and losses. The common interest should be generating income.
• The partnership agreement includes the names, the portion of investment
or share each co-partner has in the partnership, the manner how losses
and profits shall be distributed among co-partners, exit and entry of new
partners etc.
• Except for the purpose of taxation, liability and property right (which could
either be determined at partnership agreement through originally brought
in to partnership or subsequent acquired on account of p/ship including
good will) . N.B. once the property injected to the partnership all partners
will have equal right to use.
Features of Partnership
• Partnership is not artificial person like corporation. It is a common name of doing business to co-
partners
• Each partner becomes the agent of the other partners. Therefore, actions taken by one
partner bind all of the partners. Although partners may wish to restrict authority by an
internal agreement, such restrictions are only binding on third parties who have actual
notice of the restrictions. As well, each partner owes a fiduciary duty to the other partners,
i.e., a duty to act honestly and in good faith with a view to the best interests of the
partnership. There is fiducially relationship govern among co-partners.
• And unanimous decision is essential when the firm wants to decide on assigning firm’s
property or disposing such properties. etc.
• Joint several liability principle govern liabilities issue. Ex. If Mr. X has 100,000 Birr to
demand from firm set by A , B & C named ABC Partnership, he may claim either from
individually to the whole amount or by joining them together.
• Stipulated term or particular undertaking in specified agreement, will of co-parters death of
either of partner, operation of law as well as court decree can cause for partnership’s
dissolution.
The Legal Relationship Between Partners

Partners have both obligations and rights pursuant to either statutes and/or
a partnership agreement.
A partner is personally liable for: 1. Debts and obligations of the partnership
incurred while he or she is a partner; 2. Negligence and other torts
perpetrated by any of the partners acting in the ordinary course of the
partnership business; and 3. Misapplication of trust funds placed in the care
of the partnership.
Another key feature of a partnership is joint and several liability, which
means that each partner is individually as well as collectively responsible for
the entire debt.
The taxation is 30% flat rate on annual taxable income. (Art . 19(1) of Fed.
Inc. Tax Proc.
 Termination of Partnership

In the absence of express agreement, the Partnerships Act specifies rules

governing termination. In particular,
1. Expiration of a fixed term, if there was one;
2. Notice by a partner to the others;
3. Death, bankruptcy, or insolvency of any partner;
4. Charge or assignment of a partner's interest;
5. Application to the court by one or more partners under certain
circumstances (e.g., partner becomes incompetent or incapable, acts
prejudicial to the business, or breaches the partnership agreement); or
6. Agreement of the partners
1. TYPES OF PARTNERSHIPS (Non – Commercial Partnership)
This is a type of partnership established for doing activities other than commercial type. Ex.
Ethiopian Coffee football club funs association etc. Here, the goal for the association is
different than economic
2. General Partnership : - This is the conventional mode of doing commercial
activities through partnership. All the characteristics discussed above are the
characteristics of general partnership. Thus, a partnership is a joint business
enterprise carried on for profit. In determining whether or not a relationship
constitutes a partnership, the courts look at the substance rather than the form. The
sharing of profits is an essential element of a partnership, as evidenced by the
phrase with a view of profit.
3. Joint Venture : - unlike the above two, JV do not have legal recognition, lack of
publicity and tax payers identification. JV should be kept secret and unknown. If it is
known it would automatically converted in to general partnership. Ex. Bidding
4.Limited Partnership : - Combines the advantages of ease of running a
Partnership and separate legal entity status and limited liability aspect of a
Company. A limited partnership consists at least one general partner and one or
more limited partners.
• In a limited partnership, one or more of the partners limits their liability to the
amount of their capital contributions. There must be at least one or more
general partners whose liability is unlimited. A limited partner may not take
an active part in the management of the partnership, but she is permitted to
be an employee of the limited partnership and may provide management
advice. It can be a difficult balancing act—if the limited partner chooses to
exercise some control, he will incur unlimited liability; but if he does not,
there may be instances where the business is at risk to fail.
5.Limited Liability Partnerships :
• A limited liability partnership (LLP) is a special form of partnership for certain
professions, such as lawyers and accountants. Individual partners are not
personally liable for the professional negligence of their partners or for
certain other obligations provided certain requirements are met. A partner
remains liable for his own negligence and for that of people under the
partner’s direct supervision or control. The firm itself also remains liable.
Therefore, a non-negligent partner may still lose the entire value of his
partnership share but will not lose personal assets.
III. Companies
• Lord Justice Lindley defines company as : THE ASSOCIATION OF MANY PERSONS
WHO COMBINE MONEY OR MONEY WORTH TO A COMMON STOCK AND EMPLOY
IT FOR A COMMON STOCK AND EMPLOY IT FOR A COMMON PURPOSE ; A
COMMON STOCK SO CONTRIBUTED IS DENOTED IN MONEY AND IS THE CAPITAL
OF THE COMPANY; THE PERSON WHO CONTRIBUTED IT TO WHOM IT BELONG
ARE MEMBERS. THE PROPORTION OF CAPITAL TO WHICH EACH MEMBER IS
ENTITLE
• Companies may either be formed through laws or contracts (Charter).
• Is Company the property of the shareholders?
The traditional view that the company is the property of the shareholders now become
unacceptable. A company in the new socio economic thinking is a social institution having
duties and responsibilities toward the community in which it functions. Now, maximization
of social welfare is a legitimate goal than maximizing profit is the prime agenda. Thus
shareholders are regarded as not the owner of the company but supplier of capital
entitled no more than reasonable return (dividend). Hence, the company should
responsible not only to shareholders but also to employees, consumers, national
monetary policy, member of the community, and to the government and in some cases to
the international community.
• A corporation is a separate legal entity created for carrying on business.
As an artificial person, a corporation has a continuous existence
independent of the existence of its owners, and it has powers and liabilities
distinct from its owners. As such, it is responsible for its own debts. It may
enter into contracts, sue, and be sued. It can commit torts, such as
negligence, or crimes
Feature of Companies
Separate legal person distinct from incorporators (shareholders) from the date of
registration or incorporation ) hence,
(a)the company may sue or be sued in its own name,
(b)the property of the company belongs to the company,
(c)the company debt can not be regarded as the debt of the shareholders,
(d)the creditors of the shareholder cannot satisfy their claim on the company from
shareholders of the company,
(e)a shareholder of the company in its individual capacity can not bind the company
in any way.
(f)A shareholder of the company may enter in to contractual relationship with the
company,
(g)No mutual agency
(h)Perpetual Existence
 Companies do have well formed management structure. Such that there is no
mutual agency.
All companies are subject for 30% flat rate taxation
• Liabilities A corporation incurs its own debts and is responsible for their
repayment. Shareholders have limited liability: their liability for the
corporation’s debts is limited to their investment (i.e., what they paid for
their shares). From a practical perspective, banks may be unwilling to lend
to small corporations without a personal guarantee from major
shareholders, thus putting personal assets at risk. Limited liability will not
necessarily protect shareholders from personal liability for their own acts.
• A corporation is a distinct entity from its shareholders. Shareholders may
enter into contracts with the corporation, be employed by it, and make
loans to it. They owe no duty of good faith to the other owners and can
deal with the corporation as though they were strangers.
• The existence of the corporation is unaffected by the death or withdrawal
of a shareholder. Shareholders are free to sell their shares to someone
else, subject to certain requirements that may be set out in the articles of
incorporation (i.e., the consent of majority of directors). For small
companies, it may be hard to find a market for the shares
• An elected board of directors has authority to make all decisions. The
board, in turn, delegates responsibility for managing the corporation to the
officers they appoint. Shareholders elect a board by a majority vote.
Beyond that, they do not participate in ownership. In a small corporation,
however, shareholders are often also directors and officers.
• A corporation is a separate taxpayer, although special rates apply to
corporations. Shareholders pay tax only on dividends (cash or property)
received as a return on their investment.
• A corporation can enter into contracts with third parties. Only duly
appointed officers, employees, or agents may bind the corporation to
contractual obligations. Unlike partners, who are agents of the firm,
shareholders have no authority to enter into contracts on behalf of the
corporation.
Classes of Companies
• Depending of particular nature they have companies may either be
classified Private and Public.
i. Private Companies : - A private companies is one which by its articles of
association (a) restricts the right of the members to transfer their shares if
any; (b) limits the number of its members (not counting its members) to 50
and (c) prohibit any invitation to the public to subscribe for any shares in or
debentures of the company (d) no need to sign the prospectus (e) the
minimum number of members required to setup private companies.
ii.Public Companies : - the public companies do have the features of the
opposite of private companies. In Ethiopian context its referred as Share
Company. Share companies do have much extended version of
management structure.