1. PART TWO BUSINESS ORGANIZATIONS
Belaynew Ashagrie
9/21/2018
PART TWO BUSINESS ORGANIZATIONS
General Introduction
Belaynew A.
9/21/2018
College of Law, Haramaya University

2. Introduction
Business Organizations (BO) are an alternative to sole trading . It is an association of business persons set up for mutual benefits and common goal.
BO is any association arising out of a partnership agreement- Art. 210 of Com. C. It’s an agreement to work together sharing all returns and risks.
They are established for making profit. This distinguishes them from associations (as defined under Art. 404 of C.C) and social organizations (like idir, iqub, political organizations, religious organizations. etc)
Belaynew A.
9/21/2018

3. Objectives of BO The law of BO has two major objectives:
To regulate the relation between and among partners/shareholders; (e.g. in SC relation between board and shareholders; or between major shareholders and minority shareholders)
To regulate the relation of BO with third parties. (e.g. with creditors, customers, employees)
Belaynew A.
9/21/2018

4. Forms of BO
The Comm. C recognizes six kinds of BO. All are legal persons except joint ventures. These are:
(a) ordinary partnership;
(b) joint venture;
(c) general partnership-
(d) limited Partnership;
(e) share company;
(f) private limited company;
They may be grouped based on their nature or on the basis of venture carried out by the business entities.
Based on their nature, three- partnerships, joint ventures and companies.
Based on the business they carried out, two- commercial and non commercial.
Belaynew A.
9/21/2018

5. Commercial and non-commercial BO
Art 10 of the code classifies BO as commercial and non-commercial. This is a classification based on the object of the BO.
Art Business Organizations.
(1) BO shall be deemed to be of a commercial nature where their objects under the memorandum of association or in fact are to carryon any of the activities specified in Art. 5 of this Code.
(2) SC and PLC shall always be deemed to be of a commercial nature whatever their objects.
Belaynew A.
9/21/2018

6. Commercial and non-commercial BO
Commercial BO (Art. 213): Any BO other than an ordinary partnership may be a commercial BO within the meaning of Art. 10 (1) of this Code.
Where a commercial BO is created in the form of an ordinary partnership or where the form of the organization is not specified, the commercial BO shall be deemed to be a general partnership.
Hence, an ordinary partnership may not be a commercial BO, and, as such, may not engage in any of the activities listed in Article 5.
Belaynew A.
9/21/2018

7. Commercial and non-commercial BO
SCs and PLCs 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.
Belaynew A.
9/21/2018

8. Commercial and non-commercial BO
Unlike individual trader, in the case of BO, the general rule for determining the commercial character by reference to objects has been made subordinate to two exceptions.
1. for whatever its objects, any BO will be regarded as commercial as long as it adopts either of the two legal forms for commercial BO, namely the SCs and PLCs.
2. ordinary partnerships are prohibited from engaging themselves in the commercial activities listed under Article 5.
Belaynew A.
9/21/2018

9. Purpose of classification
For identification of traders which may be obliged to observe obligation of trader. For example, to keep account (Art. 63), registration (Art. 9 of Proc. 686/10, no need of publication in newspaper as was provided in Arts. 87, 219, 220, 223, 224 of the code), may be declared bankrupt, except joint venture (Art. 968 of the code),
Belaynew A.
9/21/2018

10. Characteristics of BO
The main characteristics of BO in Ethiopia include:
Legal personality (Art. 210(2));
Duty to registration;
Publicity (????) (Art )
Partnership agreement (Art. 211)
Belaynew A.
9/21/2018

11. Partnership Agreement
Partnership agreement is a constitutive or establishing document of BO. It must be always in written form. (Art. 214) Art. 211: A partnership agreement is 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, if any.
Belaynew A.
9/21/2018

12. Partnership Agreement
Elements of the definition given above:
1. Contract: Art of C.C is applicable.
Parties: at least two parties. No maximum number except for PLC whose members should not exceed 50 (Art. 510 of Comm. C). Members shall attain age of majority, be capable.
Can a foreigner carryout trade? Though foreigners are incapable under the civil code, they can engage in trade. (Art. 10/4, 11/1/c, of Proc. 686/10)
Belaynew A.
9/21/2018

13. Partnership Agreement
Consent: parties in entering in to partnership shall be free from any kind of vices of consent.
Object: it means an obligation (money or service) a partner owes to the other venture formed through the partnership agreement. It should be lawful, possible and of good moral.
Formality requirement: should be in written form except joint venture, Art. 214.
Belaynew A.
9/21/2018

14. Partnership Agreement
2. Intention to work together and co-operate: in partnership, all members are required to work together, unless agreed to the contrary, and act in its name. They have also to co-operate in every sphere for well being of the partnership. This cooperation is more important in case of joint venture. 3. Contribution (Art. 229): in the form of either money, debt, other property (like chattel, right to use a property) or skill (applicable only for partnerships and joint venture). Contribution is based on the interest of the contributing member and his capability to contribute. It need not be equal among the members. In case of SC, members are expected to buy at least one share. Joint purchase of one share is possible (Art. 328).
Belaynew A.
9/21/2018

15. Partnership Agreement
4. Carrying economic activity: profit making is their primary aim. But, they can also engage in social activities.
5. Participation in profit and loss: Art However, Art. 254 provides that members in companies and limited partners in limited partnership are relieved from share of loss.
Partners of ordinary partnership, general partnership, joint venture, and general partners in limited partnership, as a rule, should share loss.
Belaynew A.
9/21/2018

16. Dissolution of BO BO may be dissolved due to:
When its purpose achieved or not achieved; (Art. 217(a))
By agreement of partners; (Art. 217(b))
Expiration of term of establishment; (Art. 217(c))
By the order of the court. (Art. 218)
Belaynew A.
9/21/2018

17. PARTNERSHIPS It is an aggregate or collection of individual members.
Its paramount importance is personality of the individual partner (because incapacity, death, or serious disagreement between partners may result in dissolution)
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.
Belaynew A.
9/21/2018

18. PARTNERSHIPS
In the absence of a contract to the contrary, it comes to an end when a partner dies or becomes insolvent.
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.
Belaynew A.
9/21/2018

19. Companies
Companies
It is an aggregate or collection of shares or capital.
It has perpetual succession (death or insolvency of a shareholder does not affect its existence.)
Shares in a company are freely transferable unless the company’s articles of association otherwise provides.
Members of a company are not entitled to take part directly in the management of the company unless they become directors.
Belaynew A.
9/21/2018

20. FORMATION OF PARTNERSHIPS
There has to be a Partnership Agreement (PA.)
All other requirements under the Comm. C and Commercial Registration and Business Licensing Proclamation have to meet.
Contribution (Art , 303). It can be:
Money
Debt
Property
Use of a property
Skill
Belaynew A.
9/21/2018

21. Administration of Partnership
Decision on modification of PA, appointment of attorney and the carrying out of any act which goes beyond normal partnership practice is taken up on the consent of all the partners. (Arts. 233 & 235)
A partnership is administered by its own managers.
Appointment of mangers;
By law (Arts ; ; 303)
Statutory managers (PA) (Art. 239)
Revocation (Art. 240; 293(1); 303)
Rights and duties of managers (Art. 241)
Agency provisions apply.
Jointly and severally liable to partners
Belaynew A.
9/21/2018

22. Discretionary Revocation of power of manager:
Belaynew Ashagrie
9/21/2018
Discretionary Revocation of power of manager:
It is applicable to manager who is not partner but appointed by PA OR to a partner or outsider who was manager of the partnership but not appointed and named as administrator by the PA. Art. 293(2)
Where a manager is nominated by the PA and the partners approve the nomination, no discretionary power to revoke. This is applicable for statutory manager, a partner who is appointed as a manager, Art. 240
Both provisions need good cause.
Belaynew A.
9/21/2018
College of Law, Haramaya University

23. Rights and Obligations of Partners
Rights and duties may vary depending on the interest of the parties to the PA.
The following are rights and duties of general nature that are usually expected from the partners.
Belaynew A.
9/21/2018

24. Duties of the Partners
Duty to care: Art It stems from Art of C.C
Duty not to compete with the partnership: Art. 244, 292, general partners in limited partnership (Art.300)
Use of partnership property only for the partnership interest: Art. 245, no parallel provisions to general and limited partnerships.
Belaynew A.
9/21/2018

25. Belaynew Ashagrie
9/21/2018
Duties of the Partners
4. Duty not to transfer partnership interest without the consent of partners: Art. 250, 282, 303
Partners in all forms of partnerships can assign their share in whatever form when all the partners agree.
In case of GP* and LP**, the agreement permitting one person to introduce third parties on his foot may be reached where accepted by the majority. (Art. 282(2)) But what constitutes majority? For OP***, majority is as it is defined under Art. 234, for SC, Art. 407, for PLC, Art. 535.
Is transfer of an interest possible where the partnership consists two partners? NO! because, a partnership can not be undertaken by one person.
*GP- General Partnership
**LP- Limited Partnership
***OP- Ordinary Partnership
Belaynew A.
9/21/2018
College of Law, Haramaya University

26. Duties of the Partners
Whether it is internal or external transfer, substitution of a partner can’t affect the interest of creditors unless they consent to the transfer. The creditors can claim against the transferee, if the property of the partnership is not covering the debt.
If the transfer is without the permission from the creditors, the creditors can claim against the personal property of the transferor. But, this right to force the transferor is not workable for OP.
Belaynew A.
9/21/2018

27. Duties of the Partners
5. Duty to satisfy claims of creditors of the partnership- Art. 255, 294, 303
Creditors can seek payment either from partnership or from any of the partners. Here, the partner may require creditors first to destrain the property of the partnership. (Art. 255(1) and 294)
Partners in a partnership are personally, jointly and severally liable to the creditors in case where the asset of the partnership can not satisfy the claim of creditors.
Belaynew A.
9/21/2018

28. Duties of the Partners
The partner can invoke benefit of discussion- Art of C.C
Art. 255(1) is a preliminary defense. Unless raised, may not be invoked. But, Art. 294 seem not like this.
The partners can avoid joint and several liability under their contract. But, this shall be made aware to the creditors. Otherwise, they can’t raise this defense (exclusion) against the creditors.
Belaynew A.
9/21/2018

29. Rights of the Partners. Rights of the Partners
Exercise properties and other interests in the way promoting their interest.
Can check books and other properties of the partnership when it is demanded. Art. 248
Revoke the power they entrust to the managers. 293(2), 303
Belaynew A.
9/21/2018

30. Rights of the Partners
To draw economic profit. (usually at the end of the fiscal year.) No legal requirement to set aside some portion of partnership profit for future use or for any reason as that of the companies. (Art. 252)
Manner of distributing the profit and loss is provided under Art (The Code is, however, silent as to the manner of distribution of profit and loss in case of general and limited partnership. It is to be determined by the partners- Art. 284)
An exception to distribution of loss is that a partner contributing the skill may be relieved from sharing loss- Art. 254.
Belaynew A.
9/21/2018

31. Dissolution, Winding-up and Termination
The extinguishment of a partnership consists of three stages:
(1) Dissolution
(2) Winding up or liquidation, and
(3) Termination.
Dissolution occurs when the partners cease to carry on the business together. Upon dissolution, the partnership is not terminated but continues until the winding up, unfinished business is completed, receivables are collected, payments are made to creditors, and the remaining assets are distributed to the partners.
Termination occurs when the process of winding up has been completed.
Belaynew A.
9/21/2018

32. Dissolution Dissolution
Is the change in the relation of the partners caused by any partners ceasing to be associated in the carrying on, as distinguished from the winding up, of the business. It designates the point in time when the partners cease to carry on the business together.
Grounds of Dissolution
Arts are applicable for all kinds of BO. There are three categories.
Judicial (Art. 218(1))
Consensual (Art.217 (b))
Legal (Art.217(a)), (Art.217(c))
Belaynew A.
9/21/2018

33. Dissolution 1. Dissolution by Notice; Art. 258
Grounds of Dissolution Specific to Partnerships
1. Dissolution by Notice; Art. 258
2. Dissolution due to death, incapacity, and bankruptcy of a partner, Art. 260
Continuation upon Dissolution: Arts. 259 and 256(3)
Belaynew A.
9/21/2018

34. Winding-up Winding-up (Arts. 264-270)
It involves completing unfinished business, collecting debts, taking inventory, reducing assets to cash, auditing the partnership books, paying creditor, and distributing the remaining assets to the partners.
Carried out by liquidators. They may be (Art. 264):
statutory liquidators: appointed under the partnership agreement
consensual liquidators: appointed by all the partners
judicial liquidators: court appointed liquidators
Belaynew A.
9/21/2018

35. Winding-up
Duties and Responsibilities of Liquidators: Arts. 265 and 266
Powers of Liquidators: Art. 267
The purpose of the winding up is to liquidate the assets at their highest value and bring the affairs of the partnership promptly to an end. This may involve completing contracts of the partnership.
Distribution of Assets: Arts
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9/21/2018

36. Winding-up
The liabilities of a partnership are to be paid out of partnership assets in the following order:
1. amounts owing to creditors other than partners [art 268(1)];
2. amounts owing to partners other than for capital and profits, and restoration of properties whose use only were contributed to the partnership [Art 268(2)];
3. amounts owing to partners for capital [Art.269)];
4. amounts owing to partners for profits [(Art 270(1)].
Belaynew A.
9/21/2018

37. Winding-up
The partners may, by agreement, among themselves change the internal priorities of distribution (number 2, 3, & 4) but not the preferred position of third parties (number 1)
In addition, Art. 270 provides that, in the absence of any contrary agreement, each partner shall have equal share in the profits and surplus remaining after all liabilities (number 1,2, and 3) are satisfied and must contribute toward the partnership losses according to his share in the profits.
Belaynew A.
9/21/2018

38. Winding-up
Thus, the proportion in which the partners bear losses depends not on their respective capital contributions but on their agreement. If no specific agreement exists, losses are borne in the same proportion in which profits are shared.
If the partnership is insolvent, the individual partners must contribute their respective share of the losses in order to pay the creditors (Art. 268(1)).
Belaynew A.
9/21/2018