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),
 Difference Between Commerce and Business
• While Commerce deals with Buying and Selling sales Business
deals with other activities such as franchising and venturing.
• Where as Commerce is an abstract idea but Business is
realistic in the sense that business could be owned but not
Commerce.
• Commerce related with trade and directly trade related activities
while Business related to other activities such as planning
advertising supervising manufacturing economic projections etc.
• Commerce is the sub set whereas Business is the universe.
• ‘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 980/98 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%.
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
• Unless the power and duties of the co-partners is determined by the PA, there is mutual
agency principle run among co-partners. If there is anything left unstated in the
agreement statuary law ( the provisions of the Commercial Code) shall apply
• Save for otherwise provision in the PA, each partner do have the right to participate in the
decision making procedure. 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.
• There is fiducially relationship govern among co-partners. The taxation is 30% flat rate on
annual taxable income. (Art . 19(1) of Fed. Inc. Tax Proc.
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.
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.
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.
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
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.