The Commercial Code of Ethiopia defines a business organization as follows: “A Business organization is any association arising out of a partnership agreement.” According to this definition there are eight forms of business organizations:
Private limited company;
Partnership: is where two or more persons who intend to join together make 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. According to the Commercial Code of Ethiopia, contributions in partnership are possible in the following conditions.
Each person shall make a contribution, which may be in money, debts, other property or skill;
Property or the use of property may form a contribution;
Unless otherwise agreed, contributions shall be equal and of the nature and extent required for carrying out the purposes of the partnership.
Joint venture: is an agreement between partners on terms mutually agreed and is subject to the general principles of law relating to partnerships stated above.
General partnership: consists of partners who are personally, jointly, severally and fully liable between themselves and to the partnership firm’s undertakings. This means that each partner is responsible for and must assume the consequences of the actions of the other partner(s). All members share the management of the business. The death or withdrawal of a general partner, or the expiration of the term of the general partnership, will dissolve the partnership. Continuation of the partnership following such events may be dealt with, however, in the partnership agreement. Since a partnership is generally a “voluntary” association, any general partner who no longer desires to be associated with the partnership may withdraw and force dissolution. Dissolution of a partnership, as a general rule, requires the winding up of its affairs and a liquidation of the partnership’s assets.
Limited partnership: Some members are general partners who· control and manage the business and may be entitled to a greater share of the profits, while other partners are limited and contribute only capital. Limited partners take no part in control or management and are liable for debts to a specified extent only. A Legal document, outlining specific requirements, must be drawn up for a limited partnership.
Company limited: by share is a company whose capital is fixed in advance and divided into share and whose liabilities are met only by the assets of the company. The members shall be liable only to the extent of their share holding. Formation of a share company shall be by a public memorandum – memorandum of association, which consists of:
- Names, nationality and address of the members, the number of shares which they have subscribed, provided that a member may not subscribe to less than one share;
- Name of the company;
- Head office and the branches, if any;
- Business purpose of the company;
- Amount of capital subscribed and paid up;
- Par value, number, form and classes of shares;
- Value of contributions in kind, their objects, the price at which they are accepted, the designation of the shareholder and the number of shares allocated to him by way of exchange;
- Manner of distributing profits;
- Number of directors and their power.
Sole proprietorship: This is the simplest way to set up a business. A sole proprietor is fully responsible for all debts and obligations related to his or her business. A creditor with a claim against a sole proprietor has a right against all of his or her assets, whether business or personal. This is known as unlimited liability. If the proprietor chooses to carryon a business under a name other than his/her own, he/she must register with the concerned local authorities. Your business name registration, or renewal of registration, will be valid for a certain period of time. A sole proprietorship is the cheapest and easiest form 0f business where most 0f the MSEs prefer to register their business in. Under a sole proprietorship, the entrepreneur is the owner as well as the manager of the business.
The sole proprietorship terminates by law upon the death of\the sole proprietor, with very few exceptions. Estate planning documents for the sole proprietor may grant the others of the sole proprietor the right to continue the business.
Co-operatives: This is where people associate on a voluntary basis to promote their economic interests, whereby resources are pooled together and used. People with financial constraints, especially, tend to form co-operatives to benefit from joint efforts and external support facilities.
A co-operative business structure provides:
- Democratic control based on one member one vote;
- Open and voluntary membership;
- Patronage dividends.
Each form of business stated above has its own advantages and disadvantages. You can make your choice based on the following factors:
- Ease of registration;
- Number of owners;
- Financial responsibility of owners;
- Degree of freedom in decision making; and
- Mode of lax payment.
For more information on forms of business organizations and their establishment, refer to the Commercial Code of Ethiopia (1960).