6.Type and basic characterstics of companies in Ethiopia

Types of Business Organizations

Business organizations in Ethiopia can be basically categorized based on the following two
parameters- form wise and object wise.

Form wise, there are two broad categories of business organizations (partnerships and
companies) and/or six sub-categories of them- ordinary partnerships, general partnerships,
limited partnerships, joint ventures, share companies and private limited companies. Object
wise, there are two types of such organizations- commercial and non-commercial business
organizations..

The following are the six types of business organizations in Ethiopia:

A. ORDINARY PARTNERSIPS

This can be said the simplest form of partnership in Ethiopia. It seems because of this that the
com. code does not have a conclusive definition of it. Per Article 228 of the code, it is a
partnership created where property is held by several persons for reasons outside their
control. By this we mean, in case several persons become the joint owners of a property, let’s
assume due to a succession, and the joint owners agree to create a partnership for the
management of the property jointly owned.[41]

Otherwise stipulated, a certain business organization is deemed to be an ordinary partnership

if it does not have characteristics, which make it a business organization covered by the com.
code of Ethiopia.[42] Finally, such partnerships are always non-commercial in nature.

B. JOINT VENTURES

It is a secret (discreet) or clandestine type of partnership in that the joint venture

agreement as among the venturers lacks the characteristics of divulgation or publicity or

registration or transparency to third parties. It is only one of the partners (the manager) who is
only known to the public as if he is doing his own individual business. Otherwise, the
agreement between the manager and the rest of the venturers or the venture per se does not
have legal personality.

C. GENERAL PARTNERSHIPS

 As far as partnerships are concerned, this are the typical types of partnerships in that it is
commercial in nature and is established by partners who are jointly and severally liable as
between themselves and to the partnership firm’s undertakings. External liability of the
partners (towards) third parties is unlimited but the partners can settle their internal
liabilities by agreement. It fulfills all the requirements expected from a commercial
business organization in that it should be registered, publicized and it is subjected to
bankruptcy and it is equipped with better management. Moreover, it exercises the
attribute features of legal personality, such as names and the legal obligation of taxation.

D. LIMITED PARTNERSHIPS

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This is a partnership that consists of two types of partners: general partners (active partners,
who can be managers and whose liability is unlimited) and Limited partners (passive
partners, who cannot be a manager and whose liability is limited to the extent of their
contribution). Other than this all the provisions of general partnerships is applicable on them.

E. SHARE COMPANY

Compared to the rest of business organizations in Ethiopia, this is the most modern and well
organized corporate form. Per Article 304 of the com. code, a share company is a company
whose capital is fixed in advance and divided into shares and whose liabilities are met only
by the assets of the company. The concept of limited liability of shareholders is well
practiced here than the rest of the business organizations in that shareholder are liable only to
the extent of their contribution or shareholding. They are always (by their very form)
commercial in nature.

It is only such companies in Ethiopia that can participate in a high profile business such as
banking and insurance. They have professional management, such as Board of directors,
General Managers, Secretaries, and Auditors, which is different from ownership
(shareholders). Unlike partnerships, their existence is perpetual than contingent. They are
guided by their own statutes (the memorandum of association and articles of association) in
addition to the law and the general meeting of the shareholders. It is only share companies in
Ethiopia that can issue negotiable securities, such as equity instruments (shares) or debt
instruments (debentures).

F. PRIVATE LIMITED COMPANY

This is the other variety of company in Ethiopia. But viewed under a microscope it is a hybrid
of a general partnership and a share company. For instance, on the one hand, like partnerships
it cannot operate in a high-profile business; it cannot even issue negotiable securities, and
there is no ease of transfer of shares to a third party.

On the other hand, like share companies there is the concept of limited liability of partners. In
terms of the ceiling requirement of membership (which is 50) and the initial capital in need to
be subscribed (which is 15,000 ETB), it differs from share companies (where there is no
ceiling requirement of membership and initial capital is 50,000 ETB)

Merits of Companies

On the other hand, from the perspective of their ‘object of incorporation’, business
organizations in Ethiopia can be sorted as commercial and non-commercial.

The following are the major merits of companies:

Financial Resourcefulness: If a business venture is to be promoted on a large scale,

none of the partnership or sole proprietorship form of business organization can prove
equal to the task of raising funds to the required level. It is only the company forms
both private limited company and share company, which can mobilize huge funds,
required by big business.
- Limited liability: company became more popular with investors these days it is
largely because of its limited liability clause only. Other factors like profitability of

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 the business venture and confidence in the management etc.
 Scope of growth: unlike the partnership and sole proprietorship forms of business
organization, where the growth is stunted for lack of adequate funds, the company
form of organization need not suffer for lack of financial resources with a huge capital
at its disposal, collected from investors spread all over the country and even abroad
also, the company can grow and expand at a rapid pace and reach the break-even
point faster than expected.
- Professional management: in order to achieve the targeted rates of growth and
expansion of a company, competent and professional management of the company is
no less important than the availability of adequate finance. One great advantage of
company form of organization is that it allows for insulation of management from
ownership.
- Stability of the company: for the success of any business venture, continuity and
stability of business are equally important and neither can be self-supporting without
the other.
- Positive social benefits: a company is beneficial not only to its members, creditors
and employees but also to the public at large. It supplies goods and services at a
competitive rates by introducing new and sophisticated technologies and by exploiting
the natural resources in a most efficient and economic manner. That part, it provides
employment opportunities both direct and indirect to the needy and competent
persons in the society.

Nature of Companies

The following are the main characteristics of Companies in Ethiopia:

- Limited liability: limited liability of members is one of the most common characteristics of
Share Company. Share Company is a separate legal entity. It is the owner of its assets and
liable to pay its liability (Art 304(1)). In other words liability of the members is limited. No
member is liable to contribute anything more than the nominal value of the shares held by
him.
- Perpetual succession: unlike partnership Share Company will not be dissolved by the death
or incapacity of its members. It is an entity with a perpetual succession. Its life is not
measured by the life of any member. It is independent of the lives of its members. Members
may come and members may go, but the company continues its operation unless it is wound-
up.
- Transferability of shares: Even though it is possible to restrict free transfer of shares in the
articles of association (Art. 333(1). As a general principle shares of Share Company are freely
transferable and can be sold or purchased in the share market. This is one of the reasons why
people prefer to form companies than partnerships.
- Transferability of company shares is an added advantage both to the institution of the share
company as well as to the investor.

6.2 PLCs

A private limited company, or LTD, is a common business structure that does not publicly
trade shares and is limited to a maximum of 50 shareholders. Further explore the definition
and the advantages, such as limited liability and tax breaks, and disadvantages, such as
limited growth of a private limited company.

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What is a Private Limited Company?
A private limited company, or LTD, is a type of privately held small business entity. This
type of business entity limits owner liability to their shares, limits the number of shareholders
to 50, and restricts shareholders from publicly trading shares.

Advantages
Let's look at some of the advantages of having a private limited company.

Limited Liability
. One advantage of owning a private limited company is that the financial liability of
shareholders is limited to their shares. Therefore, if a private limited company was in
financial trouble and had to close, shareholders would not risk losing their personal
assets. Although, perpetrating a fraud related to the private limited company would
negate an owner's limited liability protection.
Restricted Trade of Shares
The restriction placed on the sale or transfer of shares may be considered an
advantage or disadvantage, depending on your outlook. It is an advantage to some
shareholders because shareholders who want to sell shares cannot sell them to
outside buyers. Shareholders must also agree to the sale or transfer of shares;
therefore, the risk of hostile takeovers is low. The restriction placed on the sale of
shares is a disadvantage because shareholders have limited options for liquidating
shares.
Continued Existence
Another advantage of a private limited company is its continued existence, even after
the owner dies or leaves the business. Private limited companies are incorporated.
When a business incorporates, it becomes an independent legal entity, meaning it
is able to sue or own assets separate from the company owner. A private limited
company differs from a sole proprietorship in that the latter is owned by a single
individual who is personally responsible for the company's business debts and
essential to its continued existence.
Tax Breaks
Private limited companies also enjoy tax advantages. For example, their corporate
taxes may be lower than those paid by other types of businesses. Financial
statements for private limited companies must be filed no later than nine months
after the fiscal year ends. The first accounting period begins the same day that the
business is incorporated. When pursuing tax advantages, private limited companies
must keep accurate records.

Disadvantages of a Private Limited Company

 One of the main disadvantages of a Private Limited Company is that it

restricts the transferability of shares by its articles.
 In a Private Limited Company the number of shareholders, in any case,
cannot exceed 50.
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  Another disadvantage of a Private Limited Company is that it cannot issue
prospectus to the public.
 In the stock exchange shares cannot be quoted.

6.2.1 Formation of PLCs

A company is registered by filing the necessary documents and paying the required
fee at Companies House. The company is brought into existence when the Registrar
of Companies (Registrar) issues the certificate of incorporation.

The prospective owners of the company can either, (1) register a new company with
documents that are specifically tailored to their requirements (a tailor-made
company), or (2) buy a company that has already been incorporated but has not yet
traded (a shelf company).

The following forms must be sent to Companies House to incorporate a company:

• Application to register a company on Form IN01 and the fee;

• Memorandum of Association; and
• Articles of Association (except where you adopt model articles in their entirety).
Form IN01 is used to complete the following details:

• the proposed name of the company;

• general details about the proposed company, including a statement of proposed
officers, the director(s), and the secretary if it has one, whether it is a public or
private company and its intended registered office address; and
• a statement of capital and initial shareholdings or a statement of guarantee.
Details regarding the current level of fees are available from Companies House
website.

The Memorandum of Association confirms the subscribers' intention to form a

company and become members of that company on formation and is in a prescribed
format. In the case of a company that is to be limited by shares, the memorandum

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will also provide evidence of the members’ agreement to take at least one share
each in the company.
The Articles of Association contain the internal regulations and bye-laws covering
procedure, shares, meetings, directors and other administrative issues. The articles
are chosen by the members and form a contract between the company and its
members. They help to ensure the company’s business runs as smoothly and
efficiently as possible. Every company is required to have articles by law and the
articles are legally binding on the company and all of its members. On incorporation,
a company can adopt Model Articles, Model Articles with amendments or bespoke
articles and the choice will be indicated on Form IN01. Model Articles are available
for private companies limited by shares, private companies limited by guarantee and
public companies.

6.2.2Management of PLCs
As was already noted, the term 'business manager' in a private limited liability company was
replaced by 'director' in a private limited company. The Code of Companies and Associations
aims for the same terminology for the different types of companies since the notion of
'partner' was also replaced by 'shareholder'.

The Code of Companies and Associations also provides for the possibility for directors to
elect domicile at the legal entity’s registered office, and this for all matters regarding the
holding of their office.

In that case, the director concerned may be written to (within the framework of the holding of his
office) at the company’s registered office and no longer at his private address.

. Limitation of Directors' Liability

One of the most important provisions of the Code of Companies and Associations is the legal
limitation of the directors' liability.

However, the liability of a director cannot be further limited than what is provided for in the Code
of Companies and Associations.

This liability limitation applies both to the company itself and to third parties, regardless of the
(contractual or non-contractual) basis of the liability claim.

The maximum amounts also apply to all directors together. They apply to each fact separately or
to a whole of facts that may give rise to liability, regardless of the number of claimants or claims.

However, the liability limitation does not apply: 

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  In the event of a rather common than accidental minor fault,  major fault, fraudulent
intent or intention to damage the person who is held liable;

 To obligations that have to do with the subscription and paying up of shares or a capital
increase;

 To joint and several liability with regard to overdue withholding tax and VAT;

 To joint and several liability with regard to overdue social security contributions.

Day-to-day Management 

Just as in the public limited company, a body that deals with the company’s day-to-day
management may also be set up in a private limited company.

The new Code of Companies and Associations also provides a legal definition of the notion of
"day-to-day management".

The day-to-day management comprises acts and decisions that do not justify the intervention of
the management body because they do not go beyond the company’s daily needs, or because they
are of less importance or very urgent.

On the other hand, restrictions of the power of representation of the day-to-day management body
cannot be invoked against third parties, even if they have been made public.

6.2.3 Meeting
A meeting is a group communication in action around a defined agenda, at a set
time, for an established duration.

Meetings can occur face-to-face, but increasingly business and industry are turning
to teleconferencing and videoconferencing options as the technology improves, the
cost to participate is reduced, and the cost of travel including time is considered.

 Strategies for Effective Meetings

You want an efficient and effective meeting, but recognize that group communication
by definition can be chaotic and unpredictable. To stay on track, consider the
following strategies:

 Send out the last meeting’s minutes one week before the next meeting.
 Send out the agenda for the current meeting at least one week in advance.
 Send out reminders for the meeting the day before and the day of the meeting.
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  Schedule the meeting in Outlook or a similar program so everyone receives a
reminder.
 Start and end your meetings on time.
 Make sure the participants know their role and requirements prior to the
meeting.
 Make sure all participants know one another before discussion starts.
 Formal communication styles and reference to the agenda can help reinforce
the time frame and tasks.
 Follow Robert’s Rules of Order when applicable, or at least be familiar with
them.
 Make sure notes taken at the meeting are legible and can be converted to
minutes for distribution later.
 Keep the discussion on track, and if you are the chair, or leader of a meeting,
don’t hesitate to restate a point to interject and redirect the attention back to the
next agenda point.
 If you are the chair, draw a clear distinction between on-topic discussions and
those that are more personal, individual, or off topic.
 Communicate your respect and appreciation for everyone’s time and effort.
 Clearly communicate the time, date, and location or means of contact for the
next meeting.

6.2.4 Reserve requirement

A reserve requirement is a central bank regulation that sets the minimum amount that a
commercial bank must hold in liquid assets
. This minimum amount, commonly referred to as the commercial bank's reserve, is
generally determined by the central bank on the basis of a specified proportion of deposit
liabilities of the bank.
This rate is commonly referred to as the reserve ratio. Though the definitions vary, the
commercial bank's reserves normally consist of cash held by the bank and stored physically
in the bank vault (vault cash), plus the amount of the bank's balance in that bank's account
with the central bank. A bank is at liberty to hold in reserve sums above this
minimum requirement, commonly referred to as excess reserves. This measure is commonly
referred to as the liquidity ratio.

The reserve ratio is sometimes used by a country’s monetary authority as a tool in monetary
policy, to influence the country's money supply by limiting or expanding the amount of
lending by the banks.
Monetary authorities increase the reserve requirement only after careful consideration
because an abrupt change may cause liquidity problems for banks with low excess reserves;

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they generally prefer to use open market operations (buying and selling government-issued
bonds) to implement their monetary policy.
In the United States and many other countries (except Brazil, China, India, Russia), reserve
requirements are generally not altered frequently in implementing a country's monetary
policy because of the short-term disruptive effect on financial markets.

6.2.5 Devidends
Dividend is a distribution of profits by a corporation to its shareholders.
When a corporation earns a profit or surplus, it is able to pay a proportion of the profit as a
dividend to shareholders. Any amount not distributed is taken to be re-invested in the
business (called retained earnings).
The current year profit as well as the retained earnings of previous years are available for
distribution; a corporation is usually prohibited from paying a dividend out of its capital.
Distribution to shareholders may be in cash (usually a deposit into a bank account) or, if the
corporation has a dividend reinvestment plan, the amount can be paid by the issue of
further shares or by share repurchase. In some cases, the distribution may be of assets.

The dividend received by a shareholder is income of the shareholder and may be subject to
income tax (see dividend tax). The tax treatment of this income varies considerably between
jurisdictions. The corporation does not receive a tax deduction for the dividends it pays.

A dividend is allocated as a fixed amount per share, with shareholders receiving a dividend
in proportion to their shareholding. Dividends can provide stable income and raise morale
among shareholders. For the joint-stock company, paying dividends is not an expense;
rather, it is the division of after-tax profits among shareholders. Retained earnings (profits
that have not been distributed as dividends) are shown in the shareholders' equity section
on the company's balance sheet – the same as its issued share capital. Public companies
usually pay dividends on a fixed schedule, but may declare a dividend at any time,
sometimes called a special dividend to distinguish it from the fixed schedule dividends.
Cooperatives, on the other hand, allocate dividends according to members' activity, so their
dividends are often considered to be a pre-tax expense.

A dividend is a share of profits and retained earnings that a company pays out to its

shareholders. When a company generates a profit and accumulates retained
earnings, those earnings can be either reinvested in the business or paid out to
shareholders as a dividend. The annual dividend per share divided by the share price
is the dividend yield.

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A dividend’s value is determined on a per-share basis and is to be paid equally to all
shareholders of the same class (common, preferred, etc.). The payment must be
approved by the Board of Directors.

When a dividend is declared, it will then be paid on a certain date, known as the
payable date.

Steps of how it works:

1. The company generates profits and retained earnings

2. The management team decides some excess profits should be paid out to
shareholders (instead of being reinvested)
3. The board approves the planned dividend
4. The company announces the dividend (the value per share, the date when it
will be paid, the record date, etc.)
5. The dividend is paid to shareholders

Types of dividends

There are various types of dividends a company can pay to its shareholders.  Below is
a list and a brief description of the most common types that shareholders receive.

Types include:

 Cash – this is the payment of actual cash from the company directly to the
shareholders and is the most common type of payment. The payment is
usually made electronically (wire transfer), but may also be paid by check or
cash.
 Stock – stock dividends are paid out to shareholders by issuing new shares in
the company. These are paid out pro-rata, based on the number of shares the
investor already owns.
 Assets – a company is not limited to paying distributions to its shareholders in
the form of cash or shares.  A company may also pay out other assets such as
investment securities, physical assets, and real estate, although this is not a
common practice.
 Special – a special dividend is one that’s paid outside of a company’s regular
policy (i.e., quarterly, annual, etc.). It is usually the result of having excess cash
on hand for one reason or another.
 Common – this refers to the class of shareholders (i.e., common
shareholders), not what’s actually being received as payment.
 Preferred – this also refers to the class of shareholders receiving the payment.

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  Other – other, less common, types of financial assets can be paid out as
dividends, such as options, warrants, shares in a new spin-out company, etc.

6.2.6 Dissolution
Dissolution is the end of the legal existence of the corporation, basically “corporate
death.” It is not the same as liquidation, which is the process of paying the creditors
and distributing the assets. Until dissolved, a corporation endures, despite the
vicissitudes of the economy or the corporation’s internal affairs. As Justice Cardozo
said while serving as chief judge of the New York court of appeals: “Neither
bankruptcy…nor cessation of business…nor dispersion of stockholders, nor the
absence of directors…nor all combined, will avail without more to stifle the breath of
juristic personality.

Voluntary Dissolution

Any corporation may be dissolved with the unanimous written consent of the
shareholders; this is a voluntary dissolution. This provision is obviously applicable
primarily to closely held corporations. Dissolution can also be accomplished even if
some shareholders dissent. The directors must first adopt a resolution by majority
vote recommending the dissolution. The shareholders must then have an
opportunity to vote on the resolution at a meeting after being notified of its purpose.
A majority of the outstanding voting shares is necessary to carry the resolution.
Although this procedure is most often used when a company has been inactive,
nothing bars its use by large corporations. In 1979, UV Industries, 357th on
the Fortune 500 list, with profits of $40 million annually, voted to dissolve and to
distribute some $500 million to its stockholders, in part as a means of fending off a
hostile takeover. Fortune magazine referred to it as “a company that’s worth more
dead than alive.

Once dissolution has been approved, the corporation may dissolve by filing a
certificate or articles of dissolution with the secretary of state. The certificate may be
filed as the corporation begins to wind up its affairs or at any time thereafter. The
process of winding up is liquidation. The company must notify all creditors of its

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intention to liquidate. It must collect and dispose of its assets, discharge all
obligations, and distribute any remainder to its stockholders.

Involuntary Dissolution

In certain cases, a corporation can face involuntary dissolution. A state may bring an

action to dissolve a corporation on one of five grounds: failure to file an annual
report or pay taxes, fraud in procuring incorporation, exceeding or abusing authority
conferred, failure for thirty days to appoint and maintain a registered agent, and
failure to notify the state of a change of registered office or agent. State-specific
differences exist as well. Delaware permits its attorney general to involuntarily
dissolve a corporation for abuse, misuse, or nonuse of corporate powers, privileges,
or franchise.Del. on the other hand, permits involuntary dissolution for
abandonment of a business, board deadlocks, internal strife and deadlocked
shareholders, mismanagement, fraud.

6.2.7 Reporting shareholders equity on the statement of financial

position
Stockholders Equity (also known as Shareholders Equity) is an account on a
company’s balance sheet that consists of share capital plus retained earnings. It also
represents the residual value of assets minus liabilities. By rearranging the original
accounting equation, Assets = Liabilities + Stockholders Equity, it can also be
expressed as Stockholders Equity = Assets – Liabilities.

Stockholders Equity provides highly useful information when analyzing financial

statements. In events of liquidation, equity holders are last in line behind debt
holders to receive any payments. This means that bondholders are paid before equity
holders. Therefore, debt holders are not very interested in the value of equity beyond
the general amount of equity to determine overall solvency. Shareholders, however,
are concerned with both liabilities and equity accounts because stockholders equity
can only be paid after bondholders have been paid.

Components of Stockholders Equity

Stockholders Equity is influenced by several components:

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 1. Share Capital – amounts received by the reporting entity from transactions
with its owners are referred to as share capital.
2. Retained Earnings – amounts earned through income, referred to as
Retained Earnings and Accumulated Other Comprehensive Income (for IFRS
only).
3. Net Income & Dividends – Net income increases retained earnings while
dividend payments reduce retained earnings.

1. Share Capital

Share Capital (contributed capital) refers to amounts received by the reporting

company from transactions with shareholders. Companies can generally issue either
common shares or preferred shares. Common shares represent residual ownership in
a company and in the event of liquidation or dividend payments, common shares can
only receive payments after preferred shareholders have been paid first.

2. Retained Earnings

Retained Earnings (RE) are business’ profits that are not distributed as dividends to
stockholders (shareholders) but instead are allocated for investment back into the
business.  Retained Earnings can be used for funding working capital, fixed asset
purchases, or debt servicing, among other things.

To calculate retained earnings, the beginning retained earnings balance is added to

the net income or loss and then dividend payouts are subtracted. A summary report
called a statement of retained earnings is also maintained, outlining the changes in
retained earnings for a specific period.

The Retained Earnings formula is as follows:

Retained Earnings = Beginning Period Retained Earnings + Net Income/Loss –

Cash Dividends – Stock Dividends 

3. Dividend Payments

Dividend payments by companies to its stockholders (shareholders) are completely

discretionary. Companies have no obligation whatsoever to pay out dividends until
they have been formally declared by the board. There are four key dates in terms of
dividend payments, two of which require specific accounting treatments in terms of
journal entries. There are various kinds of dividends that companies may compensate
its shareholders, of which cash and stock are the most prevalent.

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