Ordinary Partnerships: Too Vague, Trifling for Commercial Code

Aug 22 , 2020
By Alen Tesfaye Brussa

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When a person or persons decide to start a business, the first thing they do is create a business plan. During this process, it is crucial to determine the right kind of business structure. This decision is vital and potentially has far-reaching repercussions for the business and its owners - it needs careful understanding and selection. The business structure has direct implications on the business, because its liability, tax treatment and regulation are governed by the form of the business entity that is created.

Generally, there are three main types of business formulations. These are sole proprietorship, partnership or corporation. Each has its advantages and disadvantages. Some are preferred for their inexpensiveness to form while others protect against liability to protect the personal assets of the owners from creditors.

The Ethiopian Commercial Code categorises business organisations into six: ordinary partnerships, general partnerships, limited partnerships, joint ventures, share companies and private limited companies. This code has been in place since 1960, but it is due for an amendment.

Last June, the Council of Ministers endorsed a new bill to amend the 1960 Commercial Code. Even though the draft bill increased the number of forms of business organisations, notably missing from the list was ordinary partnerships.

There is not a conclusive definition of what this means. An article in the Commercial Code tries to offer a definition but does so only in the form of negation - explaining what an ordinary partnership is not or what it does not have.

“A partnership is an ordinary partnership ... where it does not have characteristics which make it a business organisation covered by another title of the Commercial Code,” it says by way of definition.

One would not understand what ordinary partnership is by just reading this article. All that is understood is that it cannot possess characteristics of business organisations - general partnership, limited partnership, joint venture, share company or private limited company – specified in the code.

Another suggested definition is found by reading the article under the title for ordinary partnership. It is stated as possibly a partnership created “where property is held by several persons for reasons outside their control.”

From this, we can understand that when several persons become the joint owners of a property, they can agree to create a partnership for the management of the property. An excellent example of the scenario where several persons jointly own property is due to succession.

The distinctiveness of ordinary partnerships from other forms of business organisations resides in the sorts of activities they can engage in.

“Any business organisation other than an ordinary partnership may be a commercial business organisation,” the text states.

This indicates that ordinary partnerships are always non-commercial forms of business organisations regardless of the nature of the activity they carry out. This is a point of contention for most scholars.

Why include it in the Commercial Code as a business organisation in the first place?

The Commercial Code is the law that governs trade. This is stressed more by an article that specifies that an ordinary partnership is non-commercial regardless of the nature of the activity it carries out. If it participates in commercial activities, the partnership “shall be deemed to be a general partnership.”

It gives credence to the argument that articles that have to do with ordinary partnerships should not be included in the Commercial Code.

Another significant argument raised against the inclusion of ordinary partnerships in the Commercial Code is applicability. Several persons who become the joint owners of a piece of property rarely go on to create an ordinary partnership – a problem that is compounded by the vagueness of the Code's explanation.

Taking the example of succession, if co-heirs of a deceased trader wanted to form a partnership, they can only form an ordinary partnership if they will not be engaged in commercial activity. In this case, the co-heirs shall apply for the cancellation of the trade registration of the deceased within two months of the death, according to another article within the Code.

Also, if they want to continue to be a trader like the deceased, they have to register and get their license (registration). But that partnership can no longer be deemed an ordinary partnership.

All of these contradictions show us that the provision for ordinary partnerships was misplaced when they were included in the Commercial Code of 1960.

The newly drafted Commercial Code bill, though it increases the number of forms of business organisations from six to seven, rightly removes ordinary partnerships. The new additions are limited liability partnership and single-member limited liability company (LLC).

It looks like the writers of the drafted bill recognised the non-commercial nature of ordinary partnerships and their relative lack of relevance in a commercial code. Due to its applicability for joint ownership, it would be better if some provision for ordinary partnerships could be added under the civil code, where its provisions are better served under property or succession laws.

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PUBLISHED ON Aug 22,2020 [ VOL 21 , NO 1060]

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