Draft Commercial Code Offers a Future of Prospect for Professional Class

Dec 11 , 2020
By Kefale Aschalew

Despite six decades having passed since the introduction of the 1960 Commercial Code, a corporate setup for the operation of professional businesses was not legally provided. The draft that amends the code will change this for the better, writes Kefale Aschalew (kefflaw2010@gmail.com), legal researcher at the Legal & Justice Affairs Advisory Council.

In Ethiopia, the provision of professional services as a business has remained stagnated to sole individual practice with limited corporate development. For long, professionals such as lawyers, accountants and engineers constrained themselves to individual practice rather than operating in a corporate setup. This has prevented them from polling resources and expertise that can offer economies of scale.

The major impediment to this was the gap in the law in providing a framework through which professionals can organise themselves to undertake professional service as a business. Despite six decades having passed since the introduction of the 1960 Commercial Code, a corporate setup for the operation of professional businesses was not legally provided. The draft commercial code will change this for the better.

The draft code introduces Limited Liability Partnerships (LLPs) as a new business vehicle whereby professionals in different disciplines can establish and manage a limited liability entity to provide professional service. It allows two or more professionals to establish an LLP through capital contribution in the form of cash, property or expertise.

Only individuals with an accredited license from the relevant authority to provide particular professional service can be partners in LLPs. For instance, if the LLP to be established is a law or accounting firm, the partners must have an individual license to provide legal or accounting services, respectively. Any partner of an LLP will have to withdraw in the case that their license to practice the particular profession is suspended.

LLPs reduce the costs of doing business for licensed professionals while increasing the partnership's capacity for growth. It enables partners to share risk, leverage individual skills and expertise, share employees and space, and establish a division of labor.

The primary importance of LLPs is the liability of the partners being limited only to the extent of their contribution. It is a form of business entity which permits individual partners to be shielded from joint liability created by another partner’s business decision or misconduct. An LLP enters into contracts in its own name in the same way as a company, but its members have the advantage of limited liability similar to the shareholders of a company. Hence, in the event of a business failure or a tortuous complex of disputes and claims, the liability would be limited to the amount of the contribution made by the partner responsible.

If the partnership fails to pay its debt or another partner commits a felony, partners will not be forced to pay creditors out of their personal assets or income. However, an LLP only protects a partner from liability arising from the incorrect decision or misconduct of other partners or any employees not under the control of the partner. Any partner that causes damage intentionally or negligently in the course of performing their duty will be liable either individually or together with the LLP.

LLPs are flexible business entities with no requirement of minimum capital and enjoy full freedom in the matter of conducting their operation with little regulatory impositions, according to the draft code. Partners can easily establish LLPs without being pressured to raise funds in the form of minimum capital.

Expansion of activities and operation will be easy because there is no restriction on the maximum number of partners. However, partners cannot operate other businesses that are similar to the activities of the LLP unless all the others agree.

The draft code has also presented flexible management opportunities for the partners as it bestows each the right to be a manager. Partners can determine the role of each partner under their bylaws, including as to whether they can have an active role or even act as a silent partner in the LLP.

It also offers a special opportunity for young professionals to transform themselves from being an employee to a partner in an institutional setup. The partners in an LLP can have a number of junior partners in the firm who work for them in the hopes of someday becoming a full partner. This, in turn, offers an opportunity for young professionals to develop themselves into a full partner.

Another importance of an LLP is it enables the provision of professional services with durability irrespective of death or incapacity of members. Currently, many sole proprietor owned professional businesses dissolve due to death or incapacity of the owner. This in turn results in loss of jobs that affects the livelihood of employees. Under the draft, the LLP will continue as a legal entity in case of death or incapacity of one or more of its members. In case of death of any shareholder, the shares of the deceased shareholder will be given to their heir converted in the form of monetary value.

Still, partners as professionals are also governed and regulated by their respective professional regulatory laws and bodies, which also control and monitor professional conduct. For instance, partners in a law or accounting firm are regulated under the legal and accounting practice regulations, respectively. Accordingly, partners must comply with professional conduct regulations in addition to what is provided under the commercial code.

In a country starved of a skilled workforce, this amendment to the commercial code to put in place a legal framework for an LLP will doubtlessly prove fruitful in encouraging the professional class to rise to the challenge.

PUBLISHED ON Dec 11,2020 [ VOL 21 , NO 1076]

(kefflaw2010@gmail.com), legal researcher at the Legal & Justice Affairs Advisory Council.

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