Formulate the guiding elements and draft the rules that would help to introduce single member companies in Ethiopia
©2013
Academic Paper
51 Pages
Summary
Since Liechtenstein, as the first country in the world, acknowledged the legal position of Single Member Liability Companies by statute law, this type of company has been legally recognized in an increasing number of countries. But in practice, England is the first country which paved the way to one man company practice with the Solomon case. Single Member Company emerged and developed rapidly in recent years, for the reason of their strong economic, political and legal theoretical basis. As a result, we can dig into their emergence and development from a social and historical point of view. It is helpful to encourage investment, develop economy and facilitate employment, and more freedom to the owner of the company. When compared with ordinary types of companies, Single Member Companies' legal character lies in the singularity of shareholder and the particularity of its corporate governance structure. Thus it increases the possibility for the single shareholder to abuse the rights and damage the interests of companies’ creditors and tax authority. In order to protect the company's creditors, it is necessary to regulate single member company strictly and set up integrated creditors protection rules. Therefore, the legal status for Single Person Companies should be authorized and as well positively standardized in order to seek advantages and avoid disadvantages. Ethiopia has suitable conditions when we analyse the factual situation of a country to introduce and to benefit from the advantage of one man companies.
Excerpt
Table Of Contents
4
1. Introduction /back ground /
Since Liechtenstein, the first country in the world acknowledged the legal position of Single
Member Liability Company by statute law, this type of company has been legally recognized in
an increasing number of countries.
2
But in practice, England is the first country which paved the
way to one man company practice in Solomon case.
3
Since the decision shows the independent
corporate existence and limited liability so that the owner of Co. Ltd (Solomon) free from
personal liability.
Single Member Company emerged and developed rapidly in recent years, for the reason of their
strong economic, political and legal theoretical basis. As a result, we can dig into their
emergence and development from a social and historical point of view. It is helpful to encourage
investment, develop economy and facilitate employment, and more freedom to the owner of the
company. When compared with ordinary types of companies, Single Member Companies' legal
characters lie in the singularity of shareholder and the particularity of its corporate governance
structure. Thus it increases the possibility for the single shareholder to abuse the rights and
damage the interests of companies' creditors and tax authority. In order to protect the company's
creditors, it is necessary to regulate single member company strictly and set up integrated
creditors protection rules.
4
Therefore, the legal status for Single Person Companies should be authorized and as well
positively standardized in order to seek advantages and avoid disadvantages. Ethiopia has
suitable condition when we analysis the factual station a country to introduce and to benefit from
the advantage of one man company.
The one man company law as company required to meet requirement on company form
(legality), initial capital, qualification and professional integrity for the board of directors, capital
adequacy, reserving, fund guarantee (investment for company), accounting, auditing reporting,
public disclosure and other corporate governances matters and the like could be vital guiding
element for one man company since it is one form of business activities.
2
Beihui Miao, A Comparative Study of Legal Framework for Single Member Company in European Union and
China 1 School of Law, King's College London, University of London, London, United Kingdom
Correspondence,WC2R 2LS, England, United Kingdom. Tel: 44-788-851-5557.
E-mail:beihui.miao@kcl.ac.uk at 1
3
Solomon & co.(1889),[1897]A.C (H.L) in
saloman v. saloman & co. case and also see infra note 5.
4
Supra note 1
5
1.1.
Definition and Nature of One Man Company
What is One Person Company? Company formed by a single person, One-person Company in
the legal system is a move that would encourage corporatization of business and OPC is a one
entrepreneurship legal and financial liability is limited shareholder corporate entity to the
company only.
5
One-man companies are the companies in which one man holds virtually the whole of the share
capital with a few extra members holding the remainder, who may be his relations or nominees
in single member Company. Being the largest holder such a person is generally the sole or the
managing director and enjoys complete control over the single member company. This is done
with a view to fulfill the statutory requirement of at least five members in the case of a public
company/share company and at least two members in the case of a private company (PLC). He
is, thus, in a position to enjoy the profits of the business with limited corporate liability. Such
types of companies are perfectly valid and not illegal. As already established in saloman v.
saloman & co. ltd case, such companies are legal entities distinct from the members that why the
single member (Solomon) shall not be personal liable.
6
Limited liability: - limited liability of single member is one of the most common characteristics
of one man Company. One man company is a separate legal entity. It is the owner of its assets
and liable to pay its liability. In other words liability of the single member is limited. A single
member is liable to contribute anything not more than the nominal value of the company held by
him.
7
If the asset of the company is insufficient to meet the claims of the creditors of the one man
5
Bizand Legis
,
OPC one person company, available at http://www.bizandlegis.com (date of assessed June
21, 2013) and also see Section 2(62) One Person Company ( OPC) Bill in India(2012), available at
http://www.mca.gov.in/Ministry/pdf/The_Companies_Bill_2012.pdf
6
Beihui Miao, A Comparative Study of Legal Framework for Single Member Company in European Union and
China Journal of Politics and Law; Vol. 5, No. 3; 2012, ISSN 1913-9047 E-ISSN 1913-9055, Published by
Canadian Center of Science and Education at1 and also see infra not 43.
7
The derivative of commercial cod of Ethiopia 1960's , share company provisions applies to single member
company in way of "mutatis mutandis" in the area gab (nature ,form, capacity , legal personality , owner of
company, outsider ,BOD, creditors, manager, capital, founder(s),MA, AA, Registration, commercial gazette,
bankruptcy and wind- up) the writer of this mini paper take principle form share company to single member
company with modification since it need some kind of contextualizing the provisions into one man company.
6
company, the single member cannot be asked to pay anything more than what is due on the
capital of the one man company by him.
The privilege of limited liability for business debts is one of the important advantages of doing
business under one man Company since the liability will not extend to the private property of the
single member, unlike that of sole partnership.
Perpetual succession: - unlike partnership one man company will not be dissolved by the death
or incapacity of its single member of one Man Company. It is an entity with a perpetual
succession. Its life is not measured by the life of a single member. It is independent of the lives
of its single member. He may come and may go, but the company continues its operation unless
it is wound-up.
8
1.2. Transferability of one Man Company: - Even though it is possible to restrict free transfer
of one Man Company in the articles of association. As a general principle a company is freely
transferable and can be sold or purchased in the market. This is one of the reasons why people
prefer to form single member companies than partnerships. Transferability
of a man company is
an added advantage both to the institution of the one man
company as well as to the investor
interims profit. The company's capital becomes a permanent and stable feature of the company
because the owner cannot with draw anything out of it.
9
Hence, it is vital to protect the interest of
creditor.
Chapter two: Basic factors for upcoming of one Man Company in general and Basis of
legal regime
2.1. Basic factors for upcoming of one man company in Ethiopia
The factual situation of the country palatable/suitable condition for introduction one man
company
10
since the people want to work alone in small business because the people has
individualistic mentality (i.e. kewisk mentality or jabelo mentality) since the desire of the people
8
Ibid
9
Ibid
10
One man company principle equally applies for one woman company in the whole mini paper that I use single
member company or man company or one person company(OPC) interchangeable
7
in business is individualistic in nature not collective stand in mega corporation. This is because
of the fear of being cheat and also the business people need limited liability (they fear risk).
Therefore, individualistic nature of Ethiopian people can be ground for introduction of one Man
Company because the introduction has advantage of corporate existences and limited corporate
liability.
11
Many entrepreneurs are "refugees" from the large corporate world (not common in Ethiopia),
while others choose to be self-employed in a "one-person company" as a change from a
traditional-based small business with employees and increased management responsibilities.
Being unemployed after another wave of outsourcing to Ethiopia can also trigger the desire in
people to become self-employed and especially to stay a "one-person company" if the law allows
single member company in Ethiopia. Especially the political games played in larger corporations
increase the desire to completely get away from the same. Being flexible and able to implement
decisions without having to worry about the "internal political players" is a driving force to work
alone. our people does not want to engage in company politics in addition to fear of loss on their
investment that why the prefer sole proprietorships (which is heights in number since people
does not want to invest their money to gather in huge corporation rather they prefer sole
entrepreneurship or small business alone)
12
2.2. Legal regime for one Man Company
The FDRE constitution provided that "every Ethiopian has the right to engage freely in economic
activity and to pursue a livelihood..."
13
at basis of this article the economic activities in include
all forms of business activities; hence, one man company is one form of business activities. Due
to this, an individual has constitutional base to engage freely in one Man Company to pursue a
livelihood and `an individual has right to ownership of the private property'
14
in the form of
business activities like by establishing one man company since it is one form of private
ownership of property. Therefore, the FDRE constitution allows the formation of one man
11
Professor Zekarias kenaa,( lecture ), individualistic nature of people of Ethiopia in small business( jeblo
mentality) could be factor introduction of single member company , Jimma university ,Jimma, date of presentation
at may 22-2013 ff. (e- mail zenkente@yahoo.com )
12
Data from Ethiopia investment agency and from trade and industry offices
13
FEDERAL DEMOCRATIC REPABLIC OF ETHIOPIA CONSTITUTION OF 1995 , ARTICLE 41(1)
14
Id at article 40(1)
8
company since it is one form of economic activities or business activities. But, there is no
recognition of one Man Company in the commercial cod of Ethiopia.
However, Article 510 of the Draft stipulates that there can be a single-member private limited
company. But no additional rules are provided as to how the concept can be integrated in this
part of the Code. Based on a study on the ramifications and implications of introducing such a
company
,
additional rules need to be incorporated
15
So, same may wonder why anyone would choose to register as a sole proprietary company
rather than as a single proprietorship. Well, there are some real advantages to being registered as
a sole shareholder/director company. Some of the reasons people choose one man company over
a proprietorship are:
Legal personality of company:-Once a company is registered with the ASIC and a CAN
(commercial registrar in Ethiopia) has been is issued, the company becomes a legal entity with a
personality that is independent and separate from its shareholder.
This distinct personality has important legal effects: A single member company can enter into
contracts in its own name and it can also sue, and be sued. When a one man company is in debt,
the money owed does not automatically become the debt of the shareholder. As a result, a civil
lawsuit for the collection of a sum of money against the company is not necessarily a legal action
against the shareholder (owner).
This is because the liability of a shareholder is limited to the value of his shareholdings unless he
previously signed a personal guarantee in favor of the one pursuing legal action. This built-in
limitation is not available in single proprietorships or for sole traders. So if he is conducting
business by himself, and he wish to limit his business liability, then the sole shareholder
proprietary company is for him.
Flexibility in ownership:-If his business grows in the future and he wishes to create incentives
for his non-shareholder employees who have contributed to the success of his company, then a
good way is to increase their involvement by transferring shares in the company to them.
15
RECOMMENDATIONS AND POSITION PAPER OF THE BUSINESS COMMUNITY ON THE REVIS OF
THE COMMERCIAL CODE OF ETHIOPIA Prepared by A TEAM OF FOURTEEN NATIONAL EXPER34
(july2008)
9
This is also known as a stock option. Because of the company's structure, he is able to
accommodate additional non-shareholder employees into the company shareholdings without
having to terminate the company's legal status.
16
This principle could be in line with FDRE
constitution article 40(1) "freedom on private ownership" and article 41(1) freedom in the choice
of form business activities.
17
Continuity:-Another advantage of the independent personality of the company is that it may
continue to exist for the duration of its registration, notwithstanding changes in the ownership of
the company's shares.
The death or retirement of a shareholder or the sale, transfer or assignment of the rights to a
company's shares will not mean the termination of a company's existence. he may one day
decide to hand over the reins of the company to someone else, such as one of his experienced
managers or employee-shareholders. While the director may be changed, the company continues
to exist as its registered self.
18
It is possible to register a company online, but if this is a daunting prospect for him, ASIC has
appointed registered agents, like Companies now who can advise and manage his online
company registration.
19
Therefore, the nature and the advantage of one Man Company could be
deferent from other form business activities like partnership, Share Company and PLCs.
2.3. The method for regulation of one Man Company
2.3.1. Formation of Single Member Company
A company may have a single member by virtue of its being formed, or by virtue of all its shares
coming to be held by a single person (natural or artificial person). In other words, a company
may have a sole member when it is formed and also when all its shares come to be held by a
single person. To the extent that a single person or single member, states choose to recognize the
concept, Single Member Companies/one Man Company may be created both ab initio and on a
16
Can One Person form a Company? Available at
www.companiesnow.com.au, date of accessed may 30-2013
17
Federal democratic republic of Ethiopia (FDRE) constitution in 1995
18
Ibid
19
I bid
10
subsequent concentration of all shares with only one owner, in the single member company
directive if we draft that.
20
Despite the title of the Directive, it will apply not only where the sole owner of the company is a
natural person but also where the owner is a legal person. Thus the Directive will also be relevant
in group relationships with 100% owned subsidiaries. So far, the Directive presents no bar to the
states maintaining special rules in cases in which a natural person is the single company
participant in several companies or a legal person is the only participant in a company.
21
In an earlier draft the Commission wanted to go as far as imposing a ban against one legal person
being sole owner of another company. These proposals which appeared very formalistic and
which undoubtedly would be easy to circumvent have been renounced. Thereby the single-
member Company Directive provisions could be focused on their central purpose: to facilitate
the access of liability limitation for small and medium size business with one single owner.
22
Therefore, these formation stage requirements should be incorporated into Ethiopian legal
systems on the future draft law of one Man Company.
Under the Old Company Law share company, PLCs, a limited liability company was required to
have two or more shareholders. The New Company Law or one Man Company now allows
natural persons or legal persons to form single shareholder limited liability companies. The new
statute provides for a simplified management structure appropriate to single shareholder entities.
However, in order to prevent abuse of the corporate structure in single shareholder companies,
the one man company provides for a number of restrictions:
23
· The registered minimum capital requirement should be 250,000 EB at base of current reality of
Ethiopia.
· The entire registered capital must be paid in a single installment since fully paid at time
· A single investor may form only one single shareholder company, no more than this.
20
Beihui Miao ,A Comparative Study of Legal Framework for Single Member Company in European Union and
China at page 7
21
.ibid
22
Ibid
23
Steven M. Dickinson ,Harris & Moure, Introduction to the New Company Law of the People's Republic of China,
at 3
11
· if the shareholder fails to maintain separation between the financial affairs of the company and
the shareholder's personal finances, the shareholder will lose the protection of limited liability
and will have joint financial liability for company debts. Therefore, these could be relevant rule
to draft one man company in Ethiopia.
A .Minimum capital:- fix the amount of capital in every company is vital including the one man
company. What is a need of fixing minimum capital for one Man Company? This for the purpose
of protecting the public interest in general (like interims of business taxation and for the
statically evidence of the company) and third party interest specifically the creditor interest.
Minimum capital requirement:-now day the value of the birr devaluated because of inflation in
the economy that why I recommend that the minimum capital requirement for one man company
at least 250,000 birr and also the minimum capital for the PLCs could be the 250,000 birr
24
in
future .these is because PLCs in effect become part of defacto one man company in Ethiopia.
Since PLCs usually establish among one family (child, wife are the member of PLC) but in
effect one person is the owner of the capital of PLCs and the profit therein that why writer
considered the PLCs as defacto one man company in Ethiopia since in effect there are many
single member PLCs.
B .Deposit and Registration
The following documents must be deposited at the office of registrar that is Ministry of Trade
and Industry at Federal level and Trade and Industry Bureau's at regional level.
1. The memorandum of association
2. The articles of association
3. all complementary documents before and during formation of one man company
These documents are accompanied by an application demanding the registration of the
company in the books of commercial register. The registration is of capital importance, for the
company does not require legal personality until it has been entered in the registry of commercial
registration. So, one man company acquires legal personality as soon as it is entered in the
24
NB 1$=1EB in 1960's (HSI regime), but now 1$=17EB, therefore, 15,000 x 17 =255,000EB that why the writer
recommend approximately, the fixed capital should be 250,000 birr. This amount of capital applies for PLCs=single
member private company=defacto one man company =formal one man company in near future.
12
registry of commercial registration.
25
This means that it is there up on it acquires the legal
capacity (let assume as draft law of one man company would consists) as it will provide by Law.
These will include:-
· a name of one man company specified in its statutes
· a registered office, which is the main address where the management of the one man
company is located. This registered office must be specified in the statutes.
· The power to do acts with legal effect:- In that it may acquire property and may acquire
or become subject to rights and liabilities. The assets of the one man company are
therefore separate from the assets of its single member (owner), and the latter have rights
in the one man company but not directly in its assets. Because the asset belongs to one
man company as independent legal entity.
· The power to sue and to defend legal proceedings against it. These are because of
corporate existence and limited liability of one Man Company.
26
Amendment
A company has a statuary right to amend its memorandum and articles of association by single
member through notification of creditors, ministry trade and industry.
Securities
One man Company can issue debt of securities but if single member wants to change from single
member in to share company it is possible to issues the equity security to increase the capital of
the new formed company without affecting the interest of third parties and federal the tax
authority.
27
Hence, he has duty to give notification to concerned authority like tax authority,
ministry of trade and industry, registrar office of the country.
Debt securities in one man company :- holders of debt securities are creditors and rank prior to
unsecured creditors, debt securities are remunerated by fixed interest ,only bond issues may be
25
BERNARD F.CATALDO,LIMITED LIABILITY WITH ONE MAN COMPANIES AND SUBSIDIARY
CORPORTION:18 LAW AND CONTEPT PROBS 474(1953)
26
Mario Rotondi, limited liability of the individual trade: one man company or commercial foundation:48
TULL.L.Rev.474,(1973-1974)
27
Ibid
13
secured by issuer(one man company) and debt securities are issued for a defined term and are
reimbursed to their holders.
C .Founder
Before one man company can be formed, there must be some person(s) who have an intention to
form a single member company and who take the necessary steps to carry that intention into
operation. Such person(s) are called founders. The word `founder' has not been defined any
where in the commercial code. Founder may be the owner of one Man Company or out side of
the ownership of one Man Company.
28
However, the founder is a person who brings one man company into existence. He/she is one
who undertakes to form one man company with reference to a given object and to set it going
and who takes the necessary steps to accomplish that purpose. The founder(s) decide the scope
and business of one Man Company. He/They prepare the necessary documents. He/They make
arrangements for advertising/notification to the concerned regulatory and to public.
29
One man Company may have single/one or several/more founder(s). A founder may be an
individual or body corporate. One existing body corporate may be founder of new one Man
Company
. A person who is not member of the newly formed one man company, but acts in a
professional activity, (such persons being solicitor, engineer, accountant or valuer) for the
founding of the one man company are also founder(s) of the single member company.
Founder(s) is/are the following:
30
· Founder(s) is/are persons who sign the memorandum of association and paid the whole of
the capital or.
· Any person outside of the company who initiated the plans of facility the formation of the
one man company
Roles, Rights and Liabilities of Founder
28
Mario Rotondi , Supra note 25 at 474ff.
29
Supra note 7, art 307 comm.cod ff
30
Id
14
Roles: - founder(s) are not agents because there is no principal because single member
company is under formation. However, founders from the moment they start to act with the name
of the company they stand in a fiduciary position towards the one man company under
formation. They have the power of creating and modifying the single member company. They
may enter into commitments/contracts with third parties in the name of the one man company,
but they may be refunded after the company has taken over this commitments and the one man
company may only take over if the commitments taken by the founder(s) were necessary for the
formation of the one man company. But, usually the founder could be the owner or become
single member of the one man company.
Rights:-The nature of the founder(s) work in the formation of the one man company call
for the considerable skill for which he should be paid sum amount of money which shall not
exceed one tenth of the net profits in the balance sheet. Such amount must be stated in
memorandum of association
. In the absence of such statement, a founder has no right against the
company for his payment.
31
If it is stated it is presumed that there is a contract which gives the
directors power to pay the preliminary expenses out of the company's funds. Such benefit may
not extend for more than two years and the founder(s) have no any other right than the one stated
in this paragraph.
Liabilities: - concerning liabilities of the founder(s), the violation of those acts may lead
into the violation of stated provision and this in turn may result into criminal liability and
criminal liability is borne by the doer personally not to be transferred to third party. If the
required capital (250,000 birr) and which is not fully paid then it is violation of law; for example,
the minimum capital required to form one man Company with less than stated amount (250,000
birr). Similarly, the capital of one Man Company should be fully paid up at formation stage. If
founders formed one man company without fully paid, such will lead to the violation of the
law.
32
As to the contribution in kind, it must be full paid, it must be done by an expert, and be
verified at least three times (founder, auditors, and ministry trade and industry).
33
If the amount
does not conform to exact value then there is violation of the law by the founder(s) this is
31
Supra note 7 at art.308 com cod ff
32
BERNARD F.CATALDO, Supra note 22 at 475ff.
33
Supra note 7 at art. 309 comm. cod
Details
- Pages
- Type of Edition
- Erstausgabe
- Year
- 2013
- ISBN (PDF)
- 9783954899494
- ISBN (Softcover)
- 9783954894499
- File size
- 781 KB
- Language
- English
- Publication date
- 2015 (June)
- Keywords
- One-man Company limited liability disregards corporate personality piercing the corporate veil Ethiopia
