COMMERCIAL LAW

CHAPTER ONE

Introduction

What is commercial law

Commercial law is a dynamic and exciting area of law. It has been flexible in order to keep pace

with the rapid changes in business and with the globalization of markets. At the same time, it has

been certain in order to assist in the growth and development required in commerce.

Commercial law is a subject that is difficult to define. In fact, there has never been a universally

acceptable definition for this aspect of law. Business dictionary defines commercial law as “legal

rules that:-

1. Determine rights and duties of the parties engaged in commerce.

2. Governs disputes arising out of ordinary transaction of the buyer and seller.

3. Settles with issues concerned with banking, insurance etc”.

One thing is however clear. This is that it encompasses the laws that apply to business which

include most importantly the law of contract and other aspects of law, like law of business

organizations or company law, agency, and sale of goods, banking, intellectual property,

competition law, taxation law and insurance. This course, Law of Commercial Transaction does

not cover all of these subjects. Its main objective is to look at certain areas in order to acquire an

understanding of the themes, principles and practices of commercial law. The areas covered in

the course are law of business organizations, sale of goods. Agents etc.

The law of persons

As far as the law is concerned, it is not only human beings who count as persons. In some cases,

the law creates artificial persons, such as bodies corporate under public law, associations,

cooperative societies, and business organizations, which are dealt with legally as if they were

people; this is called having legal personality.

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A person is defined as an entity or being which is by law recognized as having certain rights and

obligations. Such entity or being is said to be a legal person or person in law. Legal persons are

divided into two:-

Natural persons

and artificial persons

An entity as being recognized as being a person is said to have a legal personality, it has

attributes which are recognized by laws as constituting a person, examples include human

beings, natural persons and corporations (artificial persons). One of the prerequisite of a business

organization is having legal personality.

Merchant

Any business Organization or Sole trader is a merchant. A merchant shall mean any individual or

corporate body engaged by occupation in any of the following transactions:

1. Purchasing goods or other chattels for the purpose of reselling them in their original,

processed or finishing form

2. Sale of one’s own manufactured goods

3. Purchasing securities for the purpose of reselling them

4. Supervision of goods

5. Transactions in intellectual property

6. Hotel operation, tourist, advertising,

7. Entertainment, impresario and other services

8. Purchase, construction or furnishing of real property for the purpose of sale

9. Leasing

Persons who are not merchants

1. Natural persons engaged in farming

2. Persons providing services through their own labour

3. Persons providing hotel services by letting rooms on their own home

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Capacity of individuals to form a company

Not all persons are permitted under the law to form a company. The following are expressly

prohibited from forming a company:-

A person that is less than 18 years of age

A person who is unsound mind and has been so found by a Court in Somalia or elsewhere

An undercharged bankrupt

He is disqualified under the act from being a director of the company

A body Corporate in liquidation shall not join in the formation of a company under the

Act.

Business organizations

In a free market economy, business organizations are a familiar part of everyday life. Business

organizations run the supermarkets from which we buy our foods and clothes; they supply the

water, gas, and petroleum products we depend on; they publish the books and newspapers we

read. We deal with them so often as consumers of their products and services that the image

which the phrase “business organizations” brings to mind is usually of entity concerned with

marketing and collecting payments for products and services which they have offered. It is

necessary to go behind this image to get to the entities which are the subject of the Law of

Business Organizations.

Most, if not all, of the business organizations with which lawyers are concerned are legal entities

which have firm-names and head office; they can acquire rights and incur liabilities, and can sue

and be sued under their firm names. Business organizations, from a legal viewpoint, are

undertakings with more than one member, having assets distinct from the private assets of the

members and a formal system of management, which may or may not include members of the

organization.

Definition: What is a Business Organization?

Business organization is “any organization arising out of a partnership agreement.” A partnership

agreement, is a contract whereby two or more persons who intend to join together and to

cooperate undertake to bring together contribution for the purpose of carrying out activities of an

economic nature and of participating in the profits and losses arising out there if any.”

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A business organization is a contractual relationship of two or more persons who undertake to

bring in contribution with a view to carrying out an economic activity. It is an essential character

of a business organization that it should have a profit motive, this being the feature which

distinguishes it from an association.

They are not, however, the only form of business association. Sole traders also exist as specific

legal forms of business.

Sole trader

A sole trader is a very simple legal form of business. As such there is very little for us to discuss

here beyond its advantages and disadvantages. It is, as the name suggests, a one-person business.

The Sole trader may be a suitable approach for informal one-person ventures where the capital is

mostly provided by the sole trader’s savings or a bank loan. It is unsuitable for larger

organizational or investment purposes.

The advantages of a sole trader are:-

No legal filing requirements or fees and

no professional advice is needed to set it up. You just literally go into business on your

own and the law will recognize it as having legal form.

Simplicity – one person does not need a complex organizational structure.

The owner gets all profit

The owner makes all decision by himself

No bureaucracy

The disadvantages of the sole trader are:-

The disadvantages are that it is not a particularly useful business form for raising capital

(money). For most sole traders the capital will be provided by personal savings or a bank

loan. 

Unlimited liability – the most important point to note in terms of comparing this form to

the company is that there is no difference between the sole trading business and the sole

trader himself.

The profits of the business belong to the sole trader but so do the losses. As a result he

has personal liability for all the debts of the business.

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If the business collapses owing money, then those owed money by the company can go

after the personal assets of the sole trader, his or her car or house in order to get their

money back.

At most time the business can no longer go on if the owner gets sick, or decide to stop.

How to form a business Organization

The partnership agreement is a contract concluded between at least two persons who wish to

carry on an enterprise in an organized manner. Thus, the partnership agreement, being a contract,

is subject to the Civil Code provisions governing contracts in general.

Two or more persons can be parties

The minimum requirement of two persons is true for all business organizations except the share

company, for which there must be at least five. The automatic effect of the operation of the rule

on the minimum number of persons who can enter into the partnership agreement is the

exclusion of sole proprietorships from the Law of Business organizations. Put differently, one

person cannot form a business organization by himself, but can be a trader engaged in business.

On the other hand, a question arises as to the maximum number of persons who can be members

of a business organization. There is no general limit on the maximum membership size of

business organizations, except in the private limited company where it is fixed at fifty.

Intent to Join Together and Cooperate

For a a business Association to be valid, the parties to it must have had the intention “to join

together and to cooperate.” In effect, this is to mean that the parties to the partnership agreement

acted in the way they did with a view to forming a business organization. In addition, they must

have intended to collaborate on an equal footing though they all need not intend to participate in

the management and control of the business organization. The degree of collaboration expected

from members varies from one form of business organization to another.

Contributions

The parties must undertake to bring in contributions in order that a contract subsists as a valid

business Organization. Contributions can be made in cash, kind, or services. In all business

organizations, except in a share company or private limited company, they should be made in

cash or kind. Capital contribution includes intangible property. Cases in point are copyrights,

utility models, patents, trademarks, service marks, and trade secrets, including debts owed to and

the use of property belonging to the contributor.

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For the purpose of carrying out economic activities

The objective of the parties to a valid partnership agreement must be to engage in economic

activities.

Participating in the profits and losses arising out thereof

Every party to the business Organization must have the intention to share in the profits and

losses. Profits and losses will be distributed between the members in the proportion stipulated in

the partnership agreement. In the absence of such stipulation, every partner shall have an equal

share in the profits and losses, irrespective of his contribution.

Publicity

A further formality requirement imposed on the parties to a valid business Organization is

publicity. Publicity consisted in cumulative fulfillment of

(a) Publication of notice,

(b) Deposit of documents, and registration in the commercial register

Capacity.

The fundamental importance of legal personality is that an entity with legal personality is

capable to exercise juridical acts.

Firm name.

Another attribute of a legal person is name. The name of a business organization, firm-name, is

chosen by the members.

Head Office.

The head office of a business organization is the place where its principal organs of

administration and management are situated and the company is registered. The legal effects of

the place of its head office are the same as those of residence for the physical person. The

significance of the location of its head office figures prominently in procedural matters in

particular in relation to judicial jurisdiction and service of process. Moreover, it determines

nationality of the business organization under consideration.

Nationality:

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The general principle concerning bodies corporate whose head offices are situate abroad is that

they have such nationality as is registered by the laws of that country. Consequently, a legal

person with its head office in Somalia is presumably of Somali nationality

Partnership

Partnership can be defined as ‘the relationship between persons carrying on a business in

common with a view of profit’.

The number can range from 2 to 10 persons.

Advantages of Partnership

No formal legal filing requirement involved in becoming a partnership beyond the

minimum requirement that there be two members of the partnership. Once there are two

people who form the business it will be deemed legal

It facilitates investment as it allows two or more people to pool their resources. The

maximum number of partners allowable is since unlimited. Prior to that it was 20 unless

you were a professional firm – solicitors, accountants etc.

The partnership agreement can therefore be used to provide a very flexible organizational

structure although this usually involves having to pay for legal advice.

Disadvantages of Partnership

Disagreement between the partners may led to dissolution of the business

A partnership will end on the death of a partner. If you are unaware of this when the

partnership is formed, the rigidity of the Act may not reflect the intention of the partners.

The partners are jointly and severally liable for the debts of the partnership

Distinguishing Between Business Organizations and Associations

Association is defined in different legal systems as “ a grouping formed between two or more persons with a view to obtaining a result other than the securing or sharing of profits. “ What transpires from this definition is the most important distinctive feature of associations, namely profit. If profit is considered to be the underlying motive for the formation of a certain

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organization, then it is said to be a business organization. Associations are always formed for non-profit purposes. Examples are charitable organizations, religious groups, literary clubs, local and international NGOS, etc. Associations are expressly prohibited from engaging in any of the commercial activities. “ A

question may be raised in connection with this ban. Assume that a not-for profit association is

formed and it eventually engages in profit-seeking activities. Sufficiently, this would serve as a

ground for dissolution of the association by Court, on motion of its board of management, or

one-fifth of the associates, or of the office of associations of the Ministry of Justice.

Cooperative Societies

Cooperative society is generally adopted by groups of individuals who wish to pool their

resources to gain some advantage in the marketplace. Consumer purchasing cooperatives are

formed to obtain lower prices through quantity discounts. Seller marketing cooperatives are

formed to control the market and thereby obtain higher sales prices from consumers.

Cooperative Societies shall have one or more of the following objectives

1) to solve problems collectively which members cannot individually achieve; 2) to achieve a better result by coordinating their knowledge, wealth and labor; 3) to promote self-reliance among members4) to collectively, withstand and solve economic problems; 5) to improve the living standards of members by reducing production and service costs by

providing input or service at a minimum cost or finding a better price to their products or services;

6) to expand the mechanism by which technical knowledge could be put into practice; 7) to develop and promote savings and credit services; 8) to minimize and reduce the individual impact of risks and uncertainties;

Classification of Business Organizations

Partnerships and Companies

Partnerships. A partnership is an aggregate or collection of individual members. Thus, in a

partnership firm, of paramount importance is personality of the individual partner. This is so,

because incapacity, death, or serious disagreement between partners may result in dissolution of

the partnership firm. Insofar as intimate personal collaboration is expected of each partner, only

persons who know each other very closely may enter into a partnership agreement giving rise to

a partnership firm. Consequently, partnerships are suitable for small business involving a

relationship of mutual trust and confidence.

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The partners are agents for each other. Therefore, they are normally jointly and severally liable

for the acts of each other and the liability of each partner to third parties is unlimited, although

they are liable to contribute to each other’s liability and entitled to claim to an indemnity from

the partner at fault.

With respect to its length of existence the partnership firm, in the absence of a contract to the

contrary, comes to an end when a partner dies or becomes insolvent. Hence, the length of

existence of the partnership firm is generally considered as contingent.

Finally, a partner cannot transfer or assign his interest in the firm to an outsider or third party and

make the transferee or assignee a partner without the consent of all the other partners. In other

words, a partner can transfer his share in the firm, but the assignee does not thereby become a

partner and is merely entitled to the assigning partner’s share of the profits.

Company by shares-

Forms of Business Organizations

Though the main classification is between partnerships and companies, partnerships can be

further broken down into three legal forms, general partnership, limited partnership and joint

venture. Companies comprise of two legal forms, namely, Share Company and private limited

company. Totally, there are five legal forms of business organizations

1. General partnership

2. Limited partnership

3. Joint venture

4. Company by shares

5. Private company

6. Public Company

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CHAPTER TWO

GENERAL PARTNERSHIP

A general partnership is the typical partnership form. Partners in a general partnership are

“personally, jointly, severally and fully liable as between themselves and to the partnership for

the partnership firm’s undertakings.” “Any provision to the contrary in the partnership agreement

shall be of no effect with regard.

Partners in a commercial general partnership have the status of Traders. General partnerships

shall have firm-names. The firm-names must contain at least the names of two of the partners

accompanied by the phrase “General partnership”. The firm-names may not contain names of

persons who are not partners. Situations in which a person whose name is mentioned in the firm

name ceases to be a partner and or ,without being a partner, allows his name to be mentioned in

the firm-name. In these cases, the person is going to be liable as a partner.

Contributions

Every partner must make a contribution, which may be in money, kind, other property or skill.

Where contribution is made in kind, the use only of such property may be contributed. In the

absence of a contrary agreement, contributions are deemed to be equal and of the nature and

extent required for carrying out the purposes of the partnership. In cases where contribution is

made in kind, the contributor must extend to the co-partners warranty against defect and

dispossession in a manner a seller does. If the use only of a property has been contributed, the

contributor must perform the duties owed by a lessor. With regard to transfer of risk, the risk

passes to the partnership by delivery in case the contribution has been made in kind. However,

the risk shall remain with the contributing partner in case where the use only of a property has

been contributed.

Partnership Capital

“The capital is the original value of the elements put at the disposal of the undertaking by the

partners by way of contributions in cash or in kind”. In view of the foregoing, capital refers not

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to the money or property contributed as such, rather to its value. The value has to be the original

value of the contributions in kind.

Calculation needs to be made based on the value of the property on the day of contribution.

Also, it ought to be borne in mind that partnership capital consists only of contributions in cash

or kind, to the exclusion of contributions in skill or service

Consequently, the partnership capital, being the original value of the total money and property

that the partners contribute and dedicate to use in the enterprise, is a fixed amount that may

change only through amendment to the partnership agreement.

Partnership Property

Partnership property must be distinguished from partnership capital. The term “partnership

property”, refers to “property, debts and rights brought into or acquired by the partnership”.

Therefore, partnership property, being the sum of the value of the partnership’s assets, includes

all the cash, corporeal and incorporeal property and rights originally brought into the partnership

or subsequently acquired by the partnership

Glimpse of corporeal and incorporeal chattels

Intangible property, also known as incorporeal property, describes something which

a person or corporation can have ownership of and can transfer ownership to another person or

corporation, but has no physical substance, for example brand identity or knowledge/intellectual

property. It generally refers to statutory creations such as copyright, trademarks, or patents. It

excludes tangible property like real property (land, buildings, and fixtures) and personal

property (ships, automobiles, tools, etc.). In some jurisdictions intangible property are referred to

as choses in action.

Ownership and Possession of Partnership Property

Partnership property belongs to the partners in common under the terms of the partnership

agreement. That is to say, partnership property is held by the partners as joint owners. Every

partner is a co-owner with all other partners of specific partnership property, such as office

equipment, office supplies, and vehicles.

Every partner may use partnership property in accordance with usual partnership practice.” This

normally means every partner has equal rights to possess partnership property for business

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purposes or in satisfaction of firm debts, but not for any other purpose without the consent of all

the other partners.

“No partner may use partnership property against the interests of the partnership or so as to

prevent his co-partners from using such property in accordance with their rights.” In view of the

above provision, it would seem that a strong case can be made for partners‟ right to take

possession of partnership property for personal use in the absence of a statutory clause

prohibiting them from taking possession of such property for personal purposes, so long as they

do not use it against the interests of the partnership or so as to prevent their co-partners from

using such property in accordance with their rights under the partnership agreement, unless

otherwise agreed.

Memorandum of Association and Registration

A general partnership arises out of a partnership agreement, otherwise known as memorandum

of association. In order for the memorandum of association to be valid, it must be reduced into

writing. Also it must meet the legal requirement as the minimum contents which include;

The name, address and nationality of each partner; the firm-name; the head office and branches,

if any; the business purpose of the firm; the contributions of each partner, their value and the

method of evaluation; the services required from persons contributing skill; the share of each

partner in the profits and in the losses and the agreed procedure for allocation of the same; the

managers and agents of the firm; and the period of time for which the partnership has been

established.

The firm is presumed to be formed as between the partners, insofar as the memorandum of

association has been drawn up and signed and comes into legal existence only when an entry into

commercial registry and deposit of two copies of the memorandum of association along with all

complementary documents are made, without the need to have notice published in a newspaper

empowered to publish legal notices.

Accordingly, once the partners in a general partnership have gone through the registration and

deposit procedures, the firm is said be a legal person, which has to do with the enjoyment of

rights and obligations. For instance, it enjoys ownership right against the partnership property;

has the right to sue and be sued in its firm-name

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Management

Types of Managers

Statutory managers. These are managers specifically designated in the partnership agreement

or following an amendment thereto and, as such, their names appear in the text of the partnership

agreement. Partners or third parties may be appointed to be managers. Partners, as opposed to

third parties, appointed as managers under the partnership agreement, enjoy special entitlements.

“A partner appointed as manager under the partnership agreement may carry out all acts of

management in disagreement with the other partners in the absence of fraud

subsequently appointed managers. These are managers appointed by decisions of the partners

at any point in time subsequent to the making of the partnership agreement.

Managers at law. Every partner, has the right to act as a manager in the absence of both

statutory and subsequently appointed managers.

Sole manager. It refers to a situation where a single individual has been appointed a manager.

Where a single individual has been appointed a manager, he will act alone.

several managers. It refers to a situation in which two or more persons have been appointed

managers and their duties have not been specified or where it has not been specified that they act

jointly. In such cases, they may each carry out acts of management.

Each manager may object to dealings contemplated by other managers. And the objection shall

be decided on by a majority vote of all the partners.

Joint mangers. In cases where joint managers have been appointed, decisions shall be taken by

consensus. However, where an act of management is of an urgent nature and the other joint

managers cannot be consulted, one of them may act alone as if she were a sole manager.

The Authority of Managers

Express Authority: The authority which acts as:

a) As specified in the partnership agreement.

b) As stipulated in the contract of employment.

Implied authority

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Implied authority means the authority to bind the firm which arises, by operation of the law,

Implied authority can also be derived from customs and usages of the particular partnership and

those of similar business in the area.

Relationships among Partners

Rights and Duties of Partners

The mutual rights and duties of the partners may be determined by the partnership agreement,

subject to the mandatory provisions of the law. The mutual rights and duties may be altered any

time with the consent of all the partners.

The Commercial Codes lays down the following rules regarding the conduct of the partners to

one another.

General Duties. Partners are bound to:

Exercise the diligence and skill which they use in conducting their private affairs .

Act in the “strictest good faith” or “utmost good faith” towards the partnership.

Exercise the same diligence as a bonus pater familias.

Be with the same care as a bonus pater familias .

Every partner shall be liable to the other partners in respect of any damage which he

caused by his default

Specific Duties

In addition to the above general duties, the partners have the following specific duties. These are

duty to:

1) Account for her management of affairs.

2) Refrain from engaging in businesses that are in competition with or otherwise likely to

injure the partnership.

3) Refrain from using the partnership property against the interests of the partnership or so

as to prevent his co-partners from using such property in accordance with their rights.

4) Share in such expenses as may be necessary to preserve the partnership property

5) Pay damages, if any.

6) Pay interest on delayed payment of contribution in money.

Scope of the Powers of Statutory Managers

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More often than not, there will be a stipulation in the partnership agreement specifying the

powers of the manager. Through registration, third parties become aware of the scope of the

powers of the managers appointed in the partnership agreement. Also, any restriction on the

powers of a manager should be entered in the commercial register. Where a manager exceeds his

powers, the rules relating to unauthorized agency shall apply.”

Where the Partnership Agreement Fails to Specify the Powers of the Manager

Implied authority

Where the scope of the powers of the manager is not expressly fixed in the partnership

agreement, such scope shall be fixed according to the nature of the business to which it relates.

Accordingly, the business purposes clause of the memorandum of association constitutes a good

starting point. For instance, if the business purpose of a general partnership firm is warehousing,

the firm’s usual/normal business activities cannot be carried out unless the manager has the

power to issue warehousing receipts. The extent of implied authority is generally broader for

partners than for ordinary managers. The character and scope of the partnership business and the

customary nature of the particular business operation determine the scope of implied powers. For

example, each partner in commercial general partnership that has goods in inventory and makes

profits buying and selling those goods has a wide range of implied powers to borrow money in

the firm-name.

In a general partnership, partners can exercise all implied powers reasonably necessary and

customary to carry on that particular business. Some customarily implied powers include the

authority to make warranties on goods in the sales business, the power to convey real property in

the firm-name when such conveyances are part of the ordinary cause of partnership business, and

the power to enter contracts consistent with the firm’s regular course of business.

If a partner acts within the scope of authority, the partnership is bound to third parties. For

example, a partner’s authority to sell partnership products carries with it the implied authority to

transfer title and to make usual warranties. Hence, in a partnership that operates a retail

electronics store, any partner negotiating a contract with a customer for the sale of a TV set can

warrant that “each TV set is warranted against defect for 2 years.”

This same partner, however, does not have the authority to sell office furniture’s, fixtures or the

partnership office building without the consent of all the other partners. In addition, because

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partnerships are formed for profit, a partner does not generally have the authority to make

charitable contributions without the consent of the other partners. No such action is binding on

the partnership unless it is ratified by the other entire partner

Apparent authority

This is a situation where partnership, by its act or failure to act, caused a third party to believe

that the person with whom he was dealing was authorized to act on behalf of the principal.

Technically speaking, this is a situation where the partnership masked the manager with an

apparent authority. In this case, both the manger and principal are jointly liable. The manager

would be exempted from liability in cases where he acted in good faith, not knowing the reason

by which his authority has come to an end.

Dissolution, Winding up, and Termination

The extinguishment of a partnership consists of three stages:

1. Dissolution.

2. Winding up or liquidation, and.

3. Termination.

Dissolution occurs when the partners cease to carry on the business together. Upon dissolution,

the partnership is not terminated but continues until the winding up, unfinished business is

completed, receivables are collected, payments are made to creditors, and the remaining assets

are distributed to the partners. Termination occurs when the process of winding up has been

finished.

Dissolution

Dissolution is defined by the Uniform Partnership Act of the United States as the change in the

relation of the partners caused by any partners ceasing to be associated in the carrying on, as

distinguished from the winding up, of the business. It designates the point in time when the

partners cease to carry on the business together. The business is not automatically terminated

upon dissolution, but has to go through the winding up procedure.

Grounds of Dissolution

Grounds of Dissolution Applicable to All Forms of Business Organizations

The grounds of dissolution can be grouped into three categories as follows

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: (a). Legal Dissolution

Where the business purpose has been achieved or cannot be achieved;

Where the term for which the business organization was formed expires, unless the

partners agree to continue the business organization

(b).Consensual Dissolution

Where the partners agree to dissolution prior to the expiry of the term for which the

business organization was formed.

(c) Judicial Dissolution

A business organization may be dissolved for good cause by the court on the application

of a partner, there shall be good cause in particular where a partner seriously fails in his

duties or becomes through infirmity or permanent illness or for any reason incapable of

carrying out his duties or where serious disagreement exists between the partners.

Continuation upon Dissolution

Even if a partnership is to be dissolved, the partners can prevent dissolution by various ways.

One such way is that the partners may agree at any time that the interest of the indebted/insolvent

Partner shall be purchased by another partner. Another way is that they agree to take in an

additional partner or they may agree to permit the partner to sell his interest to another and to

accept that person as a substitute partner. These agreements are called buy-out agreements in

American legal system.

19, Winding up

Whenever a dissolved partnership is not to be continued, the partnership must be liquidated. The

Process of liquidation, called winding up, involves completing unfinished business, collecting

debts, taking inventory, reducing assets to cash, auditing the partnership books, paying creditor,

and distributing the remaining assets to the partners.

Winding up may be carried out by one or more liquidators appointed under the partnership

agreement (statutory liquidators), or, in default, by liquidators appointed by all the partners

(consensual liquidators), or, in default, by court appointed liquidators (judicial liquidators).

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Distribution of Assets

After all the partnership assets have been collected and reduced to cash, they are distributed to

creditors and the partners. When the partnership has been profitable, the order or distribution is

not critical; however, when liabilities exceed assets, the order of distribution has great

importance.

, Settlement with creditors.

1. The liquidators shall pay the creditors of the partnership, where necessary calling upon

the partners for contributions.

2. They shall settle with the partner’s debts which they hold against the partnership and

restore to partners property whose use only was contributed to the partnership.

, – Restitution of contributions.

1. A partner who has contributed property may not claim it back in kind.

2. He shall have a claim to the value of his contribution as accepted in the partnership’s

accounts.

3. If the value has not been so fixed, restitution shall be made on the basis of the actual

value at the time the contribution was made.

Distribution of profits and losses.

1. Where there is a surplus after all claims have been met and contributions returned, the

surplus shall be distributed among the partners.

2. Where the assets are insufficient to repay contributions after payment of debts, expenses

and advances, the loss shall be distributed among the partners.

3. The distribution of profits and losses is to be made among the partners in equal shares,

where no other proportion has been specified in the partnership agreement.

Typical Examples of a General Partnership

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When two or more people wish to create a new business together, they must decide which type of business entity best suits their new venture. Among the choices available to U.S. businesses, the general partnership is a traditional yet still popular choice. A general partnership has fewer administrative and legal requirements than other forms of business. It treats all owners as equal partners in the business and assumes that each partner has an equal business and personal liability. A general partnership is commonly adopted by professionals and small-business owners who want to reduce the complexities of owning and operating a business, leaving them free to concentrate on the business itself.

Definition of a General Partnership

In the U.S., a general partnership is a business structure where two or more partners agree to share in both the assets and liabilities, as well as the profits, of a business. The partnership structure generally carries fewer legal requirements than the more formal business structures, such as a corporation. By default, each partner enjoys equal ownership, management and legal authority over the business.

Note that referring to a "partnership" between two existing companies does not create a general partnership business structure. Companies can refer to partnering with each other for some purpose, but these are usually governed by more formal joint venture contracts that govern a specific undertaking, not an entire business.

Taxes do not flow through a general partnership as they do with a corporation. Instead, each partner's "draw" (percentage of profits) is declared as income on their respective personal income tax returns.

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While a general partnership is more straightforward to set up and administer, it also carries additional risk for each partner. For financial and legal liability purposes, each partner is viewed as the business itself. So if the general partnership incurs a debt, each general partner is also individually liable for that debt. If the business doesn't pay that debt, the creditor can sue each partner and force them to repay the balance.

Because of the unique properties of the general partnership structure, it has become a popular choice for professional services providers who wish to go into business with each other.

Law Firm

Small law firms often adopt the general partnership format for their business entities. The partnership is easy to set up and requires less administrative paperwork over the life of the business, as well.

The general partnership is well-suited for a professional services business model involving two or three primary service providers. The law firm's name will generally include the last names of each partner, such as “Law Offices of Smith & Jones,” or “Smith, Jones & Reed, Attorneys at Law.”

Medical Practice

The same qualities that make a general partnership attractive to attorneys also apply to physicians building a medical practice. Physicians often choose to start a business based on a general partnership to minimize the financial and legal risks of operating a medical practice alone.

Another advantage of the general partnership form to practicing doctors is the strength it can lend to applications for business startup loans. Newly licensed physicians, who may be carrying lots of personal student loan debt, are wise to team up with partners who have better credit ratings, making them more credible borrowers to commercial lenders.

As with all businesses formed through the general partnership structure, partnering physicians will risk personal exposure to business liabilities, including debts and legal claims. For example, a major medical malpractice lawsuit against one physician can affect all other partners who share, and ultimately assume, the liability of the business.

Architectural Firm

Licensed architects and design professionals often go into business together as general partners. Architects who share the same design philosophy and want to reduce startup and operation costs may choose to team up in a general partnership to reduce costs and administrative requirements.

The reduced legal and financial paperwork of the general partnership allows each of the architects to focus on individual strengths and interests, such as creativity, design ability or

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leadership skills. At the same time, each partner maintains an equal share in the management and decision-making responsibilities of the business.

The general partnership structure is beneficial to architects who do not have a portfolio and have little practical experience. Partnering with a more experienced professional helps these new architects practice their profession without assuming all the risks of business ownership on their own.

Family Ventures

A general partnership is the ideal business structure for relatives, including spousal co-owners. The general partnership is the default structure for spouses who want to launch a business together but who do not wish to incorporate. Spouses who go into business together are typically classified as a partnership for the ease of startup and tax purposes.

Depending on the type of business, spouses can also elect not to be treated as a partnership when filing federal income taxes so they can maximize credits for Social Security and Medicare taxes

.

CHAPTER THREE

LIMITED PARTINERSHIP

1) In many particulars, the limited partnership is the same as a general partnership. It is an

association of two or more persons carrying on business as co-owners for profit with one or

more general partners and one or more limited partners.

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The limited partnership enjoys certain characteristics of a corporation insofar as the limited

partners are concerned, since their investment and limited liability resemble those of a

shareholder of a corporation. The general partners in a limited partnership are governed by all the

rules of general partnership discussed in Chapter 2. A limited partnership, however, is a two-part

business form, and the rights and responsibilities of the limited and general partners must be

distinguished.

2) GENERAL PARTNERS OF A LIMITED PARTNERSHIP

Each limited partnership must have at least one general partner who faces the same risks and

responsibilities as a partner in a general partnership. The liability exposure of limited partners is

confined to their contributions, but the general partner suffers unlimited liability, meaning that

his or her individual assets are vulnerable to firm creditors.

The general partner also has full responsibility for management and control of the partnership

affairs, since limited partners historically have been forbidden to participate in the control of the

business if they are to maintain their limited liability status.

One person may be both a general partner and a limited partner at the same time5 simply by

naming the person as a partner in both capacities in the partnership agreement and the certificate

of limited partnership filed to form the partnership. This may produce some benefits for the

person serving in both capacities.

In a person’s status as general partner, he or she is fully liable for firm obligations and has no

limited liability. However, that person’s contribution as a limited partner ranks with the priorities

of other limited partners for dissolution purposes, and his or her limited partnership interest is

freely transferable without causing a dissolution of the partnership.

LIMITED LIABILITY AND CONTRIBUTIONS

The most significant characteristic of the limited partnership is that limited partners are protected

from full individual liability. The liability of the limited partner is limited to the amount of that

partner’s investment as stated in the partnership agreement and the limited partner’s individual

assets cannot be reached by partnership creditors for obligations of the limited partnership. In

this respect, the limited partner is almost exactly like a shareholder of a corporation. This feature

makes the limited partnership particularly attractive for persons with substantial private

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resources that they prefer not to risk in the business enterprise. The only potential loss is the

investment.

MANAGEMENT AND CONTROL

The general partners of a limited partnership manage the business, and their management

responsibilities and rights are the same in a limited partnership as they are in a general

partnership.

The partnership agreement usually provides for the specific authority of the general partner and

for any desired limitations on the general partner’s authority.

There are certain activities a general partner may never do without the consent of the limited

partners, including acting in breaking of the agreement or possessing partnership property for

other than business purposes, admitting another general partner, and confessing a judgment

against the firm. The general partner also has the fiduciary duties inherent in the partnership

relationship and as any agent would have to the principal for whom the agent is conducting

business.

To preserve the limited partner’s limited liability status, all management and control over

partnership affairs should be vested in the general partner. Historically, this prohibition against

management participation has caused some uncomfortable uncertainty for limited partners in the

limited partnership organization.

Limited partners are always entitled to inspect and copy the books and to have an accounting of

partnership affairs. They also have the right to be informed on all matters respecting the business

of the firm, and may demand any information from the general partners as is just and reasonable.

Rights of the Limited Partners

Limited Partners shall have the right to:

a) have the Partnership books kept at the principal place of business of the Partnership or such other place as designated by the General Partner, and to inspect and copy any of them in accordance with this Agreement;

b) obtain from the General Partner any information concerning the financial condition of the Partnership by requesting the same with 72 hours ‘written notice and meeting with the General Partner to obtain such information during normal business hours of the Partnership; and receive a copy of the Limited Partnership’s federal, state, and local

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income tax returns for each year within 120 days after the close of the Partnership’s fiscal year.

ADMISSION, SUBSTITUTION AND WITHDRAWAL OF A LIMITED

PARTNER

Unlike general partners, limited partners may freely come and go, with very few restrictions. If

provisions are made in the partnership agreement and the certificate of limited partnership,

additional limited partners may be admitted without the consent of the existing limited partners

by complying with the procedures in the partnership agreement, and if necessary under local law,

by filing an amendment to the certificate. Similarly, a limited partner may withdraw from the

partnership and receive a return of his or her capital contribution without causing dissolution of

the firm. If the limited partner’s contribution is essential to the continued operation of business,

however, this right to withdraw may be restricted or denied by the agreement.

The law permits a limited partner to withdraw and demand the return of his or her contribution

on the date specified for return of the contribution in the partnership agreement or upon giving

six months ‘notice in writing. The contribution also may be returned at any time if all partners,

general and limited, consent to its return. However, the investment will be returned only if the

firm’s creditors have been paid or sufficient assets remain to pay them, which may mean that a

limited partner will receive nothing if the partnership’s debts are greater than its assets.

The partnership agreement may grant to a limited partner authority to substitute a new limited

partner in his or her place without the consent of the other partners. If the agreement does not

contain such express authority, the transfer or assignment of a limited partner’s interest has an

effect similar to that of the assignment of a general partner’s interest. The assignment grants to

the assignee the right to receive the limited partner’s interest (the right to profits and other

distributions—called the “limited partner’s transferable interest” under the new law) but it does

not make the transferee a new partner unless all the partners consent. Any substitution of limited

partners, by the power of agreement or by consent, may require an amendment to the partnership

agreement to reflect the change.

DISSOLUTION OF A LIMITED PARTNERSHIP

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Causes of Dissolution

Dissolution of limited partnerships is very similar to dissolution of general partnerships

(discussed in Chapter 2). The major distinctions stem from the limited partner’s typical position

outside of the management of the business A limited partner is usually a passive investor, like a

shareholder of a corporation, and although the limited partner’s death, insanity, bankruptcy, or

withdrawal may be a sad event, but none of those things will affect the continuation of the

business. Consequently, the incapacity of a limited partner does not cause dissolution. Similarly,

the limited partner may withdraw his or her capital contribution (investment) and demand its

distribution, and the partnership may continue without that partner.

In general, a limited partner has a contractual relationship with a limited partnership and is not

regarded as an integral person for the operation of the business of the partnership hence his

withdrawal shall not result dissolution.

The limited partnership will be dissolved at the times for termination of the partnership specified

in the partnership agreement. Furthermore, as with general partnerships, all partners of the

limited partnership may consent to dissolution at any time.

Limited partners have only limited rights to ask for dissolution of the partnership all General

partners are not willing to dissolve the firm. A limited partner may have the right to request a

dissolution by decree of court whenever it is not reasonably practical to carry on the business

under the partnership agreement. This is a very broad standard and probably incorporates most of

the causes justifying dissolution under the original laws of limited partnership, such as incapacity

of a general partner, misconduct or breach of the partnership agreement by a partner, or other

business or legal reasons that would justify termination of the business based upon changed

circumstances. On the other hand, the limited partner may not be able to require a dissolution of

the partnership for purely selfish reasons under the Revised Uniform Limited Partnership Act of

the United States.

The general partner is the only integral partner of the firm in the law of limited partnerships.

becoming bankruptcy dying; becoming incompetent results in a dissolution of the partnership

unless there is at least one other general partner and the partnership agreement permits the

business to be carried on by the remaining general partner, or unless, within ninety days after the

withdrawal, all partners agree in writing to continue the business and to the appointment of a

new or additional general partner.

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Termination and Winding Up

If a cause for dissolution occurs and the business is not continued, the limited partnership must

be liquidated. The partnership agreement may (and should) anticipate the procedure for winding

up by designating appropriate liquidators and giving them specific instructions concerning the

procedure for liquidation.

The original act prescribed a scheme of priorities for the distribution of assets of a limited

partnership that created a substantial incentive for capital investment by limited partners. The

effect of the original act was to prefer limited partners in the distribution of assets, so the general

partners could be paid only after the limited partners were fully satisfied and stipulated as

follows

a) to creditors, including partners who are creditors b) to private limited partnersc) to general limited partners

CHAPTER FOUR

J OINT V ENTURE

What is a Joint Venture?

A Joint Venture (JV) is a cooperative enterprise entered into by two or more business entities for

the purpose of a specific project or other business activity. The reason for a joint venture is

usually some specific project.

Joint ventures can be informal (a handshake) or formal, and they can be short term or long term.

Often the joint venture creates a separate business entity, to which the owners contribute assets,

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have equity, and agree on how this entity may be managed. The new entity may be a corporation,

limited liability company, or partnership.

In other cases, the individual entities retain their individuality and they operate under a joint

venture agreement. In any case, the parties in the JV share in the management, profits, and

losses, according to a joint venture agreement (contract).

Joint ventures are often entered into for a single purpose - a production or research activity. But

they may also be formed for a continuing purpose.

Companies with identical products and services can also join forces to penetrate markets they

wouldn't or couldn't consider without investing tremendous resources. Furthermore, due to local

regulations, some markets can only be penetrated via joint venturing with a local business.

In some cases, a large company can decide to form a joint venture with a smaller business in

order to quickly acquire critical intellectual property, technology, or resources otherwise hard to

obtain, even with plenty of cash at their disposal.

Joint ventures are, basically:

Separate companies with a shared interest and goals

Both companies have some proprietary (ownership) basis for in this shared interest.

They agree to share income and expenses.

Both companies in a joint venture maintain their separate identities for all purposes except those

of the joint venture.

Joint ventures are exempted from registration, unlike the remaining legal forms of business

organizations;

Why Form a Joint Venture?

Businesses form joint ventures for several reasons:

To combine resources. A bigger entity may have more clout in an industry or more resources to

ensure the success of a venture.

1) To combine expertise. In technical businesses, one company might have expertise in one part of a venture while the second company might have expertise in another part. For

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example, Company A might be good at creating software, while Company B has experience creating the hardware that's needed for a venture.

2) To save money. Two companies might consider a joint venture to save money on advertising, maybe at a trade show or in a trade publication.

Examples of Joint Ventures

Joint ventures can combine large and small companies on big and little projects. Here are some

examples:

Miller Coors is a joint venture between SABMiller and Molson Coors Brewing Company to seal

their beer products in the U.S. and Puerto Rico.

In 2011, Ford and Toyota agreed to work together to develop hybrid trucks.

Mining and drilling are expensive propositions, and often two companies in these industries will

combine as a joint venture to mine or drill in a particular area.

Forming a Joint Venture

You can form a joint venture informally with just a handshake, but it's always best to have

something in writing. A joint venture, even if it's between two small businesses, should have at a

minimum this sort of written agreement. All that's needed to form a joint venture is a written

agreement (a contract) between the parties. The agreement should spell out the details of the

purpose, how the two (or more) parties share in profits and losses, and how the parties share in

making decisions about the joint venture.

How a Joint Venture Pays Taxes

When a joint venture is formed, the most common structure is to set up a separate business

entity. Then the parties each own a specific percentage of the entity. If the joint venture is a

corporation, for example, and two businesses have equal shares in the business, they structure the

company so each partner entity has an equal number of shares of company stock and equal

management and board of directors’ members.

The joint venture isn't recognized as a taxing entity. So the business form that the joint venture

company takes determines how taxes are paid.

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If the joint venture is a separate business entity, it pays income taxes and all other taxes like that

business form. For example, if the new joint venture company is an LLC, it pays taxes as an

LLC.

Because the two parties have decided on how to split profits and losses, they will use that split to

decide how each party receives profits, handles losses, and contributes to paying any taxes that

are due.

What a Joint Venture is NOT

A joint venture may have some similarity to a partnership, but it's not. A partnership is a single

business entity formed by two or more people. A joint venture joins several different business

entities (each of which may be any type of legal entity) into a new entity, which may or may not

be a partnership. Partnership income taxes are paid by the owners individually.

The Benefits of Joint Ventures

Any two businesses of any size can work together on a joint project, while still maintaining the

rest of their business apart from each other. Some related articles that might give you additional

ideas for possible joint ventures.

DISSOLUTION

There can be various grounds for the dissolution of joint ventures. These are:

a) The expiry of the term fixed by the memorandum of association unless there is provision

for its extension;

b) The completion of the venture:

c) Failure of the purpose or impossibility of performance;

d) A decision of all the partners for dissolution taken at any time;

e) Dissolution by the court for good cause at the request of one partner;

f) The acquisition by one partner of all the shares;

g) A decision of the manager, if such power is conferred upon him in the memorandum of

association

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CHAPTER FIVE

COMPANY BY SHARES

A company is formed by applying to the registrar of companies, providing a constitution

(essentially a set of rules for the company similar to a public law conception of a constitution),

the names of the first directors and members plus a small fee. This formation process is called

incorporation.

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A company is an aggregate or collection of shares or capital. As a result, of capital importance

is legal personality of the company.

The company has perpetual succession. As a result, death or insolvency of a shareholder does not

affect its existence.

With respect to transfer of shares, shares in a company are freely transferable unless the

company’s articles of association otherwise provides. Thus, a shareholder can transfer his share

and ordinarily the transferee becomes a member.

Members of a company are not entitled to take part directly in the management of the company

unless they become directors. That is to say, a shareholder of a company acting in his individual

capacity cannot bind the firm by his acts. A company is managed by a board of directors, general

manager, shareholders‟ meetings, and auditors.

With respect to transfer of shares, shares in a company are freely transferable unless the

company’s articles of association otherwise provides. Thus, a shareholder can transfer his share

and ordinarily the transferee becomes a member.

Members of a company are not entitled to take part directly in the management of the company

unless they become directors. That is to say, a shareholder of a company acting in his individual

capacity cannot bind the firm by his acts. A company is managed by a board of directors, general

manager, shareholders‟ meetings, and auditors.

CHARACTERISTICS OF A COMPANY

The main characteristics of a company are:

1. Incorporated association. A company is created when it is registered under the

Companies Act. It comes into being from the date mentioned in the certificate of incorporation.

In India forming a public company at least seven persons and for a private company at least two

persons are persons are required. These persons will subscribe their names to the Memorandum

of association and also comply with other legal requirements of the Act in respect of registration

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to form and incorporate a company. In Ethiopia five and two are required to form Share

Company and private limited company respectively.

2. Artificial legal person. A company is an artificial person. Negatively speaking, it is not

a natural person. It exists in the eyes of the law and cannot act on its own. It has to act through a

board of directors elected by shareholders. The board of directors are the brains and the only

brains of the company, the company is the body and does act only through them”. But for many

purposes, a company is a legal person like a natural person. It has the right to acquire and

dispose of the property, to enter into contract with third parties in its own name, and can sue and

be sued in its own name.

3. Separate Legal Entity: A company has a legal distinct entity and is independent of its

members. The creditors of the company can recover their money only from the company and the

property of the company. They cannot sue individual members. Similarly, the company is not in

any way liable for the individual debts of its members. The property of the company is to be

used for the benefit of the company and nor for the personal benefit of the shareholders. On the

same grounds, a member cannot claim any ownership rights in the assets of the company either

individually or jointly during the existence of the company or in its winding up. At the same time

the members of the company can enter into contracts with the company in the same manner as

any other individual can.

4. Perpetual Existence. A company is a stable form of business organization. Its life does

not depend upon the death, insolvency or retirement of any or all shareholder (s) or director (s).

Law creates it and law alone can dissolve it. Members may come and go but the company can

go on forever. The company may be compared with a flowing river where the water keeps on

changing continuously, still the identity of the river remains the same. Thus, a company has a

perpetual existence, irrespective of changes in its membership.

5. Common Seal. As was pointed out earlier, a company being an artificial person has no

body similar to natural person and as such it cannot sign documents for itself. It acts through

natural person who are called its directors. But having a legal personality, it can be bound by

only those documents which bear its signature. Therefore, the law has provided for the use of

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common seal, with the name of the company engraved on it, as a substitute for its signature. Any

document bearing the common seal of the company will be legally binding on the company.

6. Limited Liability, the liability of members is limited to the unpaid value of the shares.

For example, if the face value of a share in a company is $. 10 and a member has already paid $.

7 per share, he can be called upon to pay not more than $. 3 per share during the lifetime of the

company

7. Transferable Shares. In a public company, the shares are freely transferable. The right

to transfer shares is a statutory right and it cannot be taken away by a provision in the articles.

However, the articles shall prescribe the manner in which such transfer of shares will be made

and it may also contain bona fide and reasonable restrictions on the right of members to transfer

their shares. But absolute restrictions on the rights of members to transfer their shares shall be

ultra vires. However, in the case of a private company, the articles shall restrict the right of

member to transfer their shares in companies with its statutory definition.

8. Separate Property: As a company is a legal person distinct from its members, it is

capable of owning, enjoying and disposing of property in its own name. Although its capital and

assets are contributed by its shareholders, they are not the private and joint owners of its

property. The company is the real person in which all its property is vested and by which it is

controlled, managed and disposed of.

9. Delegated Management: A joint stock company is an autonomous, self-governing and

self-controlling organization. Since it has a large number of members, all of them cannot take

part in the management of the affairs of the company. Actual control and management is,

therefore, delegated by the shareholders to their elected representatives, known as directors.

They look after the day-to-day working of the company. Moreover, since shareholders, by

majority of votes, decide the general policy of the company, the management of the company is

carried on democratic lines. Majority decision and centralized management compulsorily bring

about unity of action.

Share Company

Nature

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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. 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.

Suppose A, has subscribed for 100 shares in a share company and the normal value of each share

is Usd10. He paid up usd 500 at the formation of the company. He is bound to pay the rest when

the company makes the call. Then what would be the extent as liability is only the unpaid

amount, ie Usd 500 and nothing more. If the asset of the company is insufficient to meet the

claims of the creditors of the share company, the members cannot be asked to pay anything more

than what is due on the shares of the company by them.

The privilege of limited liability for business debts is one of the important advantages of doing

business under Share Company since the liability will not extend to the private property of the

member, unlike that of partnership.

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 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. The share company’s share capital becomes a permanent and

stable feature of the company because the shareholders cannot with draw anything out of it. The

shareholder gets a marketable security.

Founders

There is no founder statues in the unapproved Somali company law. Before a share company can be formed, there must be some persons who have an intention to form a share company and who take the necessary steps to carry that intention into operation. Such persons are called founders.

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The founder is a person who brings a share company into existence. He/she is one who

undertakes to form a share company with reference to a given object and to set it going and who

takes the necessary steps to accomplish that purpose. The founders decide the scope and business

of the share company. They prepare the necessary documents. They make arrangements for

advertising and circulating the prospectus.

Share Company may have several founders. A founder may be an individual or body corporate.

In India the founders are rather termed as promoters. And let us see in detail

Promoters: Who Are They?

When we speak of promoters and their role in company’s establishment, it becomes important to

discuss about the company’s entire process of formation. The company’s formation can be

divided into four segments. First, is called Promotion. Second is registration. Third is Floatation

and fourth is Commencement of business. Promotion symbolizes preliminary steps taken for the

purpose of registration and floatation of the company. The person who undertakes these phases

are called promoters.

Generally, a promoter is any person who complies with the necessary formalities of company

registration, finds directors and shareholders for the new company, acquires business assets for

use by the company, and negotiates business contracts on behalf of the company and the like. In

order to be regarded as promoter, it is not necessary that the person should be involved in every

stage of company’s formation

Roles and Rights of Founders

Roles: - As to the exact position of the founders the unapproved Somali code is silent. They are not agents because there is no principal. However, founders from the moment they start to act with the name of the company they stand in a fiduciary position towards the share company under formation. They have the power of creating and modifying the company.

Rights:-

Rights of the founders has not been mentioned in the unapproved Somali company law and hence we are bound to see other legal systems

In Ethiopia they stipulate rights for the founders and they believe the nature of the founders work

in the formation of the share company call for the considerable skill for which he should be paid

a share which shall not exceed one fifth of the net profits in the balance sheet. Such amount must

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be stated in memorandum of association. In the absence of such statement, a founder has no right

against the company for his payment. Such benefit may not extend for more than three years and

the founders have no any other right than the one stated in this paragraph.

Memorandum of association

The Memorandum of Association or MOA of a company defines the constitution and the scope of powers of the company. In simple words, the MOA is the foundation on which the company is built. In this article, we will look at the laws and regulations that govern the MOA. Also, we will understand the contents of the Memorandum of Association of a company. It is a document which sets out the constitution of the business organization and is really the foundation on which the structure of the business organization is based. It contains the fundamental conditions upon which alone the business organization is allowed to be incorporated. Its five clauses provide the basic features of the business organization’s constitution.

It defines as well as confines the powers of the business organization; it not only shows the

object of its formation but also the at most possible scope of its operation beyond which its

actions cannot go. Inside that area the shareholders may make such regulations for their own

government as they think fit.

After registration of the business organization, the memorandum becomes a public document

while the memorandum must comply with the provisions of the commercial code, all other

documents of the company must comply with the memorandum.

Purpose of memorandum: - The memorandum of association is a public document available for

inspection. It services two purposes:

1. The intending partner/ shareholder, who contemplate the investment of his capital

shall know within what field it is to be put at risk. Thus, he can find out from the

memorandum the field in, or the purpose for which his money is going to be used by the

company and what risk he is taking in making the investment.

2. Anyone who deals with the company shall know without reasonable doubt

whether the contractual relation into which he contemplates entering with the company is

one relating to a matter within its corporate objects. Thus a supplier of goods or money

will know whether the transaction he intends to make with the company is within the

objects of the company and not ultra-virus its objects. In short, the memorandum enables

the shareholders/ partners, creditors and all those who deal with the company/ to know

what its powers are and what the range of its activities is:-

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Distinction between a Company and a Partnership

No Basis comparison

of Company Partnership

2 Number members

of Pvt. Ltd. Co –minimum -2

-maximum -50

Share Company – minimum -5

Maximum no limit

Minimum – 2

Maximum no limit

3 Liability Limited Unlimited

4 Transferability of interest

Subject to some restrictions in plc. and free transfer of share company

Cannot transfer interest without the consent of all other partners

5 Management Share company vests in the board of

directors

Pvt. Ltd. Company; managers

Ownership and management

in the same hands. All

partners being owners are

entitled to participate in

management

- Sometimes managers 6 Implied agency No member can act as an implied agent

and bind the company -Every partner has an implied

authority to bind the firm by his act.

7 Stability Perpetual succession ensures stability and continuity

-Comes to an end with the death, retirement insolvency of partner. Hence unstable

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