The newly passed commercial code has introduced a one-person company. This new introduction increased the number of forms of business organizations from six in the old commercial code to seven; four partnerships, a private limited company, a share company, and the one-person company. But, in addition to these seven forms of business organizations, sole-proprietorship is also another business vehicle recognized in the commercial code.
So, what is this one-person company?
One-person company is a company with the features of both a sole-proprietorship and a private limited company. It is established by only one person like the sole-proprietorship but it has a separate legal personality from its owner and a limited liability like that of a private limited company.
Business people who do not want to work with others used to choose sole-proprietorship because it was the only business vehicle to run a business lonely. However, the owner of the business has unlimited liability. This means the owner will be forced to pay debts of the business from his/her personal property if the assets of the business are not enough to cover the liabilities. In the case of share company and private limited company, however, shareholders have limited liability, and are only liable to the extent of their contribution in the company.
To run from the risks of unlimited liability nature of the sole-proprietorship, business people choose the private limited company. People also choose a private limited company because they want a capital contribution of another person who can be a partner or because the law requires joint work. Foreign investors, for example, are required to join with domestic investors to be admitted for investment. In this case, you cannot be a sole-proprietor.
The disadvantage of a private limited company is, therefore, you have to have a partner to establish and run the business. That is why most private limited companies are established by family members i.e. not to work with non-family persons but to fulfill the minimum membership requirement of the law. Moreover, in many private limited companies, the second shareholders hold a nominal share.
The one-person company comprehends the advantages of both vehicles. In the Amharic version of the new commercial code, it is described as “Bale A’nd Abal Halafinetu Yetewesene Yegil Mahber” which may be translated as “A Single Member Private Limited Company”. Although the word “mahber” refers to a group of at least two persons, the drafters of the law used it to refer to the one-person company as well.
Converting your business to a one-person company
Persons who were forced to opt for sole-proprietorship because they want to work alone but do not want its unlimited liability feature may choose to convert their sole-proprietorship to a one-person company. The same is also true for persons who opted for a private limited company because its liability is limited but do not want to have a partner.
The new commercial code contains provisions on how one can change the type of business vehicle. Article 538, and Articles 546, and the following are the relevant provisions that deal with the conversion of business organization.
However, you need to know the following before deciding to convert your business or establish a new one-person company:
- The limited liability nature of a one-person company is not absolute. It can be taken away if the owner; commits acts that jeopardize the interests of the company and creditors intentionally, merges assets of the company with his/her property, pays dividends that exceed the limit set by the law, uses the assets of the company for his personal benefit or third parties without payment, fails to separate his own legal personality from the company, or releases information on the financial status of the company to deliberately mislead the creditors of the company.
- The one-person company cannot establish another one-person company.
- The owner is required to nominate a person that will act on behalf of him/her in the event of death or absence or judicial interdiction.
- The owner acts as a General Manager of the company and is required to exercise the powers of the General Meeting in a private limited company.
- Provisions of the law that govern a private limited company also govern the one-person company.
In a nutshell, the one-person company does not replace the private limited company as there are other factors that insist to opt for a private limited company. It may, however, kick out sole-proprietorships especially in case of big businesses.
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