Business License: Major Legal Effects of Validity, Renewal and Cancellation

Applying some form of regulatory measure on the activities of businesses is always one of the major concerns of every nation. This is critically important to regulate the economic, social and political life of their citizens. Among the forms of regulatory measures, licensing is the most common instrument.

Business licenses are permits, issued, inspected and revoked by government agencies, that allow individuals or companies to conduct businesses within their jurisdiction. This doesn’t, however, mean that business licensing is a standard requirement in every nation.

The justification for using licensing as regulatory instrument depends on the type and nature of various measures that needs to be taken such as tax, employment, social security and related considerations. For instance, most countries strictly regulate liquor, cigarette, lottery, drug and food sales. These include how and to whom they can be sold, the price and the detailed safety standards to be adhered to.

Identifying legal from illegal businesses, regulating trade activities to be made in restricted and permitted areas, classifying the operation of certain businesses in designated areas, setting business operation standards and other public policy issues to be determined necessitates taking into account cultural and moral values, public and individual health, security, urban development, privacy and other issues of public and non public interests.

Despite such regulatory differences in the purpose of licensing, there is an increasing growth of common standards of trade and trade regulation among nations.

Background for trade regulations

It has been almost half a century since Ethiopia started regulating the operation of businesses based on modern laws .The commercial code is a major milestone in this regard. The previous trade regulatory measures were known for their inability to govern the then emerging modern businesses and their intricate relation among themselves, with third parties, partners and public institutions.

The code, in addition to defining and listing what type of income earning activities are considered as business activities and who can be considered as trader, has also regulated the elements of business, the type of business partnership, the need for commercial registration and tax accounting principles applicable. With some modernization, sophistication, changing institutional aspects and dynamic international trade relations and practices, these legal standards are still operational and supplemented by the various regulatory measures so far adopted by the government in the forms of proclamations and regulations.

The need for business license

The commercial code under article 86 to 123 regulates the commercial registration issues to be complied both by the trader and the registering government agency. As a matter of obligation, individuals and organizations undertaking business activities should register details of their In 2011/12, 16,543 licenses were canceled by Addis Ababa Trade and Industry Development Bureau. particulars such as name, trade name, trade mark, place of business, type of business and other details stipulated by the law. It also dictates that changes and alterations on such issues should enter into the commercial registration.

The code anticipated the coming into effect of other regulations for business operations which would change, amend or set additional criteria concerning the registration, operation and renewal of business license. Accordingly various trade regulations have so far been put in place to regulate business activities. The latest law in this regard is the commercial registration and business licensing proclamation no 686/2010. Commercial registration and licensing have been made last year on the basis of this law.

From September 2011 to October 2012, the Ministry of Trade has issued and renewed 55,832 and 16,804 licenses respectively. According to the data obtained from Addis Ababa City Trade and Industry Development Bureau, 192,224 licensed businesses were in operation in 2011/12. This makes the number of businesses with license from the Ministry and the City Government last year to over quarter a million.

Recently, in addition to what has been known as the traditional trade regulation measures limited to licensing only, the trade practice itself has become the major concern of regulation. Accordingly, the trade practice has been subjected to detail regulation originally by proclamation no 329/2003 and currently by proclamation no 685/2010.

The major trade practice concerns addressed by the law are abuses of market dominance, regulation of merger and unfair competition, agreement or concerted practice or a decision by all association having the object or effect of preventing, restricting or distorting competition. Unlike the previous legal measure which leaves every trade issues to be managed and monitored by trade offices, the trade practice and consumer protection issues have been under the mandate of the Federal Trade Practice and Consumer Protection Agency as of 2012. The agency is building its capacity to execute its mandate.

The purpose of such regulatory measure is a public policy concern. Therefore, to address these public policy issues, trade regulations will be put in place with utmost consideration of dynamic social, economic and other factors. Once registration and licensing is effected on these basis, continuous business operation is always conditioned by additional legal requirement to be complied by the trader periodically. Failure to comply with this requirement will have administrative and legal liabilities ranging from cancellation or revocation of license to imprisonment and fine.

Renewal of business license 

The proclamation for licensing has strictly regulated the validity period of business licenses. Therefore, monitoring the compliance of traders with legal and licensing criteria is one of the major purposes of license renewal. The principal obligation of a trader is the tax compliance issue. The proclamation under article 36/1/a stipulates that clearance statement for the payment of income tax, other taxes, land use fee, employees income tax and any other payment due to be paid should be effected. Among other payments pension contribution can be considered as an obligatory payment for it should be paid with employees’ income tax as per the private employees’ pension law effective as of July 2011. Therefore, when the trader claims for renewal of his trade license, prove of compliance with these legal obligation is mandatory.

The other criterion for renewal is certificate of competence or professional competence for specific type of businesses. If the trader is not qualified to get the competence certificate, the trade license cannot be renewed. If a license cannot be renewed, the consequence will be cancellation on the basis of article 36 and 39/f of the proclamation. In 2011/12, 16,543 licenses were canceled by Addis Ababa Trade and Industry Development Bureau.

The reason for the cancellations have been committing acts described by the law as fault, bankruptcy and ceasing operation, cancellation of commercial registration and submission of false information and documents to obtain the license. Returning the trade license by the trader voluntarily has also been mentioned as one of the reasons for the cancelation.

Cancellation shouldn’t be effected for the mere reason that there is a valid ground to do so. Before cancellation, the trader should be noticed 30 day in advance to submit written opinion. After such due processes are exhausted cancelation might be the last resort.

If the trader believes that the cancellation is unreasonable, filing a complaint to the court is possible. There are several such pending court cases. If the complains do not have legal bases, the cases will be reviewed administratively.

The number of cancelled licenses in Addis Ababa last year, which is 16,543, is obviously big, especially when compared with the data from the Ministry of Trade which is only 25. Therefore, the reasons for the cancellation should be given serious attention so that some policy interventions in terms of facilitating credit, advisory service, proper Undertaking businesses without valid license may result in rigorous punishment from 7 to 15 years of imprisonment and fine from birr 150,000.00 to 300,000.00 birr. tax treatment and other business support by some mechanism could be done to make the businesses remain operational. The impact of cancellation of such size will have social and economic consequences in the long run. The macro impact of the problem for sure will require serious policy, legal and administrative intervention. For instance some businesses are reported to have been closed for tax unfairness. Through effective administrative measures such businesses should have survived and even thrived.

Criminal liabilities for engaging in business without valid license

As per article 60 of proclamation 686/2010, undertaking businesses without valid license may result in rigorous punishment from 7 to 15 years of imprisonment and fine from birr 150,000.00 to 300,000.00 birr. However, many individual traders and companies are not aware of this harsh criminal liability. That is why the regulatory institutions have opted for inspecting and creating awareness before taking legal actions.

Recently the Federal Supreme Court has sentenced a broker for 4 years of imprisonment for having been engaged in brokerage services without a valid license. In its decision the court commented that the penalty was lessened for the Law was new and the public awareness on it is not yet as popular as it is for other common crimes. The effort to aware the public requires rigorous effort through various media outlets and other mechanisms.

Abebe Asamere

Abebe Asamere holds an LLB in Law and BA in Political Science and International Relations from AAU. He was a member of the executive committee and pro bono legal advisor of the Ethiopian Consumers Protection Association for six years. Later on he became president of the Association for about a year. Since 2000, he has been working as consultant and attorney at Law. He was also teaching business law at the School of Commerce at AAU on part time basis for several years. Comments can be sent to abebe.a@ethiopianbusinessreview.com or aasamere@yahoo.com

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