GAFI Circular on the Use of Sole Pr

On 11 February 2019, the General Authority for Investment and Free Zones (“GAFI”) issued a circular[1] elaborating the concept of a sole proprietorship, as a form of commercial activity that is regulated under the Commercial Code of 1999, and distinguishing it from the different company forms available under Companies Law No. 159 of 1981. The circular further reiterates the rules for using the assets of a sole proprietorship as an in-kind contribution to capital in one of these companies (joint stock, limited liability, one-person companies, and partnerships limited by shares).

Background

Egyptian law identifies various forms of commercial enterprises. These are commercial companies divided into associations of persons (partnerships), and associations of capital (corporations), as well as sole proprietorships. The most important factor in distinguishing these legal forms is whether the partner in each form of company enjoys limited liability or if they do not. Limited liability is where a partner is only liable within the limits of their contribution to capital, and is therefore not liable to cover any company debts or obligations from their personal funds even if the company goes bankrupt. In contrast, a partner whose liability is unlimited guarantees the company’s debts and obligations with their personal funds in the event that the company makes losses or is unable to meet its obligations. In light of this distinction, an association of persons – a partnership – is that where all the partners are personally liable (as in a partnership), or where at least one of the partners is personally liable (a limited partnership). On the other hand, in an association of capital – i.e. a corporation that could be a joint stock company or a limited liability company – the liability of all of the shareholders/partners is limited. Finally, a sole proprietorship is that which is owned by a single person who manages it and has unlimited liability. In January 2018, Companies Law No. 159 of 1981 was amended to introduce a new form of limited liability company which is the one-person company. Whereas the minimum number of required shareholders for a joint stock company is three shareholders, and the minimum for limited liability companies is two partners, the one-person company allowed a single person – for the first time – to establish a commercial enterprise on their own while maintaining limited liability. This is because under a sole proprietorship the sole proprietor’s liability is unlimited and in order to create a joint stock or limited liability said proprietor would need one or two other partners as the case may be.

The New Circular

GAFI’s Circular No. 24 of 2019 explains the concept of a sole proprietorship as provided under the Commercial Code, which is an individual merchant who undertakes commercial activity as a profession. As such, a sole proprietorship is not a company, and its activity is tied to its proprietor, and ceases with their death. This is in contrast to a company, which is an entity the existence of which becomes separate from its founders, and which allows for the change of partners/shareholders, including the newly introduced one-person company. The circular then goes on to say that sole proprietorships may not be transformed into a company per se, however, their assets could be used as in-kind contributions in one of the company forms. It further elaborates that in that case, the valuation of the in-kind contribution shall be in accordance to a State Council Opinion issued in 1994[2] which mandated that the in-kind contribution in a company does not exceed 75% of its capital given that the remaining 25% of capital must be in cash. In addition, the company must follow the relevant rules for the valuation of in-kind contributions as provided under the Companies Law, including that the valuation is undertaken by an authorized financial advisor (for one-person companies, limited liability companies, and partnerships), or through the relevant department at GAFI in the case of a joint stock company.   [1] GAFI Circular No. 24/2019 on the rules and regulations for sole proprietorships. [2] State Council Opinion No. 488 dated 7 May 1994, File No. 12/1/191.