Business Organization I

(Partnership, Agency & Trust)

Assignment for Thursday, September 17, 2020

1. Define partnership: (Article 1767)

Article 1767. By the contract of partnership two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among themselves.

Two or more persons may also form a partnership for the exercise of a profession. (1665a)

a. What is money, property or industry?

Money. — The term is to be understood as referring

to currency which is legal tender in the Philippines. It must
be pointed out that checks, drafts, promissory notes payable
to order, and other mercantile documents are not money
but only representatives of money. Consequently, there is
no contribution of money until they have been cashed. (Art.
1249.)

Property. — The property contributed may be real

or personal, corporeal or incorporeal. Hence, credit such as
promissory note or other evidence of obligation or even a
mere goodwill may be contributed, as they are considered
property. (see City of Manila vs. Cumbe, 13 Phil. 677 [1909].) It
has been held that a license to construct and operate a cockpit
may be given as a contribution to a partnership. (Balon vs.
Pajarillo, [C.A.] No. 146-R, Nov. 29, 1956.)

Industry. — In the absence of money or property, or in

concurrence with these two, the law permits the contribution
of industry. The word “industry” has been interpreted to
mean the active cooperation, the work of the party associated,
which may be either personal manual efforts or intellectual,
and for which he receives a share in the profits (not merely
salary) of the business. (11 Manresa 273-274.)

b. What is common fund?

-connotes co-ownership by the partners of the property and business of the partnership and which in
turn implies joint powers of management and control of the partnership and sharing of the profits and
losses.

2. Characteristics of partnership:

A partnership contract, in its essence, is a contract of agency. (see Art. 1818.)

a. Consensual;
-it is perfected by mere consent, that is, upon the express or implied agreement of two or more persons
b. Nominate;
- because it has a special name or designation in our law
c. Bilateral;
- it is entered into by two or more persons and the rights and obligations arising therefrom are always
reciprocal
d. Principal;
- it does not depend for its existence or validity upon some other contracts
e. Preparatory;
- it is entered into as a means to an end, i.e., to engage in business or specific venture for the realization
of profits with the view of dividing them among the contracting parties
f. Onerous;
- each of the parties aspires to procure for himself a benefit through the giving of something
g. Commutative;
- the undertaking of each of the partners is considered as the equivalent of that of the others

A partnership contract, in its essence, is a contract of agency. (see Art. 1818.)

3. What are the essential features of partnership?

The following are the essential features of a partnership
contract:
a. There must be a valid contract;
b. Legal capacity of partners;
c. There must be a mutual contribution of money, property or industry to ta common fund;
d. The object must be lawful; (Article 1770)
e. The primary purpose must be to obtain profits and to divide the same among the parties.

It is also required that the articles of partnership must not be

kept secret among the members; otherwise, the association shall
have no legal personality and shall be governed by the provisions
 of the Civil Code relating to co-ownership. (Art. 1775.)

4. Partnership has juridical personality. (Article 1768)

ART. 1768. The partnership has a juridical personality separate and distinct from that of each of the
partners even in case of failure to comply with the requirements of Article 1772, first paragraph. (n)
Partnership, a juridical person. A partnership is sometimes referred to as a “firm’’ or a “company,’’ terms that
connote an entity separate from its aggregate individual partners.
Like the corporation, a partnership duly formed under the law is a juridical person to which the law
grants a juridical personality separate and distinct from that of each of the partners. (Art. 44, par. 3.) As an
independent juridical person, a partnership may enter into contracts, acquire and possess property of all kinds in
its name, as well as incur obligations and bring civil or criminal actions in conformity with the laws and
regulations of its organizations. (Art. 46.)

5. What are the formalities required by law for the constitution of partnership?

a. Article 1771 (General rule); (Where immovable property or real rights are contributed.)

Article 1771. A partnership may be constituted in any form, except where immovable property or real
rights are contributed thereto, in which case a public instrument shall be necessary. (1667a)

General rule. — As a general rule, no special form is required for the validity or existence of the contract of
partnership. (see Art. 1356.)

The contract may be made orally or in writing regardless of the value of the contributions.

Where immovable property or real rights are contributed.

In such case, according to Article 1771, “a public instrument shall be necessary,” without stating, unlike
Article 1773, that without the public instrument, the contract is void. (see Arts. 1356-1358.) Read together, they
require the execution of a public instrument for the validity of a contract of partnership whenever immovable
property is contributed thereto. To affect third persons, the transfer of real property to the partnership must be
duly registered in the Registry of Property of the province or city where the property contributed is located.

When partnership agreement covered by Statute of Frauds. —

An agreement to enter in a partnership at a future time, which “by its terms is not to be performed
within a year from the making thereof” is covered by the Statute of Frauds. Such agreement is unenforceable
unless the same be in writing or at least evidenced by some note or memorandum thereof subscribed by the
parties. (see Art. 1403[2, a].)

b. Article 1772 (Registration of partnership.)

Article 1772. Every contract of partnership having a capital of three thousand pesos or more, in money or
property, shall appear in a public instrument, which must be recorded in the Office of the Securities and
Exchange Commission.

Failure to comply with the requirements of the preceding paragraph shall not affect the liability of the
partnership and the members thereof to third persons.

(1) Partnership with capital of P3,000.00 or more. — There

are two requirements where the capital of the partnership is
P3,000.00 or more,25 in money or property, namely:

(a) The contract must appear in a public instrument; and

(b) It must be recorded or registered with the Securities
and Exchange Commission.

However, failure to comply with the above requirements

does not prevent the formation of the partnership (Art. 1768.)
or affect its liability and that of the partners to third persons.
But any of the partners is granted the right by the law (see Arts.
1357, 1358.) to compel each other to execute the contract in a
public instrument. Of course, this right cannot be availed of if
the partnership is void under Article 1773.

c. Article 1773 (Partnership with contribution of immovable property.)

Article 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if
an inventory of said property is not made, signed by the parties, and attached to the public instrument. (1668a)

Partnership with contribution of immovable property.

(1) Requirements. — Where immovable property, regardless of its value, is contributed, the failure to
comply with the following requirements will render the partnership contract void in so far as the
contracting parties are concerned:

(a) The contract must be in a public instrument (Art.1771.); and

(b) An inventory of the property contributed must
be made, signed by the parties, and attached to the public
instrument.
 (2) As to contracting parties. — The absence of either formality renders the contract void. Although
Article 1771 does not expressly state that without the public instrument the contract
is void, Article 1773 is very clear that the contract is void if the formalities specifically provided therein
are not observed, implying that compliance therewith is absolute and indispensable for validity.

(3) As to third persons. — Article 1773 is intended primarily to protect third persons. With regard to
them, a de facto partnership or partnership by estoppel may exist. (see Art. 1825.) There is
nothing to prevent the court from considering the partnership agreement an ordinary contract from
which the parties’ rights and obligations to each other may be inferred and enforced.
(Torres vs. Court of Appeals, 320 SCRA 428 [1999].)

d. Article 1844 (Requirements for a formation of a limited partnership.)

e.
Article 1844. Two or more persons desiring to form a limited partnership shall:
Sign and swear to a certificate, which shall state -
(a) The name of the partnership, adding thereto the word "Limited";
(b) The character of the business;
(c) The location of the principal place of business;
(d) The name and place of residence of each member, general and limited partners being respectively
designated;
(e) The term for which the partnership is to exist;
(f) The amount of cash and a description of and the agreed value of the other property contributed by
each limited partner;
(g) The additional contributions, if any, to be made by each limited partner and the times at which or
events on the happening of which they shall be made;
(h) The time, if agreed upon, when the contribution of each limited partner is to be returned;
(i) The share of the profits or the other compensation by way of income which each limited partner shall
receive by reason of his contribution;
(j) The right, if given, of a limited partner to substitute an assignee as contributor in his place, and the
terms and conditions of the substitution;
(k) The right, if given, of the partners to admit additional limited partners;
(l) The right, if given, of one or more of the limited partners to priority over other limited partners, as to
contributions or as to compensation by way of income, and the nature of such priority;
(m) The right, if given, of the remaining general partner or partners to continue the business on the
death, retirement, civil interdiction, insanity or insolvency of a general partner; and
(n) The right, if given, of a limited partner to demand and receive property other than cash in return for
his contribution.
(2) File for record the certificate in the Office of the Securities and Exchange Commission.

A limited partnership is formed if there has been substantial compliance in good faith with the
foregoing requirements. Limited partnership not created by mere voluntary agreement.
As owner of a business can avoid personal liability for business debts only if this is provided by statute.
Since in a limited partnership a person is allowed to share in the profits without becoming personally
liable to partnership creditors, a limited partnership can be created only where permitted by statute.
The creation of a limited partnership is a formal proceeding and is not a mere voluntary agreement, as
in the case of a general partnership. Accordingly, the requirements of the statute
must be followed (Barrett & Seago, op. cit., Vol. 2, p. 494.) so that public notice may be given to all who
desire to know the essential features of the partnership. (see 68 C.J. 1006.) A limited partnership is
formed if there has been substantial compliance in good faith with the requirements set forth in Article
1844. (last par.); otherwise, the liability of the limited partners becomes the
same as that of general partners.

6. Distinguish general partnership from limited partnership:

General Partnership Limited Partnership

a. As to composition
A general partnership is one where the partners are
liable for the contracts and obligations of the
partnership with their personal property. Generally,
the partners' liability will be in proportion to the
amount that they contributed to the partnership.
(1) “A partnership is a contract of two or more
competent persons to place their money, effects,
labor and skill, or some or all of them, in lawful
commerce or business and to divide the
profits and bear the losses in certain proportions.”
(40 Am. Jur. 126, 474; 68 C.J.S. 398.)
(2) “A partnership is an association of two or more
persons to carry on as co-owners of a business for
profit.” (Uniform Partnership Act, Sec. 6.)
(3) “A partnership is a legal relation based upon the
express or implied agreement of two or more
competent persons whereby they unite their
property, labor or skill in carrying on some lawful
business as principals for their joint profit.”
(Mechem, Elements of the Law of Partnership
[1923], p. 1.)
A limited partnership is one where there is one or
more general partners and one or more limited
partners. Limited partners are only liable to the
extent of their contribution. The partnership name
of a limited partnership should always contain the
word "Limited" or "Ltd.".
-the form of business association composed of
one or more general partners and one or more
special partners, the latter not being personally
liable for the partnership debts. (68 C.J.S. 1004.)
A limited partnership is thus composed of two
classes of partners. It is so called because the
liability to third persons of one or more of its
members referred to as limited (or special)
partners is limited to a fixed amount (Hoefer vs.
Hall, 411 P.d. 230.), their capital contributions or
the amount they have invested in the partnership.
This limited liability is the key characteristic of the
limited partnership. Characteristics of limited
partnership. As a general rule, the characteristics
of a limited partnership are as follows:
 (4) “A partnership is the status arising out of a
contract entered into by two or more persons
whereby they agree to share as common owners
the profits of a business carried on by all or
any of them on behalf of all of them.” (31 Words
and Phrases [1957 ed.], p. 291.)
(5) “A partnership is an organization for production
of income to which each partner contributes one or
both of the ingredients of income, which are capital
or service.” (Ibid., p. 292.)
(6) “A partnership is an entity, distinct and apart
from the members composing it, and, for the
purpose of which it was created, it is a person
having its own assets and liabilities and any benefit
or liability attaching to a member of the partnership,
results from the partnership relation.” (Ibid., p.
293.)
(7) “A partnership is a joint undertaking to share in
the profit and loss.” (Eastman vs. Clark, 53 N.H.
276, 16 Am. Rep. 192.)
Partnership is a legal concept, but the determination
of the existence of a partnership may involve
inferences drawn from an analysis of all the
circumstances attending its creation and operation.
(68 C.J.S. 399; see Art. 1769.) As a form of
business organization, it falls between two extremes
of organizational form — the single proprietorship
and the corporation.
b. As to firm name
-The general partners may or may not include their
surname to the firm name.
c. As to creation
Partnerships are required to be registered with the
Securities and Exchange Commission [SEC].
Registration is done by filing the Articles of
Partnership with the SEC. The Articles of
Partnership set forth all the terms and conditions
mutually agreed by the partners thereto.
More specifically, the documents required are as
follows:
[1] Proposed Articles of Partnership;
[2] Name Verification Slip;
[3] Bank Certificate of Deposit;
[4] Alien Certificate of Registration, Special
Investors Resident Visa or proof of other types of
visa [in case of foreigner];
[5] Proof of Inward Remittance [in case of non-
resident aliens].
It bears noting that corporations are not allowed by
law to become partners in a partnership.
7. Distinguish a general partner from a limited partner:
General Partner Limited Partner
a. Contribution
-may contribute money, property, or industry to -must contribute cash or
the partnership partnership but not services
b. Liability
-personally liable for partnership obligations -extends only to his capital contribution
c. Firm name
(1) A limited partnership is formed by compliance
with the statutory requirements (Art. 1844.);
(2) One or more general partners control the
business and are personally liable to creditors
(Arts. 1848, 1850.);
(3) One or more limited partners contribute to
the capital and share in the profits but do not
participate in the management of the business
and are not personally liable for partnership
obligations beyond the amount of their capital
contributions (Arts. 1845, 1848, 1856.);
(4) The limited partners may ask for the return of
their capital contributions under the conditions
prescribed by law (Arts. 1844[h], 1857.); and
(5) The partnership debts are paid out of common
fund and the individual properties of the general
partners. The general partners are treated by the
law much like a partner in an ordinary
partnership. They are typically those who know
how to manage the business. The limited partners
are usually those who put money for then
business. They are only investors. Their limited
liability is an exception to the general rule that all
partners, including industrial partners, are liable
pro rata with all their property for partnership
debts. (Art. 1816.) Thus, a limited partner has the
same type of liability as stockholder in a
corporation.
-incase in limited partnership those limited
partners whom their surname appears in the firm
name shold be liable as a general partner.
ART. 1844. Two or more persons desiring to form
a limited partnership shall:
(1) Sign and swear to a certificate, which shall
state:
(a) The name of the partnership, adding thereto
the word “Limited”;
(b) The character of the business;
(c) The location of the principal place of business;
(d) The name and place of residence of each
member, general and limited partners being
respectively designated;
(e) The term for which the partnership is to exist;
(f) The amount of cash and description of and
the agreed value of the other property contributed
by each limited partner;
(g) The additional contributions, if any, to be
made by each limited partner and the times at
which or events on the happening of which they
shall be made;
(h) The time, if agreed upon, when the
contribution of each limited partner is to be
returned;
(i) The share of the profits or the other
compensation by way of income which each
limited partner shall receive by reason of his
contribution;
(j) The right, if given, of a limited partner to
substitute an assignee as contributor in his place,
and the terms and conditions of the substitution;
(k) The right, if given, of the partners to admit
additional limited partners;
property to the
 -the name of a general partner may appear in the
firm name
d. As to limitation to engage in another
business
-prohibited from engaging in a business which is of
the kind of business in which the partnership is
engaged, if he is a capitalist partner.
(Art. 1808) or in any business for himself if he is an
industrial partner.
e. As to the management
-when the manner of the management has not
been agreed upon, all the general partners have an
equal right in the management of business
whether or not the general partner has made any
capital contribution.
-As a general rule, the name of a limited partner
must not
-no such prohibition in the case of limited partner
who is considered as a mere contributor to the
partnership
-no share in the management of a limited
partnership, his rights being limited to those
enumerated in Art. 1851, such that he renders
himself liable to creditors as a general partner if he
takes part in the control of business (Art. 1848)

8. Distinguish partnership from corporation:

The following are the distinctions:

a. Manner of creation

Manner of creation. — A partnership is created by mere agreement of the parties (Art. 1787.), while a
corporation is created by law or by operation of law (Sec. 2, B.P. Blg. 68.);

b. Number of incorporators/partners

Number of incorporators. — A partnership may be organized by only two persons (Art. 1767.), while a
corporation (except a corporation sole) requires at least five incorporators
(Sec. 10, Ibid.);

c. Commencement of juridical personality

Commencement of juridical personality. — A partnership commences to acquire juridical personality from the
moment of the execution of the contract of partnership (Art. 1784.), while a corporation begins to have juridical
personality only from the date of issuance of the certificate of incorporation by the Securities and Exchange
Commission (Sec. 19, Ibid.);

d. As to who may exercise powers

Powers. — A partnership may exercise any power authorized by the partners provided it is not contrary to law,
morals, good customs, public order, or public policy (Art. 1306.), while a corporation can exercise only the
powers expressly granted by law or implied from those granted or incident to its existence (Secs. 2, 36, Ibid.);

e. Management (Who shall manage?)

Management. — In a partnership, when the management is not agreed upon, every partner is an agent of the
partnership (Art. 1803.), while in a corporation, the power to do business and manage its affairs is vested in the
board of directors or trustees (Sec. 23, Ibid.);

f. Who can sue in case of mismanagement?

Effect of mismanagement. — In a partnership, a partner as such can sue a co-partner who mismanages (see
Arts. 1794, 1806, 1809.), while in a corporation, the suit against a member of the board of directors or trustees
who mismanages must be in the name of the corporation (see Sec. 23, Ibid.);

g. Extent of liability to third persons

Extent of liability to third persons. — In a partnership, the partners (except limited partners) are liable personally
and subsidiarily (sometimes solidarily) for partnership debts to third persons (see Arts. 1816, 1822-1824.), while
in a corporation, the stockholders are liable only to the extent of the shares subscribed by them (see Secs. 64,
37, Ibid.);

h. Right of succession

Right of succession. — A partnership has no right of succession (see Arts. 1828-1831, 1860.), while a corporation
has such right (Sec. 2, Ibid.);

i. Term of existence

Term of existence. — A partnership may be established for any period of time stipulated by the partners (see
Arts. 1767, 1785.), while a corporation may not be formed for a term in excess of 50 years extendible to not
more than 50 years in any one instance (Sec. 11, Ibid.);

j. Firm name

Firm name. — A limited partnership is required by the law to add the word “Ltd.” to its name (Art. 1844[1, a].),
while a corporation may adopt any fi rm name provided it is not the same as or similar to any registered fi rm
name (see Sec. 18, Ibid.);
 k. Governing law

Governing law. — A partnership is governed by the Civil Code, while a corporation is governed by the Corporation
Code.

l. Transferability of interest

Transferability of interest. — In a partnership, a partner cannot transfer his interest in the partnership so as to
make the transferee a partner without the consent of all the other existing partners because the partnership is
based on the principle of delectus personarum (see Arts. 1767, 1804.), while in a corporation, a stockholder has
generally the right to transfer his shares without the prior consent of the other stockholders because a
corporation is not based on this principle (Sec. 63, Ibid.);

m. Dissolution

Dissolution. — A partnership may be dissolved at any time by the will of any or all of the partners (Art. 1830[1,
2].), while a corporation can only be dissolved with the consent of the State (Secs. 117-122, Ibid.); and

7. Classification of partners:

Partners are classified according to their interests in the

partnership business, or their obligations to the partnership, or
their liabilities to third persons.

a. Capitalist partner;
Capitalist partner or one who contributes money or property to the common fund (see Art. 1767.);

b. Industrial partner;
Industrial partner or one who contributes only his
industry or personal service (Arts. 1789, 1767.);

c. General partner
General partner or one whose liability to third persons extends to his separate property; he may be either a
capitalist or industrial partner. (see Arts. 1843, 1816.) He is also known as real partner;

d. Limited partner
Limited partner or one whose liability to third persons is limited to his capital contribution. (see Art. 1843.)
He is also known as special partner. The terms “general partner” and “limited partner” have relevance only in
a limited partnership;

e. Partner by estoppel
Partner by estoppel or one who is not really a partner, not being a party to a partnership agreement, but is
liable as a partner for the protection of innocent third persons. (see Art. 1825.) He is one who is represented
as being in fact a partner, but who is not so as between the partners themselves. He is also known as
partner by implication or nominal partner. The term “quasi-partner” is sometimes used (68 C.J.S. 405.);

Additional:
(e) Managing partner or one who manages the affairs or business of the partnership; he may be appointed either
in the articles of partnership or after the constitution of the partnership. (see Art. 1800.) He is also known as general or
real partner;
(f) Liquidating partner or one who takes charge of the winding up of partnership affairs upon dissolution (see Art.1836.);
(h) Continuing partner or one who continues the business of a partnership after it has been dissolved by reason of the
admission of a new partner, or the retirement, death, or expulsion of one or more partners (see Art. 1840.);
(i) Surviving partner or one who remains after a partnership has been dissolved by the death of any partner
(see Art. 1842.); and
(j) Subpartner or one who, not being a member of the partnership, contracts with a partner with reference to the latter’s
share in the partnership. (see Art. 1804.)
(2) Other classifications. — They have also been classified into:
(a) Ostensible partner or one who takes active part and known to the public as a partner in the business (see Art. 1834,
par. 2.), whether or not he has an actual interest in the firm. Thus, he may be an actual partner or a nominal partner.
If he is not actually a partner, he is subject to liability by the doctrine of estoppel (Art. 1825.);
(b) Secret partner or one who takes active part in the business but is not known to be a partner by outside parties
nor held out as a partner by the other partners (Ibid.), although he participates in the profi ts and losses of the
partnership. He is an actual partner. He is also an active partner in the sense that he participates in the management of
the partnership affairs;
(c) Silent partner or one who does not take any active part in the business although he may be known to be a partner.
(Ibid.) Thus, he need not be a secret partner. If he withdraws from the partnership, he must give notice to those persons
who do business with the fi rm to escape liability in the future;
(d) Dormant partner or one who does not take active part in the business and is not known or held out as partner. (see
Art. 1834, par. 2.) He would be both a silent and a secret partner. He would be both a secret and a silent partner. He
may retire from the partnership without giving notice and cannot be held liable for obligations of the fi rm subsequent
to his withdrawal. His only interest in joining the partnership would be the sharing of the profits earned. The term is used
as synonymous with “sleeping partner” (68 C.J.S. 404.);
(e) Original partner or one who is a member of the partnership from the time of its organization;
(f) Incoming partner or a person lately, or about to be, taken into an existing partnership as a member (68 C.J.S. 404;
see Arts. 1826, 1828.); and
(g) Retiring partner or one withdrawn from the partnership; a withdrawing partner. (68 C.J.S. 404-405; see Arts. 1840,
1841.)
 All partners in any of these six classes are subject to liability for all partnership obligations. (see Arts. 1816, 1822-1824,
1826, 1835, 1844, 1841.)