Week 4: Limited Partnership

Definition of a Limited Partnership (Art. 1843):

Formed by two or more persons under the provisions of the following article (referring to Art. 1844), having as members
one or more general partners and one or more limited partners.

Characteristics:
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.
 
Business reason and purpose of statutes authorizing limited partnerships.
1. Secure capital from others for one’s business and still retain control.
2. Share in profits of a business without risk of personal liability
3. Associate as partners with those having business skill.
 
Distinction between a general partner/partnership and limited partner/partnership
GENERAL PARTNER LIMITED PARTNER
Personally liable for partnership obligations Liability extends only to his capital contribution.
Have equal right in management of partnership No share in management of partnership.
May contribute money, property or industry May contribute money and property
Proper party to proceedings Not proper party to proceedings
Interest is assignable with assignee acquiring all
Interest cannot be assigned to make new partner
rights of the limited partner
His name may appear in the firm name Name not included in firm name
Prohibited from engaging in a business-like
No prohibition
partnership’s
His retirement, insolvency and/or death dissolves the
His retirement, insolvency and/or death dissolves the
partnership His retirement, insolvency and death
partnership
does not dissolve the partnership

Requirements for formation of a limited partnership (Article 1844):

1. The certificate or articles of the limited partnership which states the matters enumerated in the article, must be
signed and sworn to; and
2. Such certificate must be filed for record in the Office of the Securities and Exchange Commission.
The purpose of requiring the filing of the certificate is to give actual or constructive notice to potential creditors or
persons dealing with the partnership to acquaint them with its essential features, foremost among which is the limited
liability of the limited partners so that they may not be defrauded or misled.
 
NOTE: In Art. 1849, after a limited partnership has been formed, additional limited partners may be admitted, provided
there is proper amendment to the certificate which must be signed and sworn to by all of the partners, including the
new limited partners, and filed in the Securities and Exchange Commission pursuant to the requirements of Article 1865.
 
Limited Partner’s Contribution:
1. Medium: A limited partner or special partner is not allowed to contribute services. He can contribute only
money or property; otherwise, he shall be considered an industrial and general partner, in which case, he shall
not be exempted from personal liability.
2. Time: The contribution of each limited partner must be paid before the formation of the limited partnership (see
Art. 1844[f].), although with respect to the additional contributions they may be paid after the limited
partnership has been formed.
 
Limitations of a Limited Partner:
1. Limited partner has no control in business.  A limited partner is excluded from any active voice in the control of
the affairs of the firm.
2. Limited partner cannot perform acts of administration.  Limited partners may not perform any act of
administration with respect to the interests of the partnership, not even in the capacity of agents of the
managing partners
 
Consequences: A limited partner is liable as a general partner for the firm’s obligations if he takes part or interfere in the
management of the firm’s business.
  
Rights, powers, and liabilities of a general partner in a limited partnership (Art. 1850)
1. Right of control/unlimited personal liability.
A general partner in a limited partnership is vested with the entire control of the firm’s business and has all the rights
and powers and is subject to all the liabilities and restrictions of a partner in a partnership without limited partners,
i.e., in a general partnership.
It is in consideration of his unlimited personal liability for the obligation of the partnership that he is granted the
general authority to manage the firm’s business.

2. Acts of administration/acts of strict dominion.

As a rule, he may bind the partnership by any act of administration, but he has no power to do the specific acts
enumerated in Article 1850 (even if agreed to by all the general partners) without the written consent or at least
ratification of all the limited partners
The said acts are acts of strict dominion or ownership and are, therefore, beyond the scope of the authority of a
general partner. (Art. 1818.)
a. In No. (1), the act is in violation of the agreement of the partners as contained in the certificate;
b. In Nos. (2) to (4), the acts are prejudicial to the interests of the limited partners;
c. In Nos. (5) and (6), the rule is based on the highly fiduciary nature of the partnership relation; and
d. In No. (7), any of the events mentioned results in the dissolution of the partnership. (see Art. 1860.)
The general partner who violates the requirement imposed by Article 1850 is liable for damages to the limited
partners

3. Other limitations:
a. The general partners, of course, have no power to bind the limited partners beyond the latter’s
investment.
b.  Neither do they have the power to act for the firm beyond the purpose and scope of the partnership,
and
c. They have no authority to change the nature of the business without the consent of the limited
partners.
Rights, in general, of a limited partner. (Art. 1851)
 The limited partner, in order to protect his interest in the firm, has the same right to compel the partners to account as
a general partner has.
 
Specific rights of the limited partner in the partnership.
a. To require that the partnership books be kept at the principal place of business of the partnership (see Art.
1805.);
b. To inspect and copy at a reasonable hour partnership books or any of them (Ibid.);
c. To demand true and full information of all things affecting the partnership (see Art. 1806.);
d. To demand a formal account of partnership affairs whenever circumstances render it just and reasonable (see
Art. 1809.);
e. To ask for dissolution and winding up by decree of court (see Arts. 1831, 1857, par. 4.);
f. To receive a share of the profits or other compensation by way of income (Art. 1856.); and
g. To receive the return of his contribution provided the partnership assets are in excess of all its liabilities. (Art.
1857.)
 
One person, both a general partner and a limited partner
 A person may be a general and a limited partner at the same time in the same partnership provided that this
fact is stated in the certificate signed, sworn to, and recorded in the Office of the Securities and Exchange
Commission. (see Art. 1845.)
 Generally, his rights and powers are those of a general partner. Hence, he is liable with his separate property to
third persons. (Art. 1816.)
 However, with respect to his contribution as a limited partner, he would have the right of a limited partner
insofar as the other partners are concerned. (Arts. 1855-1858.)
 This means that while he is not relieved from personal liability to third persons for partnership debts, he is
entitled to recover from the general partners the amount he has paid to such third persons; and in settling
accounts after dissolution, he shall have priority over general partners in the return of their respective
contributions. (Art. 1863.)
 
Loan and other business transactions with limited partnership.
1. Allowable transactions. — Under Art. 1854, a limited partner (who is not also a general partner), being merely a
contributor to the partnership (see Art. 1866.) without the right to participate in its management, is not prohibited
from:
a. Granting loans to the partnership;
b. Transacting other business with it; and
 c. Receiving a pro rata share of the partnership assets with general creditors if he is not also a general
partner.
2. Prohibited transactions. — The limited partner, in respect of any such claim, is, however, prohibited from:
a. Receiving or holding as collateral security any partnership property; or
b. Receiving any payment, conveyance, or release from liability if it will prejudice the right of third persons.
3. Preferential rights of third persons. — In transacting business with the partnership as a non-member, the limited
partner is considered as a non-partner creditor. However, third persons always enjoy preferential rights insofar as
partnership assets are concerned (see Art. 1827.)
 
Compensation of limited partner.
The right of the limited partner to receive his share of the profits or compensation by way of income stipulated for in the
certificate is subject to the condition that partnership assets will still be in excess of partnership liabilities after such
payment. In other words, third-party creditors have priority over the limited partner’s rights.
 
Requisites for return of contribution of limited partner. (Art. 1857)
 
First Paragraph:
The following conditions must exist before the contribution of a limited partner can be returned to him:
(1) All liabilities of the partnership have been paid or if they have not yet been paid, the assets of the partnership are
sufficient to pay such liabilities. As in Article 1856, liabilities to limited partners on account of their contributions and to
general partnership are not considered;
(2) The consent of all the members (general and limited partners) has been obtained except when the return may be
rightfully demanded; and
(3) The certificate is cancelled or so amended as to set forth the withdrawal or reduction of the contribution.
 
Second Paragraph
 The limited partner may demand, as a matter of right, the return of his contribution provided the conditions have been
complied with —
(1) On the dissolution of the partnership; or
(2) Upon the arrival of the date specified in the certificate for the return; or
(3) After the expiration of the 6 months’ notice in writing given by him to the other partners if no time is fixed in the
certificate for the return of the contribution or for the dissolution of the partnership.
 
Third Paragraph:
Even if a limited partner has contributed property, he has only the right to demand and receive cash for his contribution.
The exceptions are:
(1) When there is stipulation to the contrary in the certificate; or
(2) Where all the partners (general and limited) consent to the return other than in the form of cash.
 
Fourth Paragraph:
Additional grounds for the dissolution of the partnership upon petition of a limited partner:
(1) When his demand for the return of his contribution is denied although he has a right to such return; or
(2) When his contribution is not paid although he is entitled to its return because the other liabilities of the partnership
have not been paid or the partnership property is insufficient for their payment. In other words, were it not for this first
condition in the first paragraph of Article 1857 which is not present, he would have been entitled to the return of his
contribution because of the presence of the second and third conditions.
 
The limited partner must first ask the other partners to have the partnership dissolved; if they refuse, then he can seek
the dissolution of the partnership by judicial decree.
 
Liabilities of a limited partner. (Art. 1858)
1. To the partnership.
a. As limited partners are not principals in the transaction of a partnership, their liability, as a rule, is to the
partnership (Art. 1858.), not to the creditors of the partnership. (see Art. 1866.)
2. To partnership creditors and other partners.
a. A limited partner is liable for partnership obligations when he contributes services instead of only
money or property to the partnership (Art. 1845.);
b. when he allows his surname to appear in the firm name (Art. 1846.);
c. when he fails to have a false statement in the certificate corrected, knowing it to be false (Art. 1847);
d. when he takes part in the control of the business (Art. 1848.);
e. when he receives partnership property as collateral security, payment, conveyance, or release in fraud
of partnership creditors (Art. 1854); and
 f. when there is failure to substantially comply with the legal requirements governing the formation of
limited partnerships. (Art. 1844, par. 2.)

3. To separate creditors.
a. As in a general partnership, the creditor of a limited partner may, in addition to other remedies allowed
under existing laws, apply to the proper court for a “charging order” subjecting the interest in the
partnership of the debtor partner for the payment of his obligation. (Art. 1862.)
 

Rules on assignment of limited partner’s assignment of interest:

1. A limited partner may assign his interest in the partnership to another person.
However:
a. The assignee is only entitled to receive the share of the profits or other compensation by way of income or the
return of the contribution to which the assignor would otherwise be entitled.
b. His rights are similar to those of a person to whom a partner conveyed his whole interest in the partnership.
 
2. The substitution of a person as a limited partner in place of an existing limited partner (Art. 1859.), or the withdrawal,
death, insolvency, insanity, or civil interdiction of a limited partner (Art. 1860.), or the addition of new limited partners
(Art. 1849.) does not necessarily dissolve the partnership.
 
3. No limited partner can withdraw his contribution until all liabilities to creditors are paid. (see Art. 1857.)
Substituted limited partner - is a person admitted to all the rights of a limited partner who has died or has assigned his
interest in a partnership.
Requisites:
1. All the members must consent to the assignee becoming a substituted limited partner or the limited partner,
being empowered by the certificate, must give the assignee the right to become a limited partner;
2. The certificate must be amended in accordance with Article 1865; and
3. The certificate as amended must be registered in the Securities and Exchange Commission.
Art. 1860. The retirement or withdrawal, death, insolvency, insanity, or civil interdiction of a general partner dissolves
the partnership (see Art. 1830.), while any of such causes affecting a limited partner (see Art. 1861.) does not result in its
dissolution unless, of course, there is only one limited partner. (see Art. 1843.)
 
Dissolution of a limited partnership
A limited partnership is dissolved in much the same way as an ordinary partnership. It may be dissolved for:
1. misconduct of a general partner,
2. fraud practiced on the limited partner by the general partner, or
3. Retirement, death, etc. of a general partner (Art. 1860.), or
4. when all the limited partners ceased to be such (Art. 1864, par. 1.), or
5. on the expiration of the term for which it was to exist (Art. 1844[1, e].), or
6. By mutual consent of the partners before the expiration of the firm’s original term.
 
Notice of Dissolution:
1. When the firm is dissolved by the expiration of the term fixed in the certificate, notice of the dissolution
need not be given since the papers fi led and recorded in the Securities and Exchange Commission are notice to all
the world of the term of the partnership.
2. Where, however, the dissolution is by the express will of the partners, the certificate shall be cancelled,
and a dissolution of the partnership is not effected until there has been compliance with the requirement in this
respect.
 
Winding Up:
The consequences of the dissolution of a general partnership apply to limited partnership. Therefore, the partnership
continues in operation while winding up.
 
Priority in the distribution of partnership assets. (Art. 1863)
The partnership liabilities shall be settled in the following order:
1. Those due to creditors, including limited partners, except those on account of their contributions, in the
order of priority as provided by law (Arts. 1854, 1856, 1857[1].);
2. Those due to limited partners in respect to their share of the profits and other compensation by way of
income on their contributions;
3. Those due to limited partners for the return of the capital contributed;
4. Those due to general partners other than for capital and profits;
5. Those due to general partners in respect to profits; and
 6. Those due to general partners for the return of the capital contributed. Partnership creditors are
entitled to first distribution, followed by limited partners who take priority over general partners.
Note that in a general partnership, the claims of the general partners in respect of capital enjoy preference over those in
respect of profits. (see Art. 1839[1, c, d].)
 

When certificate shall be cancelled or amended.

 
1. The certificate shall be cancelled, not merely amended:
a. When the partnership is dissolved other than by reason of the expiration of the term of the partnership;
or
b. When all the limited partners cease to be such. A limited partnership cannot exist as such if there are no
more limited partners. (Art. 1843.)
2. Amendment of the certificate is required for the following:
a. There is a change in the name of the partnership or in the amount or character of the contribution of
any limited partner;
b. A person is substituted as a limited partner;
c. An additional limited partner is admitted;
d. A person is admitted as a general partner;
e. A general partner retires, dies, becomes insolvent or insane, or is sentenced to civil interdiction and the
business is continued under article 1860;
f. There is change in the character of the business of the partnership;
g. There is a false or erroneous statement in the certificate;
h. There is a change in the time as stated in the certificate for the dissolution of the partnership or for the
return of a contribution;
i. A time is fixed for the dissolution of the partnership, or the return of a contribution, no time having been
specified in the certificate; or
j. The members desire to make a change in any other statement in the certificate in order that it shall
accurately represent the agreement among them.
 
Requirements for amendment and cancellation of certificate
1. The following are the requirements to amend a certificate:
a. The amendment must be in writing;
b. It must be signed and sworn to by all the members including the new members, and the assigning
limited partner in case of substitution or addition of a limited or general partner; and
c. The certificate, as amended, must be fi led for record in the Securities and Exchange Commission.
2. For cancellation:
a. Cancellation of a certificate must be in writing
b. Signed by all the members and
c. Filed with the Office of the Securities and Exchange Commission.
d. If the cancellation is ordered by the court, certified copy of such order shall be filed with the
Commission.
 
NOTE: The approval by the Commission of the amendment or cancellation is not required.