Chapter 2 - Nature and Formation of a Partnership

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1. Partnership By the contract of partnership two or more persons bind themselves to contribute money, property, or industry
(Article 1767) to a common fund, with the intention of dividing the profits among themselves.
2. (Characteristic) It is a legally binding relationship entered into by business partners, which gives each partner authority on behalf
Mutual agency of the business. With this agreement, each of the partners becomes an agent of the business and, therefore, has
the power to make business decisions, such as creating a binding agreement with a third party.

e.g. An example of mutual agency may include a retail partner who purchases goods from a supplier and,
therefore, requires the partnership to provide payment for the purchased items. The partnership is responsible for
the purchase because it falls within scope of normal business operations.
3. (Characteristic) It means that business owners are responsible for their companies' debts. The business owner can be held
Unlimited liability personally responsible for paying back business debts if the business were to run out of money.

e.g. This can include the accumulations from debt made by the business or if the company were to lose a lawsuit
and be forced to pay more damages than it can afford. Therefore, the business owners would be required to
cover the debt.
4. (Characteristic) A partnership may be dissolved at any time by action of the partners or by operation of law.
Limited life
e.g. It may be dissolved by the admission, death, insolvency, incapacity, withdrawal of a partner or expiration of
the term specified in the partnership agreement.
5. (Characteristic) A partner has the right to share in partnership profits.
Mutual
participation in
profits
6. (Characteristic) A legal personality separate and distinct from that of each of the partners.
Legal entity
7. (Characteristic) All assets contributed into the partnership are owned by the partnership by virtue of its separate and distinct
Co-Ownership of juridical personality. If one partner contributes an asset to the business, all partners jointly own it in a special
Contributed sense.
Assets
8. (Characteristic) Partnerships, except general professional partnerships, are subject to tax at the rate of 30%
Income tax
9. General are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the
professional income of which is derived from engaging in any trade or business.
partnerships
10. Advantages of Advantages Over Proprietorships
Partnership 1. Brings greater financial capability to the business.
2. Combines special skills, expertise and experience of the partners.
3. Offers relative freedom and flexibility of action in decision-making.

Advantages Over Corporations

1. Easier and less expensive to organize.
2. More personal and informal.
11. Disadvantages of 1. Easily dissolvable, and thus unstable compared to a corporation.
Partnership 2. Mutual agency and unlimited liability may create personal obligations to partners.
3. Less effective than a corporation in raising large amounts of capital.
12. (Kinds of a. Trading partnership - one whose main activity is the manufacture and sale or the purchase and sale of goods
Partnership) As to
activity: b. Non-trading partnership - one which is organized for the purpose of rendering services
13. (Kinds of a. Universal partnership
Partnership) As to 1. Universal partnership of all present property - is that in which the partners contribute all the property which
object: actually belongs to them to a common fund, with the intention of dividing the same among themselves, as well
as all the profits which they may acquire therewith. (1778)

All assets contributed to the partnership and subsequent acquisitions become common partnership assets.

2. Universal partnership of all profits - comprises all that the partners may acquire by their industry or work
during the existence of the partnership. (1780)

b. Particular partnership - one which has for its object determine things, their use or fruits or a specific
undertaking or the existence of a profession or vocation. (1783)

A partnership formed for a single transaction or enterprise as distinguished from one organized for carrying on
a general business. After the completion of the said venture or activity, the partnership will be dissolved (single
venture)
14. (Kinds of a. General co-partnership - all partners are liable to the extent of their separate properties.
Partnership) As to
liability of partners: b. Limited partnership - the limited partners are liable only to the extent of their personal contributions. The
limited partners as such shall not be bound by the obligations of the partnership.

In a limited partnership, the law states that there shall be at least one general partner.
15. (Kinds of a. Partnership at will - one for which no term is specified and is not formed for a particular undertaking or
Partnership) As to venture and which may be terminated any time by mutual agreement of the partners or the will of one alone.
duration:
b. Partnership with a fixed term - one in which the term or period for which the partnership is to exist is agreed
upon. It may also refer to a partnership formed for a particular undertaking and upon the expiration of that
term or completion of a particular undertaking the partnership is dissolved.
16. (Kinds of a. Ordinary partnership - one which actually exists among the partners and also as to third persons.
Partnership) As to
representation to b. Partnership by estoppel - one in which in reality is not a partnership but it is considered as one only in
others: relation to those who by their conduct or omission are precluded to deny or disprove the partnership's
existence.

This means, that though two people or entities are not partners, if one partner allows the other to advertise or
otherwise solicit business based on the representation that the two are partners, then in the eyes of the law,
they will be seen as partners to that third party.
17. (Kinds of a. De jure partnership - one which has complied with all the requirements for its establishment.
Partnership) As to
legality of b. De facto partnership - one which failed to comply with one or more of the legal requirements for its
existence: establishments.
18. (Kinds of a. Secret partnership - one wherein the existence of certain persons as partners is not made known to the
Partnership) As to public by any of the partners.
publicity:
b. Open partnership - one wherein the existence of certain persons as partners is made known to the public by
the members of the firm.
19. De facto means a state of affairs that is true in fact, but that is not officially sanctioned.
20. De jure means a state of affairs that is in accordance with law (i.e. that is officially sanctioned).
21. Pro rata [Latin, Proportionately.] A phrase that describes a division made according to a certain rate, percentage, or
share.
22. (Classes of partners) As to a. Capitalist partner - contributes money, property to the partnership.
contribution:
b. Industrial partner - contributes only his skills, knowledge, industry or personal service to
the partnership.

c. Capitalist-Industrial partner - contributes money, property and industry in the partnership.

23. (Classes of partners) As to liability: a. General partner - one whose liability extends to his separate properties.

b. Limited partner - one whose liability for partnership obligation is limited to his
contribution.
24. (Classes of partners) As to a. Managing partner - one who is appointed by the partners to take charge of the
management: partnership.

b. Silent partner - one who has no active part in the management of the partnership.
25. (Classes of partners) As to a. Liquidating partner - one who takes charge of the winding up of the partnership affairs
classifications: after dissolution.

b. Secret partner - one who is not known to third persons as a partner.

c. Dormant partner - who is secret and silent partner.

d. Nominal or Ostensible partner - one who is not really a partner, not being a party to the
partnership agreement, but is made liable as a partner for the protection of innocent third
persons; one who takes active part in the management of the firm and is know to the public
as a partner in the business.

A partner in name only by permitting the use of his name either for accommodation or for
consideration; subject to liability by the doctrine of estoppel.
26. Partnership Contract Is created by an oral or written agreement. A written agreement is necessary since it has to
be registered with the Office of the Securities and Exchange Commissions.
27. The Articles of Co-Partnership a written agreement among partners which governs the formation, operation, and dissolution
of the partnership.
28. Partnership Registration ...
Requirements
29. Plurality of Capital and Drawing In a partnership, there should be as many capital accounts and as many drawing accounts
Accounts as there are partners (one capital and drawing account is maintained for each partner).
30. Capital Account of Partnership ...
31. Drawing Account of Partnership ...
32. Face Value If the asset contributed is in the form of cash.
33. Agreed Value/Fair Market Value If the asset contributed is in the form of property or non-cash asset. In the absence of
agreement, use fair value.
34. Memorandum entry An entry in the journal that notes a significant event, but has no debit or credit amount.

Prepared when industry is contributed into the partnership.

35. (Partnership Formation A) Two or 1. Cash Contributions only (Capitalist Partners)
more persons form a partnership for 2. Cash and Non-Cash Contributions (Capitalist Partners)
the first time. All partners are new in 3. Contributions in the form of Cash, Non-cash Assets, and Industry (Capitalist-Industrial
the business. Partners)
36. Cash Contributions only (Capitalist
Partners)
37. Cash and Non-Cash Contributions
(Capitalist Partners)
38. Contributions in the form of Cash,
Non-cash Assets, and Industry
(Capitalist-Industrial Partners)
39. (Partnership Formation B) A sole
proprietor form and an individual
form a partnership
40. Replacement Cost
41. Formation B, Assumption 1 - The
partnership will use the books of
the sole proprietor.
42. Formation B, Assumption 2 - The
partnership will open a new set of
books.
43. (Partnership Formation C) - Two or
more sole proprietors form a
partnership.
44. Formation C, Assumption 1 - The
partnership will use of the books
of one of the sole proprietors.
45. Formation C, Assumption 2 - The
partnership will use a new set of
books.
...
...
...
one of the partners is already engage in business prior to the formation of the partnership. In
such a case, the partner may transfer his/her assets and liabilities (net assets) to the
partnership at agreed values or at fair market values if there are no agreed values.
The partnership may either:
1. use the books of the sole proprietor , or
2. open a new set of books (a common practice)
refers to the amount that an entity would have to pay to replace an asset at the present time,
according to its current worth.
1. Adjust the books of the sole proprietor to bring account balances to agreed values.
2. Record the investment of the other partner.
the entry required on the new books of the firm is the recording of the investment of the
partners at agreed values.
When all the prospective partners are already in business, they may decide to transfer his/her
assets and liabilities (net assets) to the partnership at agreed values or at fair market values if
there are no agreed values.
The partnership may either:
1. use the books of the sole proprietor , or
2. open a new set of books (a common practice)
1. Adjust the books of the Albano Trading to bring account balances to agreed values.
2. Record the investment of Antonio.
the entry required on the new books of the firm is the recording of the investment of the
partners at agreed values.