CHAPTER -1

FUNDAMENTAL CONCEPTS AND BASIC LAW PROVISIONS GOVERNING PARTNERSHIP

partnership — is an organization where two or more persons bind themselves to contribute money,
property or industry into a common fund with the intention of dividing the profits among themselves.
(New Civil Code, Article 1767)
The contract of partnership may be verbal or written, express or implied. 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. (An. '1771)
A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated
(Art. 1784). The agreements between the owners are specified in a partnership contract. This contract
deals with such matters as the purpose of the partnership, capital contribution, division of profits and
losses, and distribution of resources of the business upon termination of its operations, among others.

Article 1772 paragraph l, estates that "every contract of partnership having a capital of P3,000.00 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" Article 1773 estates further that "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"
However failure to comply with the requirements of article 1772 paragraph I shall not affect the liability
of the partnership and the members thereof to third persons (Art
1772 par 2). In other words, even if the capital of the partnership is or more, as long as the contributed
capital is not an immovable property, the requirement of a public instrument as well as the registration
with the SEC in article 1772 is only directory and not a mandatory requirement for the validity of the
contract of partnerships In short, the registration required by law is only a matter of formality.

Essential Elements of Partnership

l. There must be two or more persons who have the legal capacity to contract.

There must be a valid contract.

There must be shared contribution of money, property or industry into a common fund.
There must be a lawful purpose to engage in business.
There must be an intention of dividing the profits among themselves.

l . Legal capacity. Unemancipated minors, insane or demented persons, and deaf mutes who do not
know how to write cannot give consent to a contract of
partnership (An. 1327). A corporation cannot be a partner in a partnership by reason of public policy. A
partnership, having a juridical personality, can be a partner in another partnership.
2. Valid contract. There is no contract unless the following requisites concur:
a. Consent of the contracting parties;
b. Object cenain which is the subject matter of the contract;

c. Cause of the obligation which is established. (Art. 1818)

 3. Contribution to a common fund. Unless there is a stipulation to the contrary, the partners shall
contribute equal shares to the capital of the partnership (Art. 1790). In the presence of a contract, the
panners may contribute:

Money
Property: real or personal; tangible or intangible
Industry: physical or intellectual

General partners can contribute money, property or industry. An industrial partner is considered by law
as a general partner; besides industry he can also contribute money or property. Limited partners can
contribute only money or property, never industry.
4. Lawful purpose. A partnership must have a lawful object or purpose, and must be established for the
common benefit or interest of the panners. When an unlawful partnership is dissolved by a judicial
decree, the profits shall be confiscated in favor of the State, without prejudice to the provisions of the
Penal
Code governing the confiscation of the instruments and effects of a crime. (Att
1770)

5. Division of profits and losses. The losses and profits shall be distributed in conformity with the
agreement. If only the share of each partner in the profits has been agreed upon, the share of each in
the losses shall be in the same proportion. In the absence of stipulation, the share of each partner in the
profits and losses shall be in proportion to what he may have contributed, but the industrial partner
shall not be liable for the losses. As for the profits, the industrial partner shall receive such share as may
be just and equitable under the circumstances. If besides his services he has contributed capital, he shall
also receive a share in the profits in proportion to his capital (Art. 1797). A stipulation which excludes
one or more partners from any share in the profits or losses is void (Art. 1799).
In determining whether a partnership exists, these rules shall apply (Art. 1769):
l. Except as provided by Article 1825, persons who are not partners as to each other are not partners as
to third persons;
2. Co-ownership or co-possession does not of itself establish a partnership, whether such co- owners or
co-possessors do not share any profits made by the use of the property;
3. The sharing of gross returns does not of itself establish a partnership, whether or not the persons
sharing them have a joint or common right or interest in any property which the returns are derived;
4. The receipt by a person of a share of the profits of a business is prima facie evidence that he is a
partner in the business, but no such inference shall be drawn if such profits were received in payment:

As a debt by installments or otherwise;

As wages of an employee or rent to a landlord;
As an annuity to a widow or representative of a deceased partner;
As interest on a loan, though the amount of payment vary with the profits of the business;
As the consideration for the sale of a goodwill of a business or other property by installments or
otherwise.

Characteristics of Partnership
l. Voluntary Association — individuals by their own free will agreed to join together to form a
partnership. (Art. 1767)
 Mutual Contribution — a partnership cannot be formed without contribution of money, property or
industry. (ArtA767)
Legal Entity the partnership has a 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. (Art 1768)
Having a juridical personality means:

the partnership can acquire or posses property of all kinds;

the Partnership can enter into contract or incur obligation;
the partnership can sue and be sued.

all assets contributed into the 4. Co-ownership of Contributed Assets partnership is ovvned by the
partnership by virtue of separate and distinct juridical personality. In other words, if one partner
contributes an asset to the

business, all partners jointly own it. (Art 1768)

Mutual Agency -- any partner can bind the other partner to a contract if he is acting within his express
or implied authority. (Art. 1818)
Limited Life a partnership has a limited life. It may be dissolved by the

admission, death, insolvency, incapacity, withdrawal of a panner or expiration of the term specified in
the partnership agreement. (Art. 1828-1830)
Unlimited Liability all partners (except limited partner/s) including industrial partners are personally
liable for all debts incurred by the partnership. If the partnership cannot settle its obligations, creditors'
claims will be satisfied from the personal assets of the partners without prejudice to the rights of the
separate creditors of the partners. (Art 1816)
Taxable Entity pannerships, except general professional partnerships, are. subject to corporate income
tax at the present rate of 30% General Professional Partnership is one which is formed for the purpose
of exercising the partners' common profession, such as CPA, Lawyers and others.

i. A partnership of all present property is that in which the partners contribute all the property which
actually belongs to them to a common fund, with the intention of dividing the same among themselves,
as well as the profits which they may acquire therewith. (Art. 1778)

ii. A universal partnership of profits comprises all that the partners may acquire by their industry or
work during the existence of the partnership. Movable or immovable property which each of the
partners may possess at the time of the celebration of the contract shall continue to pertain exclusively
to each, only the usufruct passing to the partnership. (Art. 1780)
2. Particular Partnership a particular partnership has for its object determinate things, their use or
fruits, or a specific undertaking, or the exercise of a profession or vocation. (Alt. 1783)
b. As to the liability of the partners, a partnership may be general or limited. (Art.
1776 par. 2)
l . General Partnership — is a partnership whereby all partners are general partners. Legally each
partner in a general partnership has unlimited liability — he is answerable to pannership •debts up to
the extent of his separate properties. (Arts. 1822-1824)
 2. Limited Partnership is a partnership having as members one ornore general partners and one
or more limited partners. A limited partner is

only answerable to partnership debts up to the extent of his capital

contribution in the partnership. (Art, 1843)

As to term of the contract, a partnership maybe at will or fixed term.

At Will there is no specific term or period of existence stipulated in the contract of partnership. (Art.
1785)
Fixed Term — there is a specific term or period of existence stipulated in the contract of partnership,
and expiration of the term shall dissolve the partnership.
As to manner of creation, a partnership maybe verbally agreed upon or by means of a written contract.
l . Verbally Agreed Upon — a partnership that is formed by simple verbal agreement of the partners.
2. Written Contract — partnership that is created by means of a written contract, either in a public
instrument or a private contract.
i. Public instrument — is a written contract notarized by a public attorney, ii. Private contract — is a
simple, not notarized, written contract.
As to the legality of its existence.

L De jure — a partnership which has complied with all the legal requirements for its establishment
2 De facto a partnership which has failed to comply with all the legal requirements for its establishment.
Kinds of Partners
a. As to liability
l, General partner — one whose liability extends to his separate property after all the assets of the
Partnership are exhausted. (Arts. 1843?Ä816)
2. Limited partner one whose liability extends only to his capital contribution to the partnership. (Art.
1843)

As to nature of contribution to the partnership

Capitalist partner — one who contributes money or property to the common fund of the partnership.
(Art. 1767)
Industrial partner — one who contributes industry to the partnership. (Arts.
1789, 1767)
Distinction between a capitalist and industrial partner.

 

CAPITALIST PARTNER
INDUSTRIAL PARTNER

1. Contributed capital

Money or property.

Industry.

2. Prohibition to engage in other business

Cannot engage in similar kind of business unless permitted by the other partner/s.

Cannot engage in any kind of business unless permitted by the other partner/s.

3. Profits

Profits shall be divided according to the agreement. In the absence of agreement, according to

contributed capital ratio,

Just and equitable share.

4. Losses

Losses shall be divided according to the agreement. In the absence of agreement, according to

contributed capital ratio.

Industrial partner does not share from losses. In case of liability to 3 rd persons, he/she has the right to
ask

for reimbursement from

the general capitalist

partner.

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As to nature of management work

1. Managing partner one who is appointed by the partners as manager of the partnership. (Art 1800)
He is also considered a general partner.

2. Liquidating partner one who is designated in closing up the affairs of

the partnership after dissolution, (Art. 1836) to knowledge by the public
L Ostensible partner -- one who is known to the public as a partner in the partnership. (Art, 1834)

2. Secret partner one whose connection with the partnership is not known to the public.
e. As to extent of participation in the business
L Universal partner -- one whose participation refers to the whole or entire

business.
Particular partner — one whose panicipation to the business is specified or limited only to a particular
part of it.
f As to connection or relation with the partnership
l. Real partner — one who is actually a partner in the partnership.
2. Nominal partner one who is not really a partner, but acts and represents himself to third persons as
partner in an existing partnership. Sometimes he is also called as partner by estoppel or quasi-partner.
He is liable for the debts of the company to those who in good faith believed him to be a partner. (Art.
1825)
3. Silent partner — one who has no participation in the business of the partnership though may be
known as a partner.
4. Dormant partner -- one who has no participation in the business of the partnership and not known as
a partner.
Obligations of a Partner
In general, a partner shall have the following obligations:

The obligation to contribute what he has promised to contribute. (Art. 1786)

The obligation to deliver the fpaits of what should have been delivered (Art. 1786)
The obligation to warrant the thing delivered. (Art. 1786)

An industrial partner cannot engage in business for himself, Nnless the partnership expressly permits
him to do so. (Arte 1789)
A capitalist partner cannot engage in similar kind of business the partnership is engaged, unless there is

to the contrary, Any capitalist partner violating this prohibition shall bring to the common funds any
profits accruing to him from his transactions, and shall be personally bear all the losses. (Art. 1808)

Rights of a Partner
In general, a partner shall have the following rights:

To participate in the management of the business of the partnership.

(Art. 1803)
To associate another person in his share in the partnership with the consent of all the other partners.
(Art. 1804)

To ask the book of the partnership be kept, subject to any agreement between the partners, at the
principal place of business of the partnership; and at any reasonable hour have access to and may
inspect and copy any of them. (Art. 1805)
To demand true and full information of all things affecting the partnership. (Art. 1806)
To demand formal accounting of the partnership affairs in cases provided by law. (Art. 1809)
To share in the profits and surplus assets of the partnership. (Art. 1812)
To ask for judicial dissolution. (Art. 1831)
To wind up the partnership affairs or to ask winding up by the court.

(Art. 1836)
Advantages and Disadvantages of Partnership
Advantages:

Greater amount of capital may be accumulated from partners compared to sole proprietorship.
Better management because of the concerted managerial skills, efforts

and experiences of the partners compared to sole proprietorship.

The partners share the business risks and decision making.
Limited liability on the part of limited partner.
Easier and less expensive to organize compared to corporation,
Disadvantages:
Conflicts and disagreements may easily arise.
Unlimited liability on the part of general partner,

Less effective than a corporation in raising large amount of capital.

General co-partnership' profit is subject to corporate tax of 30%
(General Professional Partnership is exempted to Corporate Income Tax, However, profit share of the
partners is subject to Individual Income Tax)
Double taxation -- share in profits of partners are subject to individual income

Articles of Partnership
A partnership may be constituted in any form, verbally or in writing, express or implied; except where
immovable property or real rights are contributed thereto, in which case a signed inventory of the said
property and attached in a public instrument shall be necessary.
The legal covenant between the partners is specified in the articles of partnership which is also known
as partnership contract. Articles of partnership is a negotiated agreement created by the partners. The
important provisions that may be included in the articles of partnership are:
a. The name of the partnership; h The business address of the partnership;
c. The purpose of the partnership;
d. The names, citizenship and residences of the partners;
e. The capital contribution of each partner; f The duties of the partners;
g. The division of profits and losses;
h. The date of formation of the partnership.
Other (or additional) provisions that may be included are:

The drawings to be allowed or salaries to be given to partners;

The accounting period to be used; the nature of accounting systems and records;

c. The designated independent external auditor;

d. Procedure for admitting new partner/s;

e. The provision for arbitration of disputes, dissolution, and liquidation;

Securities and Exchange Commission (SEC) Registration

Registration of a business name is a prerequisite for the issuance of permits and licenses to engage in
businesse Partnership with less than P3,000.00 capital only need to register with Department of Trade
and Industry (DTI). Partnership with more than P3,OOO.00 capital must register with SEC. To register a
partnership with the SEC, here are the basic steps to follow:
Verify and reserve the proposed partnership name in the SEC Verification Unit, located at the SEC
Building, EDSA, Greenhills, Mandaluyong City or make use of the verification and registration online,
through the After paying the reservation fee, you will get a Name Verification Slip.

Submit the following documents for verification:

a. Verification Slip for the Business Name
Registration data sheet for partnership duly accomplished in six copies
Duly notarized Articles of Partnership
Written undertaking to change business name if required
e. Tax Identification Number (TIN) of each partner f 'If one of the Partners is a foreigner, submission of
SEC for F-105 is required
g. Other documents that may be required

Pay the registration/filling and miscellaneous fees.

Forward/submit all documents and official receipt (O.R.) to the receiving SEC Officer for signature of the
SEC Commissioner / Authorized Representative Signatory.

Partnership Financial Statements

The financial statements of a partnership are quite similar with those of a sole proprietorship.
Partnership statement of income includes a section showing the division of net profit or net loss. The
statement of financial position shows the equity accounts of each partner. The statement of changes in
partners' equity and statement of cash flows are almost similar with sole proprietorship.