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. (Art 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 1 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 P3,000.00 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 partnership. In short, the registration required by law is only a matter of formality.
Essential Elements or Partnership
1. There must be two or more persons who have the legal capacity to contract.
2. There must be a valid contract.
3. There must be shared contribution of money, property or industry a common fund.
4. There must be a lawful purpose to engage in business.
5. There must be an intention of dividing the profits among themselves.
1. 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 (Art. 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 certain 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 partners may contribute:
a. Money
b. Property: real or personal, tangible or intangible
c. 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 partners. 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. (Art 1770).

Partnership is one which formed for the purpose of exercising the partners’ common
profession, such as CPA, Lawyers and others.
5. Division of profits and losses. The losses and profits shall be distributed in conformity
with the agreement. If only the share or 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):
1. 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 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:
a. As a debt by installments or otherwise;
b. As wages of an employee or rent to a landlord;
c. As an annuity to a widow or representative of a deceased partner;
d. As interest on a loan, though the amount of payment varies with the profits
of the business;
e. As the consideration for the sale of a goodwill of a business or other
property by installments or otherwise.
Characteristics of Partnership
1. Voluntary Association — individuals by their own free will agreed to join together to
form a partnership. (Art. 1767)
2. Mutuál Contribution — a partnership cannot be formed without contribution of
money, property or industry. (Art. 1767)
3. Legal Entity — 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. (Art. 1768)
Having a juridical personality means:
a. The partnership can acquire or possess property of all kinds;
b. The partnership can enter into contract or incur obligation;
c. The partnership can sue and be sued.
4. Co-ownership of Contributed Assets – all assets contributed into the partnership is
owned 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)
5. Mutual Agency – any partner can bind the other partner to a contract if he is acting
within his express or implied authority. (Art 1818)
6. Limited Life – a partnership has a limited life. It may be dissolved by the admission,
death, insolvency, incapacity, withdrawal of a partner or expiration of the term
specified in the partnership agreement. (Art. 1828-1830)
7. 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)
8. Taxable Entity – partnerships, except general professional partnerships, are subject to
corporate income tax at the present rate of 30%. General Professional Partnership is
one which formed for the purpose of exercising the partners’ common profession, such
as CPA, Lawyers and others.
Classification of Partnership

a. As to its object, a partnership is either Universal or Particular (Art. 1776 par. 1)

1. Universal Partnership – a universal partnership may refer to all the present
property or to all the profits. (Art. 1777)
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 diving 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 determine
things, their use or fruits, or a specific undertaking, or the exercise of a
profession or vacation. (Art. 1783)
b. As to the liability of the partners, a partnership may be general or limited. (Art. 1776
par. 2)
1. 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 partnership debts up to the extent of his separate properties.
(Arts. 1822-1824)
2. Limited Partnership – is a partnership having as members one or more 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)
 c. As to term of the contract, a partnership maybe at will or fixed term.
1. At Will – there is no specific term or period of existence stipulated in the
contract of partnership. (Art. 1785)
2. 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.
d. As to manner of creation, a partnership maybe verbally agreed upon or by means of a
written contract.
1. 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 public
attorney.
ii. Private contract – is a simple, not notarized, written contract.
e. As to the legality of its existence
1. 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
1. General partner – one whose liability extends to his separate
property after all the assets of the Partnership are exhausted. (Arts.
1843, 1816)
2. Limited partner – one whose liability extends only to his capital
contribution to the partnership. (Art. 1843)
b. As to nature of contribution to the partnership
1. Capitalist partner – one who contributes money or property to the
common fund of the partnership. (Art. 1767)
2. 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 Money or property Industry

capital

2. Prohibition Cannot engage in similar kind Cannot engage in any kind of

to engage in of business unless permitted business unless permitted by
other by the other partner/s the other partner/s
business

3. Profits Profits shall be divided Just and equitable share

according to the agreement. In
the absence of agreement,
according to contributed
capital ratio

4. Losses Losses shall be divided Industrial partner does not

according to the agreement. In share from losses. In case of
the absence of agreement, liability to 3rd persons, he/she
according to contributed has the right to ask for
capital ratio reimbursement from the
general capitalist partner

c. 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)
d. As to knowledge by the public
1. 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
1. Universal partner – one whose participation refers to the whole or
entire business.
2. Particular partner – one whose participation to the business is
specified or limited only to particular of it.
f. As to connection or relation with the partnership
1. 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 estopped 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 is not known as a partner.

Obligations of a Partner

In general, a partner shall have the following obligations:

a. The obligation to contribute what he has promised to contribute. (Art. 1786)
b. The obligation to deliver the fruits of what should have been delivered. (Art. 1786)
c. The obligation to warrant the thing delivered. (Art. 1786)
 d. An industrial partner cannot engage in business for himself, unless the partnership
expressly permits him to do so. (Art. 1789)

e. A capitalist partner cannot engage in similar kind of business the partnership is

engaged, unless there is stipulation 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:

a. To participate in the management of the business of the partnership. (Art. 1803)
b. To associate another person in his share in the partnership with the consent of all the
other partners. (Art. 1804)
c. 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 to any reasonable
hour have access to and may inspect and copy any of them. (Art 1805)
d. To demand true and full information of all things affecting the partnership. (Art. 1806)
e. To demand formal accounting of the partnership affairs in cases provided by law. (Art.
1809)
f. To share in the profits and surplus assets of the partnership. (Art. 1812)
g. To ask for judicial dissolution. (Art. 1831)
h. To wind up the partnership affairs or to ask winding up by the court. (Art. 1836)

Advantages and Disadvantages of Partnership

Advantages:
1. Greater amount of capital may be accumulated from partners compared to sole
proprietorship.
2. Better management because of the concerted managerial skills, efforts and experiences
of the partners compared to sole proprietorship.
3. The partners share the business risks and decision making.
4. Limited liability on the part of limited partner.
5. Easier and less expensive to organize compared to corporation
 Disadvantages:
1. Conflicts and disagreements may easily arise.
2. Unlimited liability on the part of general partner.
3. Less effective than a corporation in raising large amount of capital.
4. 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)
5. Double taxation – share in profits of partners are subject to individual income tax.

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 articled of partnership are:
a. The name of the partnership.
b. 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:

a. The drawings to be allowed or salaries to be given to partners;
b. 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.
An example of simple articles of partnership follows:

ARTICLES OF PARTNERSHIP

G – 3000 COMPANY

KNOW ALL MEN BY THESE PRESENTS:

That we, undersigned, of legal age, citizens and residents of the Philippines, have this day
voluntarily bind ourselves together for the purpose of forming a general partnership, effective as
of this date, under the terms and conditions herein after set forth, and subject to the requirements
of existing laws of the Republic of the Philippines.

AND WE HEREBY CERTIFY:

That name of the partnership shall be “G 3000 COMPANY” and shall operate and transact
business under the said firm.

II

That the principal business address of the partnership shall be located at 12 Fairview,
Quezon City, Philippines.

III

That the names and postal address of the partners are as follows:
NAMED NATIONALITY ADDRESS
Gerald A. Bautista Filipino 12 Malibu St., Fairview, Quezon City
Green Paul A. Bautista Filipino 17 Eastwood, Libis, Quezon City
Gerardo A. Bautista II Filipino Blk. 15, Lot 14, China St., Deparo, Caloocan City

IV

That the capital of the partnership is PHP: SEVEN MILLION PESOS ONLY
(P7,000,000.00) which has been contributed as follows:
 Gerald Alcantara Bautista P 3,000,000.00
Gerald Paul Alcantara Bautista P 2,000,000.00
Gerardo Alcantara Bautista P 2,000,000.00

That the purpose shall be engaged in Car Rental business.

VI

That Gerald A. Bautista shall serve as the General Manager of the partnership, Green Paul
A. Bautista shall be the treasurer and Mr. Gerardo A. Bautista II shall be the accountant. All the
partners shall be jointly and severally signatories of bank accounts. In cas of liquidation, MR. Gree
Paul A. Bautista and Mr. Gerardo A. Bautista II shall be the liquidating partners to wind up the
affairs of the partnership.

VII

That the profits and losses shall be divided according to capital ratio.

VIII

That Abuan, Bentillo & Company shall be the external auditor of the partnership. In case
of litigation and disputes; Aquino, Bautista & Associates shall be the lawyer and legal adviser of
the partnership.

IN WITNESS WHEREOF, we have hereunto set our hands, this 1st day of September,
2010, at Fairview, Quezon City.
__________________ __________________
Gerardo A. Bautista II Green Paul A. Bautista
_______________
Gerald A. Bautista
Signed in the presence of:
____________________ ____________________
Witness Witness
Acknowledgement
NOTARY PUBLIC
Securities and Exchange Commission (SEC) Registration
Registration of a business name is a prerequisite for the issuance of permits and licenses to engage
in business. Partnership with less than P3,000.00 capital only need to register with Department of
Trade and Industry (DTI). Partnership with more than P3,000.00 capital must register with SEC.
To register a partnership with the SEC, here are the basic steps to follow.
1. 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 SEC-iRegister. After paying the reservation fee, you
will get a Name Verification Slip.
2. Submit the following documents for verification:
a. Verification Slip for the Business Name
b. Registration data sheet for partnership duly accomplished in six copies
c. Duly notarized Articles of Partnership
d. Written undertaking to change business name if required
e. Tax Identification Number (TIM) 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
3. Pay the registration/filling and miscellaneous fees.
4. 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.