Nature and Formation

of a Partnership
PART 1 of 2
Partnership and Corporation Accounting 1
Learning Objectives
1. Define and discuss the nature of a
partnership, its characteristics,
advantages and disadvantages
2. Identify the different kinds of partnership
and the classes of partners
3. Discuss the requirements in the formation
of partnership
4. Discuss the accounting for partners’ initial
investments in a partnership
Definition
Civil Code of the Philippines:
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)
Essential Features
1. There must be a valid contract;
2. The parties must have legal capacity;
3. There must be a mutual contribution of money,
property, or industry to a common fund;
4. The object must be lawful;
5. The primary purpose must be to obtain profits
and to divide the same among the parties;
6. The partnership has a juridical personality
separate from individual partners [Article 1768].
Parties
General Rule: Any person capacitated to
contract may enter into a contract of partnership.
The following persons CANNOT enter into a
contract of partnership:
1. Those suffering from civil interdiction;
2. Minors;
3. Insane or demented persons;
4. Deaf-mutes who do not know how to write;
5. Incompetents who are under guardianship.
Parties (Cont’d)
Exceptions : The capacity of the following
persons to enter into a contract of partnership,
though capacitated to contract generally, are
limited:
1. Those who are prohibited from giving each
other any donation or advantage cannot
enter into a universal partnership [Article
1782];
2. A corporation cannot enter into a partnership
in the absence of express authorization by
statute or charter.
Parties (Cont’d)
• Although a corporation cannot enter into a
partnership contract, it may, however, engage
in a joint venture with others [Aurbach v.
Sanitary Wares Manufacturing Corp, G.R. No.
75875 (1989)]
• On the other hand, there is no prohibition
against a partnership being a partner in
another partnership [De Leon (2010)]
Characteristics of a
Partnership
1. Mutual agency
2. Unlimited liability
3. Limited life
4. Mutual participation in profits
5. Legal entity
6. Co-ownership of contributed assets
7. Income tax
Advantages of a
Partnership
1. It is easy and inexpensive to organize as it is
formed by a simple contract between two or more
persons
2. The unlimited liability of the partners makes it
reliable from the point of view of creditors
3. The combined personal credit of the partners
offers better opportunity for obtaining additional
capital than does a sole proprietorship
4. The participation in the business by more than
one person makes it possible for closer
supervision of all the partnership activities
Advantages of a
Partnership (cont’d)
5. The direct gain to the partners is an incentive to
give close attention to the business
6. The personal element in the characters of the
partners is retained
Disadvantages of a
Partnership
1. The personal liability of a partner for firm debts
deters many from investing capital in a partnership
2. A partner may be subject to personal liability for the
wrongful acts of omissions of his/her associates
3. It is less stable because it can be easily be
dissolved
4. There is divided authority among the partners
5. There is constant likelihood of dissension and
disagreement when each partners has the same
authority in the management of the firm
Kinds of Partnership
As to Activity
1. Trading (merchandising and/or manufacturing)
2. Non-Trading (rendering of services)

As to Object
UNIVERSAL PARTNERSHIP
• All Present Properties (all properties contributed,
profits it may acquire therewith, and subsequent acquisition)
• All Profits (original asset contribution does not become
common partnership assets, only the rights to use, and profits
it generates)
PARTICULAR PARTNERSHIP
• determinate things, specific undertaking, exercise of
profession
Kinds of Partnership
As to Liability of the Partners
1. General (liable prorate sometimes solidarily with their
separate property for partnership liable)
2. Limited (there should be at least one general partner,
limited partners are not bound by the obligation of the
partnership beyond their capital contribution)

As to Duration
1. At Will
2. Fixed Term

As to Representation to Others
1. Ordinary (exists among partners and to third parties)
2. By Estoppel (not a real partnership, but precluded by the
law to deny or disprove its existence)
Kinds of Partnership
As to Legality of Existence
1. De Jure (complied with all the requirements for
establishment)
2. De Facto (failed to comply with one or more legal
requirements)

As to Publicity
1. Secret (existence of certain persons as partners are not
made known to the public)
2. Open (the identity of all partners are publicly known)
Kinds of Partnership

As to Activity

1. Trading Partnership
− those which have capital stock divided into shares
and are authorized to distribute to the holders of
such shares, dividends, or allotments of the surplus
profits on the basis of the shares held
2. Nonstock Corporation (members – Board of
Trustees)
− charitable purposes, no part of its income is
distributed to its members, trustees, or officers
Classes of Partners
As to Contribution
1. Capitalist (money or property)
2. Industrial (industry, labor, skills, talent or service)
3. Capitalist-Industrial (cash or property PLUS industry)

As to Liability
1. General (liability to third person extends to his separate
or private property)
2. Limited (limited only to his capital contribution)

As to Management
1. Managing
2. Silent
Classes of Partners
Other Classification

1. Liquidating (in-charge of the winding up of partnership

affairs upon dissolution)
2. Nominal (not really a partner, but made liable as a partner
for protection of innocent third persons)
3. Ostensible (active part in the management, identity known
to the public)
4. Secret (take an active part in management, identity is
concealed or unknown to the public)
5. Dormant (does not take an active part in management,
identity is concealed or unknown to the public, silent and
secret)
Partnership Contract
• A partnership is created by oral or a written
agreement. Since partnership are required to
be registered with the Office of the Securities
and Exchange Commissions, it is necessary
that the agreement be in writing.
• The written agreement between or among the
partners governing the formation, operation
and dissolution of the partnership is referred
to as the Articles of Partnership.
Articles of Partnership
1. The name of partnership;
2. The names and addresses of the partners,
classes of partners, stating whether the partner
is a general or a limited partner;
3. The effective date of the contract;
4. The purpose or purposes and principal office of
the business;
5. The capital of the partnership stating the
contributions of individual partners, their
description and agreed values;
Articles of Partnership
6. The rights and duties of partner;
7. The manner of dividing net income or loss
among the partners, including salary, allowance
and interest on capital;
8. The conditions under which the partners may
withdraw money or other assets for personal
use;
9. The manner of keeping the books of accounts;
10. The causes of dissolution; and
11. The provision for arbitration in settling disputes.
Organizing a Partnership
Place of Requirements for
Registration Registration Certificates Issued
Securities and • Articles of • SEC Certificate
Exchange Partnership
Commission • Filed SEC
Registration Form
Department of • Articles of • Certificate of
Trade and Partnership Registration of
Industry • SEC Certificate Business Name
(renewable every five
years)
City or Municipal • Certificate of • Mayor’s Permit and
Mayors’ Office Registration of License to Operate
Business Name (renewable annually)
Organizing a Partnership
Place of Requirements for
Registration Registration Certificates Issued
Bureau of • SEC Registration • BIR Registration
Internal Revenue • Articles of Form No.
Partnership • Partnerships’ Tax
Identification Number
• Registration of
Books, Invoices and
Official Receipt
Social Security • Filed SSS • SSS Certificate of
System Application Form Membership
• List of Employees • SSS Employer ID
No.
Organizing a Partnership
Place of Requirements for
Registration Registration Certificates Issued
Philippine Health • SEC Registration • PhilHealth Employer
Insurance • Employer Data Record No. (PEN) and
Corporation or ERI Form Certificate of
• Business Permit or Registration
License • PhilHealth Identification
No. (PIN) and Member
Data Record (MDR) for
concerned employees
PAG-IBIG Fund • SEC Registration • PAG-IBIG Fund
• Articles of Partnership Certificate of
Membership
• PAG-IBIG Fund
Employer ID No.
Accounting for
Partnership
Plurality of Capital and Drawing Accounts
Accounting for partnership differs from other
forms of business organization with regards
to capital accounts. In partnership, there
should be as many capital accounts and as
many drawing accounts as there are partners
(i.e. one capital account and one drawing
account is maintained for each partner).
Accounting for
Partnership
CAPITAL ACCOUNT
1. Permanent withdrawal 1. Original investment by
of capital (decrease in a partner
capital) 2. Additional investment
2. Share in the by a partner
partnership loss from 3. Share in the
operations partnership profits from
3. Debit balance of the operations to be added
drawing account to capital
closed to the capital
Accounting for
Partnership
DRAWING ACCOUNT
1. Personal withdrawal by 1. Share in the
a partner partnership profits from
2. Share in the operations (this may be
partnership loss from credited directly to the
operations (this may be partner’s capital
debited directly to the account)
partner’s capital
account)
Partnership Formation
If the asset contributed is in a form of:
Cash
 Record at face value
Property or Noncash Assets
 Agreed value, in the absence of
agreement – fair value
Industry
 Memorandum entry only
Partnership Formation
Formation A: Two or More Persons Form a
Partnership for the First Time | All Partners are New in
the Business
1. Cash contribution only (capitalist partners)

Abad and Alba agreed to form a partnership by

contributing P600,000 cash each:

Cash 1,200,000
Abad, Capital 600,000
Alba, Capital 600,000
Partnership Formation
2. Cash and noncash contribution (capitalist
partners)
Abdon and Anton made the following contribution to the partnership:
Abdon Anton o
Cash 600,000 200,000
Inventories 300,000
Equipment 500,000

Cash 800,000
Inventories 300,000
Equipment 500,000
Abdon, Capital 900,000
Anton, Capital 700,000
Partnership Formation
3. Cash, noncash contribution, and industry
(capitalist and industrial partners)
Alma, Anna, and Adela formed a partnership. Alma contributed
P600,000 cash, Anna contributed P300,000 cash and equipment
valued P450,000; Adela is an industrial partner to contribute her special
skills and talents to the partnership. Profit or loss is to be shared
equally among partners.
Cash 900,000
Equipment 450,000
Alma, Capital 600,000
Anna, Capital 750,000
Adela is admitted into the partnership as an industrial partner to share one-
third in the partnership profit. (memorandum entry)
End of Presentation
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