Part I – Partnership

Chapter 1 – General Provisions

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.

• A partnership falls between two extremes of organizational form – the single

proprietorship and the corporation.

Partnership for the exercise of a profession

• Profession – a calling in the preparation for or practice of which academic learning is

required and which has for its prime purpose the rendering of public service. It may also
refer to the whole body of persons engaged in a calling.
• The second paragraph relates to a general professional partnership, or a partnership for
the exercise of a profession.
• The practice of a profession is not a business or an enterprise for profit, hence the law
does not allow individuals to practice a profession as a corporate entity, as personal
qualifications for such practice cannot be possessed by a corporation.

Characteristic elements of Partnership

• Consensual – it is perfected by mere consent, upon the express or implied agreement of

two or more persons.
• Nominate – it has a special name or designation in our law.
• Bilateral – it is entered into by two or more persons and the rights and obligations arising
therefrom are always reciprocal.
• Onerous – each of the parties aspires to procure himself a benefit through the giving of
something.
• Commutative – the undertaking of each of the partners is equivalent of that of the others.
• Principal – it does not depend for its existence or validity upon some other contract.
• Preparatory – it is entered into as a means to an end; to engage in business for the
realization of profits with the view of dividing them among the contracting parties.
• A partnership contract, in essence, is a contract of agency.

Partnership relation fiduciary in nature

• Partnership is a form of voluntary association entered into by the associates.

• Partnership is a personal relation in which the element of delectus personae exists.
o Delectus personae – “choice of the person or choice of the persons”
• Right to choose co-partners – Unless otherwise provided in the partnership agreement,
no one can become a member of the partnership association without the consent of all
the other associates.
• Power to dissolve partnership – Among partners, mutual agency arises and the doctrine
of delectus personae allows them to have power, although not necessarily the right, to
dissolve the partnership. The attendance of bad faith cannot prevent the dissolution of
the partnership, but it can result in a liability of damages.

Essential features of partnership

1. There must be a valid contract.

2. The parties must have the legal capacity to enter into the contract.
3. There must be a mutual contribution of money, property, or industry to a common fund.
4. The object must be lawful.
5. The purpose or primary purpose must be to obtain profits and to divide the same among
the parties.
6. It is also required that the articles of partnership must not be kept secret among the
members; otherwise, the association shall have no legal personality and shall be governed
by the provisions relating to co-ownership.

Existence of a valid contract

• A form of voluntary and personal association – A partnership is a form of voluntary

association entered into by the association, a personal relation in which the element of
delectus personae exists.
• Creation and proof of existence – It may be informally created, and its existence proved
by the conduct or acts of the parties.
o However, it is customary to embody the terms of the association in a written
document known as Articles of Partnership.
o Since Partnership is essentially contractual, all the requisites of a valid contract
must be present:
a) Consent and capacity of the contracting parties.
b) Object which is the subject matter of the contract.
c) Cause which is established.
• Other forms of association excluded – Partnership excludes from its concept all other
associations which do not have their origin in a contract, express or implied. Religious
societies, conjugal or community partnerships and other of a similar nature are not
included as they are not created by the expressed or implied contract of the parties.
• A limited partnership, however, as distinguished from a general partnership, cannot be
created by voluntary agreement alone.

Legal capacity of parties to enter into the contract.

• General rule – Any person may be a partner who is capable under the law of entering into
contractual relations. Consequently, any person who cannot legally give consent to a
contract cannot be a partner. Hence the following cannot give their consent to a contract
of a partnership.
o Unemancipated minors,
o Insane or demented persons,
o Deaf-mutes who do not know how to write,
 o Persons who are suffering from civil interdiction,
o Incompetents who are under guardianship.
• Exceptions – Persons who are prohibited from giving each other any donation or
advantage cannot enter into a universal partnership. A married woman may enter into a
contract of partnership even without her husband’s consent, but the latter may object
under certain conditions.
• Capacity of partnership/corporation to be a partner – There is no prohibition against a
partnership being a partner in another partnership. Unless authorized by law, a
corporation is without capacity or power to enter into a contract of partnership.

Mutual contribution to a common fund.

• Proprietary or financial interest – The partners must have a proprietary or financial

interest in the business. Without the element of mutual contribution to a common fund,
there can be no partnership.
• Form of contribution – The partners must contribute money, property, and/or industry or
services to the common business.
o Money – The term is to be understood as referring to currency which is legal
tender in the Philippines. There is no contribution of money until they have been
cashed; It must be pointed out that checks, drafts, promissory notes payable to
order, and other mercantile documents are not money, but merely
representatives of money.
o Property – The property contributed may be real or personal, tangible or
intangible. Credit such as promissory notes or other evidence of obligation or
even a mere goodwill may be contributed as it is considered property.
o Industry – Partners may contribute their work or service, which may either be
personal manual efforts or intellectual, for which he receives a share in the
profits, and not merely salary.
o A limited partner in a limited partnership cannot contribute mere industry or
services.

Legality of object

• Effect of illegality – the object is unlawful when it is contrary to law, morals, good customs,
public order, or public policy.
• Businesses partnership not permitted to engage in – A partnership may be organized for
any purpose except that it may not engage in an enterprise for which the law requires a
specific form of business organization, such as banking.

Intention to realize and divide profits.

• Very reason for existence of partnership – The very reason for the existence of a business
partnership is the idea of obtaining pecuniary profit or gain directly as a result of the
business to be carried on.
• Sufficient if obtaining profit principal purpose – The realization of pecuniary profit need
not be the exclusive aim of a partnership. It is sufficient that it is the principal purpose
even if there are, incidentally, moral, social, or spiritual ends.
 Sharing of profits

• A partnership is essentially a business enterprise established for profit.

• Not necessarily in equal shares – Since the partnership is for the common benefit of the
partners, it is necessary that there be an intention to divide the profits, although not
necessarily in equal shares. One without any right to participate in the profits cannot be
deemed a partner.
• Not conclusive evidence of partnership – The sharing of profits is merely presumptive and
not conclusive, even if cogent, evidence of partnership.

Sharing of losses

• Necessary corollary of sharing in profits – The object of a partnership is primarily the

sharing of profits, while the distribution of losses is but a possible “consequence of the
same.”
• Agreement not necessary – It is not necessary for the partnership to agree upon a system
of sharing. The essence of a partnership is that the profits and losses arising from the
undertaking will be shared between or among the partners.

Article 1768

The partnership has a juridical personality separate and distinct from that of each of the partners, even
in case of failure to comply with its requirements of Article 1772, first paragraph.

Partnership, a juridical person.

• A partnership duly formed under the law is a juridical person to which the law a juridical
personality separate and distinct from that of each of the partners.
• As a juridical person, a partnership may acquire and possess property of all kinds, as well
as incur obligations and bring civil or criminal actions in conformity with the laws and
regulations of its organization.

Article 1769

In determining whether a partnership exists, these rules shall apply:

(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 or 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 from 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 amounts of payment vary 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.

Rules to determine existence of partnership.

• Where terms of contract not clear – All of a partnership’s essential features must be
shown as being present. In case of doubt, Article 1769 shall apply.
• Where existence disputed – The existence of a partnership may be disputed or questioned
by an affected party.

Persons not partners as to each other.

• If they are not partners as between themselves, they cannot be partners as to third
persons.
• Partnership, a matter of intention – each party giving his consent to become a partner.
• Partnership by estoppel – A partnership never exists as to third persons if no contract of
partnership, express or implied, has been enter between the parties themselves.

Co-ownership or co-possession.

• There is co-ownership whenever the ownership of an undivided thing or right belongs to

different persons.
• Co-ownership of property does not of itself establish the existence of a partnership.

Sharing of gross returns

• The mere sharing of gross returns alone does not indicate a partnership, since in a
partnership, the partners share profits after satisfying all of the partnership’s liabilities.

Receipt of share in the profits

• The mere fact of a right under the contract to participate in both profits and losses of a
business does not of itself have the effect of establishing a partnership between those
engaged therein.

Tests and incidents of partnership

• Terms of agreement control – Only those terms of a contract upon which the parties have
reached an agreement may afford a test by which to ascertain the existence of a
partnership.
• Typical incidents once existence established – Some of the typical incidents of a
partnership are:
o The partners share in profits and losses.
o They have equal rights in the management and conduct of the partnership
business.
o Every partner is an agent of the partnership and entitled to bind the other partner
by his acts, for the purpose of its business.
o All partners are personally liable for the debts of the partnership with their
separate property except that limited partners are not liable beyond their capital
investments.
o On dissolution, the partnership is not terminated, but continues until the winding
up of the partnership is completed.
o Such incidents may be modified by stipulations of the partners subject to the
rights of third persons dealing with the partnership.

Partnership distinguished from co-ownership.

• Co-ownership – whenever the ownership of an undivided thing or right belongs to

different persons.
• Distinctions between partnership and a co-ownership:
o Creation – Co-ownership is generally created by law. It may exist without a
contract, but partnership is always created by a contract, either express or
implied;
o Juridical personality – A partnership has a juridical personality while a co-
ownership has none;
o Purpose – The purpose of a partnership is the realization of profits, while in a co-
ownership, it is the common enjoyment of a thing or right;
o Duration – Under the law, there is no limitation upon the duration of a
partnership, while in a co-ownership, an agreement to keep the thing undivided
for more than 10 years is not allowed.
o Disposal of interests – A partner may not dispose of his individual interest in the
partnership so as to make the assignee a partner unless agreed upon by all of the
partners, while a co-owner may freely do so;
o Power to act with third persons – In the absence of any stipulation to the contrary,
a partner may bind the partnership, while a co-owner cannot represent the co-
ownership, hence, a judgement secured against only one of the co-owners will
not bind the other co-owners;
o Effect of death – The death of a partner results in dissolution, but the death of a
co-owner does not necessarily dissolve the co-ownership.

Partnership distinguished from conjugal partnership of gains.

• Conjugal partnership of gains – partnership formed by the marriage of husband and wife.
• Parties:
o A business partnership is created by the voluntary agreement of two or more
persons.
 o A conjugal partnership arises in case the future spouses – a man and a woman –
agree that it shall govern their property relations during marriage.
• Laws which govern:
o The ordinary partnerships are, as a rule, governed by the stipulation of the
parties.
o A conjugal partnership is governed by law.
• Juridical personality:
o A partnership has a personality under the law separate from the members
composing it.
o A conjugal partnership of gains has none.
• Commencement:
o A partnership begins from the moment of the execution of the contract unless it
is otherwise stipulated.
o A conjugal partnership of gains commences precisely on the date of the
celebration of the marriage, and any stipulation to the contrary is void.
• Purpose:
o The primary purpose of the ordinary partnership is to obtain profits.
o A conjugal partnership is to regulate the property relations of husband and wife
during the marriage.
• Distribution of profits:
o In the ordinary partnership, the profits are divided according to the agreement of
the partners or in proportion to their respective capital contributions.
o A conjugal partnership, the shares of the spouses in the profits are divided
equally.
• Management:
o In the ordinary partnership, the management is shared equally by all the partners
unless stipulated in the articles of partnership.
o A conjugal partnership, the husband’s decision shall prevail in case of
disagreement.
• Disposition of shares:
o In the ordinary partnership, the whole interest of a partner may be disposed of
without the consent of the other partners.
o A conjugal partnership, the share of each spouse cannot be disposed of during
the marriage even with the consent of the other.

Partnership distinguished from voluntary associations.

• Juridical personality:
o A partnership has a juridical personality.
o A voluntary association has none.
• Purpose:
o A partnership is always organized for pecuniary profit.
o A voluntary association has no profit objective.
• Contributions of members:
 o A partnership has a contribution of capital, either in the form of money, property,
property, or services.
o A voluntary association for social purposes has fees collected for maintenance,
but there is no contribution of capital.
• Liability of members:
o The partnership is the one liable in the first place for the debts of the firm.
o In a voluntary association, the members are individually liable for the debts of the
association, authorized by them, either expressly or impliedly, or subsequently
ratified by them.

Article 1770

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.

Object or purpose of partnership

• The provision reiterates two essential elements of a contract of partnership: legality of

the object and community of benefit or interest of the partners.

Effects of an unlawful partnership.

• The contract is void ab initio and the partnership never existed in the eyes of the law.
• The profits shall be confiscated in favor of the government.
• The instruments or tools and proceeds of the crime shall also be forfeited in favor of the
government.
• The contributions of the partners shall not be confiscated unless they fall under No. 3.

Dissolution of unlawful partnership.

• A judicial decree is not necessary to dissolve an unlawful partnership, however, it may

sometimes be advisable that a judicial decree of dissolution be secured for the
convenience and peace of mind of the parties.

Article 1771

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.

• No special form is required for the validity or existence of the contract of partnership.
• The contract may be made orally or in writing regardless of the value of the contributions
unless immovable property or real rights are contributed.
Article 1772

Every contract of partnership having a capital of Three thousand pesos (P 3,000) 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.

Failure to comply with the requirements of the preceding paragraph shall not affect the liability of the
partnership and the members thereof to third persons.

Article 1773

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.

• The contract and inventory of the property contributed must be made and signed by the
parties and must be in public instrument for the contract of partnership to be effective.

Article 1774

Any immovable property or an interest therein may be acquired in the partnership name. Title so
acquired can be conveyed only in the partnership name.

• Since a partnership has its own juridical personality, it can acquire immovable property
under its name.

Article 1775

Associations and societies, whose articles are kept secret among the members, and wherein anyone of
the members may contract in his own name with third persons, shall have no juridical personality, and
shall be governed by the provisions relating to co-ownership.

Article 1776

As to its object, a partnership is either universal or particular.

As regards the liability of the partners, a partnership may be general or limited.

Classifications of partnership.

• As to the extent of its subject matter:

o Universal partnership – One which refers to all present property or to all profits.
a) Universal partnership of all present property, defined in Article 1778;
b) Universal partnership of profits, defined in Article 1780;
 o Particular partnership – Defined in Article 1783
• As to liability of the partners
o General partnership – One consisting of general partners who are liable pro rata
and subsidiarily sometimes solidarily, with their separate property for
partnership debts;
o Limited partnership – one formed by two or more persons having as members
one or more general partners and one or more limited partners, the latter not
being personally liable for the obligations of the partnership.
• As to its duration
o Partnership at will – one in which no time is specified and is not formed for a
particular undertaking or venture and which may be terminated anytime by
mutual agreement of the partners, or by the will of any one partner alone, or one
for a fixed term or particular undertaking which is continued by the partners after
the termination of such term or particular undertaking without express
agreement.
o Partnership with a fixed term – one which the term for which the partnership is
to exist is fixed or agreed upon or one formed for a particular undertaking, and
upon the expiration of the term or completion of the particular enterprise.
• As to the legality of its existence
o De jure partnership – one which has complied with all the legal requirements for
its establishment.
o De facto partnership – one which actually exists among the partners and also as
to third persons.
o Ostensible partnership or partnership by estoppel – one which in reality is not a
partnership but is considered a partnership only in retaliation to those who are
precluded to deny or disprove its existence.
• As to publicity
o Secret partnership – one wherein the existence of certain persons as partners is
not made known to the public.
o Open or notorious partnership – one whose existence is avowed or made known
to the public.
• As to purpose
o Commercial or trading partnership – one formed for the transaction of business.
o Professional or non-trading partnership – one formed for the exercise of a
profession.

Kinds of partners

• Under the Civil Code

o Capitalist partner – one who contributes money or property.
o Industrial partner – one who contributes only his industry or service.
o General partner – one whose liability to third persons extends to his separate
property; may either be a capitalist or industrial partner.
o Limited partner (or special partner) – one whose liability to third persons is limited
to his capital contribution.
 o Managing partner (or general or real partner) – one who manages the affairs of
business of the partnership; may be appointed in the articles of partnership or
after the constitution of the partnership.
o Liquidating partner – one who takes charge of the winding up of partnership
affairs upon dissolution.
o Partner by estoppel – one who is not really a partner but is liable as a partner for
the protection of innocent third persons.
o Continuing partner – one who continues the business after it has dissolved.
o Surviving partner – one who remains after a partnership has been dissolved by
the death of any partner.
o Subpartner – one who, not being a member of the partnership, contracts with a
partner with reference to the latter’s share in the partnership.
• Other classifications
o Ostensible partner – one who takes active part and known to the public as a
partner in the business, whether he has an actual interest in the firm.
o Secret partner – one who takes active part in the business but is not known to be
a partner by the public.
o Silent partner – one who does not take any active part in the business although
he may be known to be a partner.
o Dormant partner – one who does not take active part in the business and is not
known or held out as partner. He would be both a silent and a secret partner.
o Original partner – one who is a member of the partnership from the time of its
organization.
o Incoming partner – a person lately, or about to be, taken into a partnership as a
member.
o Retiring partner – one withdrawn, or withdrawing, from the partnership.
• All partners in any of these classes are subject to liability for all partnership obligations.

Article 1777

A universal partnership may refer to all present property or to all the profits.

Article 1778

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 all the profits they may acquire therewith.

Article 1779
In a universal partnership of all present property, the property which belonged to each of the partners
at the time of the constitution of the partnership, becomes the common property of all the partners, as
well as all the profits which they may acquire therewith.

A stipulation for the common enjoyment of any other profits may also be made; but the property which
the partners may acquire subsequently by inheritance, legacy, or donation cannot be included in such
stipulations, except the fruits thereof.

• Universal partnership of all present property – one in which the partners contribute all
the properties which belong to each of them at the time of the constitution of the
partnership. In this kind of partnership, the following become the common property of all
the partners:
o Property which belonged to each of them at the time of the constitution of the
partnership;
o Profits which they may acquire from the property contributed.
• Generally, future properties cannot be contributed. The position of a partner is like that
of a donor, and donations cannot comprehend future property.

Article 1780

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 many possess at the time of the celebration
of the contract shall continue to pertain exclusively to each, only the usufruct passing to the
partnership.

• Universal partnership of profits – one which comprises all that the partners may acquire
by their industry or work during the existence of the partnership and the usufruct of
movable or immovable property which each of the partners may possess at the time of
the celebration of the contract.
o Ownership of present and future property – The partners retain their ownership
over their present and future property, only the profits or income and the
usufruct of the property is taken by the partnership.
o Profits acquired through chance – Profits acquired by the partners through
chance, such as lottery or by lucrative title without employment of any physical
or intellectual efforts, are not included.
o Fruits of property subsequently acquired – fruits of property subsequently
acquired by the partners do not belong to the partnership, however, it may be
included through express stipulation.

Article 1781

Articles of universal partnership, entered into without specification of its nature, only constitute a
universal partnership of profits.
Article 1782

Persons who are prohibited from giving each other any donation or advantage cannot enter into a
universal partnership.

Article 1783

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.

• Particular partnership – a partnership which is neither a universal partnership of present

property nor a universal partnership of profits.
• An example of a particular partnership would be two or more accountants associating
themselves in the practice of accountancy or two or more lawyers in the practice of law.