PARTNERSHIP: BASIC CONCEPTS AND FORMATION

PARTNERSHIP
 An organization where two or more persons bind themselves to contribute
money, property, or industry into a common fund with the intention of distributing
the profits among themselves. (New Civil Code, Article 1767)
 Requires the combination of capital resources and managerial skills and
expertise.
 Each owner is called a partner

CHARACTERISTICS OF A PARTNERSHIP
1. Voluntary Association
 Individuals, by their own free will, agree to join together and form partnership.
2. Legal Entity
 Has a juridical personality separate and distinct from that of each of the
Partnership. (Art. 1768)
 Can acquire, sell, incur obligations and transact business on its name.
3. Co-ownership of Property
 Partnership assets are jointly owned by the partners. Once a partner invested
an asset, these ceases to become personal properties and instead become
joint property of all partners.
 By virtue of its separate and distinct juridical personality.
4. Taxable Entity
 Subject to 30% tax.
5. Mutual Agency
 Each partner is fully authorized agent. (a partner acts as agent for the
partnership whom he represents)
 The partnership can be sued, together with the partners, by third parties when
a partner commits a wrongful act or a breach of trust. (Act 1818)
 Any partner can bind the other partners to a contract if he is acting within his
express or implied authority.
6. Limited Life
 Can operate for indefinite period. However in practice, it can be easily
dissolved or terminated with the mere withdrawal, incapacity or death of a
partner. (Act. 1830-1831)
7. Unlimited Liability
 Each partner is personally and individually liable for all partnerships liabilities,
(Act 1791 & 1835)
 Except limited partners
8. Mutual Contribution
 There cannot be a partnership without contribution of money, property, or
industry to a common fund,
9. Division of profits or losses
 The essence of partnership is that each partner must share in the profits or
losses in the venture.
 ELEMENTS OF A PARTNERSHIP
1. A valid contract (oral/written)
2. Put up by persons having legal capacity to contract
3. Money, properties or service contribution
4. Divide profit among themselves

KINDS OF PARTNERSHIP
1. As to Liability
 General
 All partners are liable to the extent of their separate/personal properties
 All partners are general partners
 Limited
 Only liable to the extent of their personal contributions/investments,
 Law states there shall be at least one general partner. (Act 1816, 1843)
2. As to property

 All partners contribute their properties into a common fund. (act 1778)
 Universal Partnership of profits
 The partners contribute all what they will receive as a result of their work
during the lifetime of the partnership (Act 1780)
3. According to duration
 Partnership with a fixed term or for a particular undertaking.
 Partnership at will. One in which no term is specified and is not formed for
any particular undertaking.
4. According to purpose
 Commercial or trading partnership.
 One formed for the transaction of business.
 Professional or non-trading partnership.
 One formed for the exercise of profession.
5. According to legality of existence
 De jure partnership
 One which has complied with all the legal requirements for its
establishment.
 De facto partnership
 One which has failed t comply with all the legal requirements for its
establishment.

ROLES OF PARTNERS
1. The partners are co-owners of the partnership property.
2. The partners have unlimited liability.
3. The partnership is bound by the acts of any of the partners as they are
considered agents of the partnership for the purpose of carrying its activities.
RIGHTS OF A PARTNER
1. A Partner has a right over specific partnership property
2. A partner has right to share in the profits resulting from business operation
3. A partner has a right to share in the remaining assets upon partnership
liquidation after the partnership creditors have been paid.
4. A partner has a right to co-manage the partnership
5. A partner has a right to ask that the books be kept in the principal place of
business subject to inspection at a reasonable time.

KINDS OF PARTNERS
1. General
- Manages the partnership, and contributes money, property or service and
liable to the extent of his personal property
2. Limited
- Invest cash or property, but liable only to the extent of its contribution
- No active role in the management
3. Capitalist
- Contributes money or property
4. Industrial
- Contributes service
5. Ostensible
- Known to the public that he is a partner
6. Secret
- Not known as such to the public
7. Universal
- Participation extends to the entire business
8. Particular
- Participation limited to a unit or part of the business.

PARTNERSHIP CONTRACT
Articles of Co-Partnership
- Agreement concerning formation, operation, dissolution, and liquidation of the
partnership
Should include the ff.:
1. Name of Partnership
2. Principal place of business
3. Date of effectiveness and life of the partnership
4. Purpose of the Partnership
5. Names, addresses and contribution of the partners
6. Manner of management of the partnership
7. Manner of dividing the profits among the partners
8. Periodic withdrawals allowed for a partner
9. Manner of liquidating the partnership with the rights and duties of the partners
 10. Arbitration of disputes, dissolution, and liquidation.

COMPARISON BETWEEN ORGANIZATIONS

Similarities between Partnership and Sole Proprietorships
1. Unlimited Liability
2. Limited Liability
3. Legal Entity
Advantages of Partnership against Sole Proprietorship
1. Greater amount of capital
2. Better Management
- combines special skills, expertise and experiences of the partners
3. A greater opportunity expand.
4. Offers relative freedom and flexibility of action in decision-making.

Disadvantages of Partnership against Sole Proprietorship

1. Conflicts and disagreements may easily arise due to many persons involved.
Similarities between Partnership and Corporation
1. Taxable entities (30%)
Difference between Partnership and Corporation
1. Manner of Creation
- Partnership is created by agreement whereas corporation is created by law.
2. Number of Persons
- Two or more persons may form in partnership whereas at least five persons
and not exceeding fifteen.
3. Commencement of Juridical Personality
- Judicial personality commences from the execution of the articles of
partnership whereas in a corporation, the issuance of certificate of
incorporation comes from SEC.
4. Management
- Every partner is an agent of the partnership whereas managers is vested on
the Board of Directors in Corporation.
5. Extent of Liability
- Each partner (except a limited partner) is liable to the extent of his personal
assets whereas in corporation, shareholders are only liable to the extent their
investments/contributions.
6. Right of Succession
- There is no right succession in Partnership whereas in a Corporation has the
right of succession.
7. Terms of existence
- Any period of time stipulated by the partners whereas in a corporation it will
not be exceed fifty years but subject to extension.
Advantages of Partnership against Corporation
1. Easier and less expensive to form / organize
2. More personal and informal
3. Active management
Disadvantages of Partnership against Corporation
 1. Easily dissolved thus unstable
2. Partners are personally liable for the partnership’s obligations.
3. Difficult to transfer or increase ownership

ACCOUNTING FOR PARTNERSHIP

Each partner’s equity is represented by two accounts: Partner’s Capital and Partner’s
Drawings.

Partner’s Capital
The capital account represents original investments which becomes its permanent
interest. This could change only if additional investments are made or when non-current
assets are revalued:
Transactions that affect the capital:
1. Investment
- Credited to the capital account and increases the partner’s equity
2. Permanent Withdrawal
- Debited to the capital account and decreases the partner’s equity
Partner’s usually make investments once or twice over the lifetime of the
partnership. Addition of investments must make revision of the Articles of Co-
Partnership.

Partner’s Drawing Account

Transaction that affects this account:
1. Share in the Net Profit
- Credited to the drawings account to increase the partner’s equity
Share in Net Loss
- Debited to the drawings account to decrease the partner’s equity
2. Personal Drawings
- Oftentimes called Salaries (withdrawals of profit)
- Debited to the drawings account to decrease the partner’s equity.

Balances of the drawing account is closed to the capital account. If the share in the net
profit of the partner is greater than the actual withdrawal he made, the credit balance of
the drawing account is added to the capital account to arrive at the total partner’s equity.

The balances in the drawing accounts represents unwithdrawn profits.

- Unwithdrawn profits could be left open and brought forward next accounting
for the purpose if withdrawing them. (as per agreement)
- Unwithdrawn profits could be closed to the capital accounts and made part of
their permanent investments
Note that whether or not the drawing balances are closed, the partner’s equity will
remain the same.

Loan Payable or Receivable from a Partner

 Loan Payable to a Partner is a liability
 Loan Receivable from a Partner is an asset
Therefore are not to be considered in determining partner’s equity.

Opening the Books of the Partnership

 The first entries pertain to the contributions made by the partners. (Cash,
Property or Service
Entry:
Cash (Merchandise, building) xxx
Partner, Capital xxx

A contribution in the form of property should be recorded, as of investment date

and at current fair market value or appraised value. (In support of the Cost
Principle)

Liabilities attached to invested properties may be assumed by the partnership in

which case the capital of the partner will be credited only for the net amount of
the asset contribution.
 If the contribution is in the form of service. The entry should be:
Admitted Partner’s name to act as general manager for a 20% share in the profit