RFBT_02.

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Partnership & Corporation UL CPA REVIEW CENTER

UNIVERSITY OF LUZON
COLLEGE OF ACCOUNTANCY
CPA REVIEW CENTER

PARTNERSHIP
(Regulatory Framework for Business Transactions)

I. General Provisions
Partnership defined
Partnership is a contract whereby 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.
Note: Two or more persons may also form a partnership for the exercise of a profession.
Essential requisites of a Contract of Partnership
1. There must be a valid contract;
2. There must be contribution of money, property, or industry to a common fund;
3. The partnership must be organized for gain or profit; and
4. The partnership should have a lawful object or purpose and must be established for the
common benefit or interest of the partners.
Partnership as Juridical Person
The partnership has a Juridical Personality separate and distinct from that of each partner.
Consequences of the Partnership being a Juridical Entity. Partnership, in general, can do the
following:
 acquire and possess property of all kinds
 incur obligations
 bring civil and criminal actions
Characteristics of a partnership
1. Bilateral – it is entered into by two or more persons and the rights and obligations arising
therefrom are always reciprocal
2. Onerous – each of the parties aspires to procure for himself a benefit through the giving of
something
3. Nominate – it has a special name or designation in our law
4. Consensual – perfected by mere consent, upon the express or implied agreement of two or
more persons
5. Commutative – the undertaking of each of the partners is considered as the equivalent of
that of the others
6. Principal – it does not depend for its existence or validity upon some other contracts
7. Preparatory – because it is entered into as a means to an end, i.e. to engage in business or
specific venture for the realization of profits with the view of dividing them among the
contracting parties.
Rules in determining the Existence of a Partnership (Article 1769)
Rule 1: Persons who are not partners as to each other are not partners as to third persons;
Exception to this rule is Partnership by Estoppel
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It is one where persons, by words spoken or written or by conduct, represent themselves, or

consent to another representing them to anyone, as partners in an existing partnership or with
one or more persons not actual partners.
Rule 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;
Rule 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;
Rule 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 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.

Commencement of Partnership
General rule: A partnership is a consensual contract; hence, it exists from the moment of the
celebration of the contract by the partners.
A partnership begins from the moment of the execution of the contract, unless it is
otherwise stipulated. Its registration in the Securities and Exchange Commission is not essential to
give it juridical personality.
Form of Partnership
General Rule: There is no form required in a Contract of Partnership.
Exception: If real properties or real rights in immovable properties are contributed
regardless of value. A public instrument is necessary, otherwise, the contract of partnership is VOID.
Contribution Formal Status of Effect on
requirement contract Juridical
Personality
Capital of less than 3,000 Oral Valid Not affected
Capital of 3,000 or more Public Instrument Valid Not affected
Real property Public Instrument Void Affected

Lawful Object or Purpose

 A partnership must have lawful object or purpose, and must be established for the common
benefit or interest of the partners
 It must be within the commence of man, possible and not contrary to law, morals, good
customs, public order or public policy
 If a partnership has several purposes, one of which is unlawful, the partnership can still
validly exist so long as the illegal purpose can be separated from the legal purposes
 There is no need for judicial decree to dissolve an unlawful partnership because it is VOID
ab initio
 When an unlawful partnership is dissolved by a judicial decree, the profits shall be
confiscated in favor of the state
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Capacity to become a partner

 A person capacitated to enter into contractual relations may become a partner
 An unemancipated minor cannot become a partner unless his parent or guardian consents
 A married woman, cannot contribute conjugal funds as her contribution to the partnership
unless she is permitted to do so by her husband or unless she is the administrator of the
conjugal partnership, in which the court must give its consent authority
 A partnership being a juridical person by itself can form another partnership
 A corporation cannot become a partner on grounds of public policy
Kinds of Partners
A. Capitalist Partner – one who contributes money or property to a common fund
- Unless there is a stipulation to the contrary, a capitalist partner can engage in other
business but not the same as the partnership.
- General rule: a capitalist partner is not bound to contribute more than what he agreed
to contribute.

B. Industrial Partner – one who contributes only his industry or personal service
- An industrial partner cannot engage in other business, rule is absolute.
- Ratio: To prevent conflict between industrial partner and partnership, and to ensure
faithful compliance by said partner with his obligation.

C. General Partner – one whose liability to third persons to third persons extends to his
separate property.
D. Limited Partner – one whose liability to third persons is limited to his capital contribution,
also known as a special partner, does not participate in the management of the business
E. Managing Partner - one who manages the affairs of the partnership
F. Liquidating Partner – one who takes charge of the winding up of partnership affairs upon
dissolution
G. Partner by Estoppel – one who is not really a partner, but is liable as a partner for the
protection on innocent third persons
H. Continuing Partner – one who continues the partnership after it has been dissolved
I. Surviving Partner – one who remains after a partnership has been dissolved by reason of the
retirement, death or expulsion of the partner
J. Sub partner -one not being a membership of the partnership, contracts with a partner
K. Ostensible Partner - one who takes active part and known to the public as a partner in the
business
L. Secret Partner – one who takes active part in the business but not known to be a partner by
the public.
M. Silent Partner – one who does not take any active part in the business although he may be
known to be a partner
N. Dormant Partner - one who does not take active part in the business and is not known or
held out as a partner.
O. Original Partner – one who is a member of the partnership from the time of its organization
P. Incoming Partner – about to be taken into a partnership as a member
Q. Retiring Partner – one who withdraws from the partnership
R.

Classification of Partnership
As to object
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1) Universal Partnership refers to all the present property or to all the profits.
i All present property – partners contribute all their present property to the
partnership with the intention of dividing the profits among themselves.
ii All profits – the partners retain their ownership over their present and future
property, what passes to the partnership are the profits and or income and the
usufruct or use of the same.
Note: There is presumption in favor of universal partnership of all profits
Persons prohibited to enter into a universal partnership
1. Legally married spouses
2. Persons living together as husband and wife without a valid marriage
3. Persons who were guilty of adultery or concubinage at the time of donation
4. Persons found guilty of the same criminal offense, in consideration thereof;
5. Persons and a public officer or his wife, descendants and ascendants by reasons of his office.
Ratio: Persons who are prohibited from giving each other any donation or advantage cannot
enter into universal partnership.
2) Particular Partnership has for its object determinate things, their use or fruits, or a specific
undertaking, or the exercise of a profession or vocation.
As to Liability
3) General Partnership partners liable pro rata and subsidiarily, sometime solidarily with
their separate property for partnership debts.
4) Limited Partnership has one or more general partners and one or more limited partners,
the limited partner not being personally liable for the obligations of the partnership.
As to Duration
5) Partnership at Will has no time specified and not formed for a specific undertaking and may
be terminated anytime by mutual agreement or by will of one partner alone.
6) Partnership with a Fixed Term or for Particular Undertaking has for its term a fixed
period or is formed for a specific undertaking.
As to Legality of its Existence
7) De Jure Partnership or one which has complied with the legal requirements for its
establishment.
8) De Facto partnership or one which has failed to comply with the legal requirements for its
establishment.
As to Representation to Others
9) Ordinary or Real Partnership or one which actually exists among the partners and also as
to third persons.
10)Ostensible or by Estoppel or not a real partnership but is considered one only for to those
who, by their conduct or admission, are precluded to deny or disprove its existence.
Legal relations created by a contract of partnership
1. Relations among the partners themselves;
2. Relations of the partners with the partnership;
3. Relations of the partnership with third persons with whom it contracts; and
4. Relations of the partners with such third persons.
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II. Rights and Obligations of Partners

Obligations of partners among Rights of partners among themselves

themselves
1. To make contributions
2. Not to convert partnership money to
personal use
3. Prohibition in engaging in business for
himself
4. To contribute additional capital
5. Managing partner who collects debt
6. Partner who receives share of
partnership credit
7. To pay damages to partnership
8. To keep the partnership books
9. To render information
10. To be accountable as fiduciary
1. Right to reimbursement for amounts
advanced to the partnership and to
indemnification for risks in
consequence of management
2. Right on the distribution of profits and
losses
3. Right to associate another person
with him in his share without the
consent of the other partners
4. Right to free access and to inspect and
copy at any reasonable hour the
partnership books
5. Right to formal account as to
partnership affairs
6. Right to have the partnership
dissolved
7. Property rights of a partner

Rules regarding the prohibition to engage in another business

Industrial Partner (Absolute Prohibition)
Cannot engage in business for himself unless the partnership expressly permits him
to do so. Capitalist partners may:
i Exclude him from the firm
ii Avail themselves of the benefits which he may have obtained
iii Damages, in either case

Capitalist Partner (Relative Prohibition)

Cannot engage in business (with same kind of business with the partnership) for his
own account, unless there is a stipulation to the contrary. Capitalist partner, who violated
shall:
i Bring to the common fund any profits accruing to him from said transaction; and
ii Personally bears all losses (

Obligations of managing partners who collect his personal receivable from a person who also owes
the partnership
1. Apply sum collected to 2 credits in proportion to their amounts
2. If he received it for the account of partnership, the whole sum shall be applied to partnership
credit
Requisites:
i At least 2 debts, one where the collecting partner is creditor and the other, where
the partnership is the creditor
ii Both debts are demandable
iii Partner who collects is authorized to manage and actually manages the
partnership
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Note: The debtor is given the right to prefer payment of the credit of the partner if it
should be more onerous to him in accordance with his right to application of payment
Obligation of a partner who receives share of partnership credit
To bring to the partnership capital what he has received even though he may have given
receipt for his share only.
Requisites:
i A partner has received in whole or in part, his share of the partnership credit
ii Other partners have not collected their shares
iii Partnership debtor has become insolvent

Rules regarding distribution of profits and losses

A. Distribution of profits
a. The partners share in the profits according to their agreement
b. In the absence of such:
i Capitalist partner – in proportion to his contribution
ii Industrial partner – what is just and equitable under the circumstances
Note: If the industrial partner has contributed capital other than his services, he shall also
receive a share in the profits in proportion to his capital.
B. Distribution of losses
a. The partners share in the losses according to their agreement
b. In the absence of such, according to their agreement as to profits
c. In the absence of profit agreement, in proportion to his capital contribution

General rule: Stipulation excluding a partner in the sharing of profits or loss is VOID.
Exception: In the absence of stipulation to contrary, an industrial partner shall not be liable
for losses. However, he is not exempted from liability insofar as third persons are concerned.
Property rights of a partner
1. Right in specific partnership property
2. Interest in the partnership (share in the profits and surplus)
3. Right to participate in the management

Obligations of partners with regard to 3rd persons

1. Every partnership shall operate under a firm name. Persons who include their names in the
partnership name even if they are not members shall be liable as a partner.
2. All partners shall be liable for contractual obligations of the partnership with their property,
after all partnership assets have been exhausted:
a. Pro rata
b. Subsidiary
Note: Any stipulation excluding a partner from such liability shall be void except as among
the partners.
3. Partner as an agent of the partnership
Effects of the acts of partners acting as an agent of the partnership
 An act carrying on in the usual way of business of the partnership binds the partnership
Exception: The partner so acting has no authority and the person with whom he is
dealing has knowledge of the fact that he has no such authority.
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 An act of a partner which is not apparently for the carrying on of business of the
partnership in the usual way does not bind the partnership
Exception:
Unless authorized by all other partners or unless they have abandoned the business.
 No act of a partner in contravention of a restriction on authority shall bind the
partnership to persons having knowledge of the restriction.
4. Conveyance of real property belonging to the partnership
5. Admission or representation made by any partner concerning partnership affairs within the
scope of his authority is evidence against the partnership
6. Notice to partner of any matter relating to partnership affairs operates as notice to
partnership except in case of fraud:
a. Knowledge of partner acting in the particular matter acquired while a partner
b. Knowledge of the partner acting in the particular matter then present to his mind
c. Knowledge of any other partner who reasonably could and should have
communicated it to the acting partner
7. Partners and the partnership are solidarily liable to 3rd persons for the partner's tort or
breach of trust
8. Liability of incoming partner is limited to:
a. His share in the partnership property for existing obligations
b. His separate property for subsequent obligations
9. Creditors of partnership are preferred in partnership property & may attach partner's share
in partnership assets

III. Dissolution and winding up

Dissolution
The dissolution of a partnership is the change in the relation of the partners caused by any
partner ceasing to be associated in the carrying on as distinguished from the winding up of the
business.
Kinds of Dissolution
 Judicial Dissolution
 Extrajudicial Dissolution
Causes of Dissolution
1. Without violation of the agreement
a. Termination of the definite term or specific undertaking
b. Express will of any partner in good faith, when there is no definite term and no
specified undertaking
c. Express will of all partners (except those who have assigned their interests or
suffered them to be charged for their separate debts) either before or after the
termination of any specified term or particular undertaking
d. Expulsion of any partner in good faith of a member
2. In contravention of the agreement
3. Unlawful or Illegal Partnership
4. Loss of a specific thing
a. Specific thing promised as contribution is lost or perished before delivery
b. Loss of a specific thing contributed before or after delivery, if only the use of such is
contributed
5. Death of any partner
6. Insolvency of a partner/partnership
7. Civil Interdiction of any partner/partnership
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8. By virtue of a court’s judicial decree*

a. A partner has been declared insane or of unsound mind
b. A partner becomes in any other way incapable of performing his part of the
partnership contract
c. A partner has been guilty of such conduct as tends to affect prejudicially the carrying
on of the business
d. A partner wilfully or persistently commits a breach of the partnership agreement
e. The business of the partnership can only be carried on at a loss f. Other circumstances
render a dissolution equitable
General rule: Dissolution does not discharge the existing liability of a partner.
Exception: Said liability is discharged when there is an agreement between:
i Partner himself;
ii Person/s continuing the business; and
iii Partnership creditors
Liability in case of Dissolution
A. ACTS BINDING ON THE PARNERSHIP
a. Transactions necessary for winding-up
b. Transactions begun but not yet finished as of the time of dissolution
c. New business with innocent third persons-
i Former client with no knowledge or actual notice of dissolution
ii New client who knows of the partnership but has no knowledge or notice of dissolution
and the fact of dissolution not having published

B. ACTS NOT BINDING ON THE PARNERSHIP

a. When dissolution is due to unlawfulness of the business
b. When the acting partner is insolvent
c. When partner is not liquidating partner EXCEPT in the transaction is with-
i Former client with no knowledge or actual notice of lack of authority
ii New client who knows of the partnership but has no knowledge or notice of the fact of
want of authority not having been published.
Winding Up
Winding up is the actual process of settling the business or partnership affairs after
dissolution, involving the collection and distribution of partnership assets, payment of debts, and
determination of the value of each partner’s interest in the partnership.
Manner of winding up
The winding up of the dissolved partnership may be done either:
 Judicially, under the control and direction of the proper court upon cause shown by any
partner, his legal representative, or his assignee; or
 Extra judicially, by the partners themselves without intervention of the court

IV. Limited Partnership

It is 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 partnership debts.
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Rights of a limited partner

1. To have partnership books kept at principal place of business; 2. To inspect/copy books
at reasonable hours;
2. To have on demand true and full information of all things affecting partnership;
3. To have formal account of partnership affairs whenever circumstances render it just and
reasonable;
4. To ask for dissolution and winding up by decree of court;
5. To receive share of profits/other compensation by way of income; and
6. To receive return of contributions, provided the partnership assets are in excess of all its
liabilities.
Substituted limited partner
It is a person admitted to all the rights of a limited partner who has died or assigned his
interest in the partnership.
Rights and liabilities of a substituted limited partner
General rule: He has all the rights and powers and is subject to all the restrictions and liabilities of
his assignor.
Exception: Those liabilities which he was ignorant of at the time that he became a
limited partner and which could not be ascertained from the certificate.
Liabilities of a limited partner
To the partnership
Since limited partners are not principals in the transaction of a partnership, their liability as
a rule, is to the partnership, not to the creditors of the partnership.
To the partnership creditors and other partners
a. A limited partner is liable for partnership obligations when he contributed services instead
of only money or property to the partnership
b. When he allows his surname to appear in the firm name
c. When he fails to have a false statement in the certificate corrected, knowing it to be false
d. When he takes part in the control of the business
e. When he receives partnership property as collateral security, payment, conveyance, or
release in fraud of partnership creditors
f. When there is failure to substantially comply with the legal requirements governing the
formation of limited partnerships
To separate creditors
As in a general partnership, the creditor of a limited partner may, in addition to other
remedies allowed under existing laws, apply to the proper court for a charging order subjecting the
interest in the partnership of the debtor partner for the payment of his obligation.
Order of payment in winding up
1. Those owing to creditors other than partners
2. Those owing to partners other than for capital or profits
3. Those owing to partners in respect of capital
4. Those owing to partners in respect to profits
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General Partnership Limited Partnership

Creation As a rule, it may be constituted in any Created by the partners after

form compliance with the requirements of
law
Contribution The general partners contribute The limited partners contribute
money, property or industry money, property or both. They
cannot contribute service or industry
Membership All are general partners At least one general partner and one
limited partner
Extent of The partners are liable for partnership The limited partners are liable only
Liability obligations to the extent of their capital
contribution
Management All are managers unless there is Limited partners has no
right stipulation to the contrary participation in the management
Prohibition to The capitalist partner cannot engage No prohibition against engaging in
engage in other for his own account in any operatic business
business which is of the kind of business in
which the partnership is engaged
The industrial partner are absolutely
prohibited to engage in other
Assignment of Interest is not assignable unless Interest is assignable
interest consented to by all of the other
partners
Effect of death. It dissolves the partnership As a rule, it will not dissolve the
Insolvency, partnership
retirement and
insanity of a
partner
Firm name It may or may not include the name if The firm name must be followed by
one or more of the partners. the word “Limited”. The surname of
a limited partner must not appear in
the firm name.