LIMITED PARTNERSHIP

I. DEFINITION (ARTICLE 1843)

ARTICLE 1843. A limited partnership is one formed by two or more persons under the
provisions of the following article, having as members one or more general partners
and one or more limited partners. The limited partners as such shall not be bound by
the obligations of the partnership.

It is so called because the liability to third persons of one or more of its members referred to
as limited (or special) partners is limited to a fixed amount (Hoefer vs. Hall, 411 P.d. 230.),
their capital contributions or the amount they have invested in the partnership.

This limited liability is the key characteristic of the limited partnership

- One formed by two or more persons having as members one or more

general partners and one or more limited partners.
- The limited partners as such are not bound by the obligations of the
partnership.

What Is a Limited Partnership (LP)?

- A limited partnership (LP)—not to be confused with a limited liability partnership (LLP)—is a
partnership made up of two or more partners.

The general partner oversees and runs the business while limited partners do not partake in
managing the business. However, the general partner of a limited partnership has unlimited
liability for the debt, and any limited partners have limited liability up to the amount of their
investment.

- General partners have unlimited liability and have full management control of
the business.
- Limited partners have little to no involvement in management, but also have
liability that's limited to their investment amount in the LP.

The Different Reasons Why Partnerships Are Formed

- General partnerships are formed when there are several partners investing personal
expertise in the business and each of them will take an active role in the management
and operation of the company.

- Limited partnerships are formed usually to raise capital for business start-ups or
acquisitions where a hands-on management role is not required of the individual
investing partners.

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CHARACTERISTICS OF LIMITED PARTNERSHIP.

As a general rule, the characteristics of a limited partnership are as follows:

(1) A limited partnership is formed by compliance with the statutory requirements (Art. 1844.);

(2) One or more general partners control the business and are personally liable to creditors
(Arts. 1848, 1850.);

(3) One or more limited partners contribute to the capital and share in the profits but do not
participate in the management of the business and are not personally liable for partnership
obligations beyond the amount of their capital contributions (Arts. 1845, 1848, 1856.);

(4) The limited partners may ask for the return of their capital contributions under the
conditions prescribed by law (Arts. 1844[h], 1857.); and

(5) The partnership debts are paid out of common fund and the individual properties of the
general partners.

 The general partners are treated by the law much like a partner in an ordinary
partnership. They are typically those who know how to manage the business.

 The limited partners are usually those who put money for the business. They are only
investors.

 Their limited liability is an exception to the general rule that all partners, including
industrial partners, are liable pro rata with all their property for partnership debts. (Art.
1816.) Thus, a limited partner has the same type of liability as stockholder in a
corporation.

ARTICLE 1866. A contributor, unless he is a general partner, is not a proper party to proceedings
by or against a partnership, except where the object is to enforce a limited partner’s right against
or liability to the partnership.

Business reason and purpose of statutes

authorizing limited partnerships.

(1) Secure capital from others for one’s business and still retain control.

 There are at least three classes of contracts which can be made with those from whom
the capital is secured:

a. First, the ordinary loan on interest.

b. Second, the loan where the lender, in lieu of interest, takes a share in the profits of
the business.
c. Third, those cases in which the person advancing the capital secures, besides a
share in the profits, some measure of control over the business.

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 (2) Share in profits of a business without risk of personal liability.

(3) Associate as partners with those having business skill.

PURPOSE:

 To encourage those having capital to become partners with those having skill, by
limiting the liability of the former to the incidental amount actually contributed by them.

 The object of such a statute is to furnish reasonable protection to those dealing with
the concern by requiring acts to be done and public notice thereof given so that all who
desire
may know the essential features of the arrangement

DIFFERENCES BETWEEN A GENERAL PARTNER/PARTNERSHIP AND A LIMITED

PARTNER/PARTNERSHIP

AS TO LIABILITIES:

(1) A general partner is personally liable for partnership obligations (Art. 1816.), while a
limited partner’s liability extends only to his capital contribution (Arts. 1845, 1848,
1856.);

EXCEPTION: LP partakes in business

AS TO MANNER OF MANAGEMENT:

(2) When the manner of management has not been agreed upon,

- All of the general partners have an equal right in the management of the business (Arts.
1803, 1810[3].), whether or not the general partner has made any capital contribution,

- While a limited partner has no share in the management of a limited partnership, his rights
being limited to those enumerated in Article 1851, such that he renders himself liable to
creditors as a general partner if he takes part in the control of the business (Art. 1848.);

AS TO THE MANNER OF CONTRIBUTION:

(3) A general partner may contribute money, property, or industry to the partnership (Art.
1767.),
while a limited partner must contribute cash or property to the partnership but not
services (Art. 1845.);

AS TO THE MATTER OF PROCEEDINGS:

(4) Unlike a general partner, a limited partner is not a proper party to proceedings by or
against a partnership unless he is also a general partner (Art. 1853.), or where the
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 object of the proceeding is to enforce a limited partner’s right against, or liability to, the
partnership (Art. 1866.);

AS TO THE MATTER OF INTEREST:

(5) A general partner’s interest in the partnership (Art. 1812.) may not be assigned as to
make the assignee a new partner without the consent of the other partners (Art. 1813.)
although he may associate a third person with him in his share (Art. 1804.),

while a limited partner’s interest is freely assignable, with the assignee acquiring
all the rights of the limited partner subject to certain qualifications1 (Art. 1859.);

AS TO THE NAME OF THE PARTNERSHIP:

(6) The name of a general partner may appear in the firm name (Art. 1815.), while, as a
general rule, that of a limited partner must not (Art. 1846.);

AS TO THE BUSINESS ENGAGEMENT:

(7) A general partner is prohibited from engaging in a business which is of the kind of
business in which the partnership is engaged, if he is a capitalist partner (Art. 1808.),
or in any business for himself if he is an industrial partner (Art. 1789.),

while there is no such prohibition in the case of a limited partner who is considered as
a mere contributor to the partnership (see Art. 1866.); and

AS A MATTER OF DISSOLUTION:

(8) The retirement, death, insanity, or insolvency of a general partner dissolves the
partnership (Arts. 1860, 1830, 1831.),

while the retirement, etc. of a limited partner does not have the same effect, for his
executor or administrator shall have the rights of a limited partner for the purpose of
selling his estate. (Art. 1861.)

THE OTHER DIFFERENCES ARE:

- A general partnership may, as a general rule, be constituted in any form by contract
or conduct of the parties,

- while a limited partnership is

o created by the members after compliance with the requirements set forth by law;
o it is composed only of general partners;
o it must operate under a firm name which in the case of a limited partnership must be
followed by the word “Limited” (Art. 1844[1, a].); and
o its dissolution and winding up are governed by different rules.

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II. FORMATION

1. Statutory requirements (Article 1844)

ARTICLE 1844. Two or more persons desiring to form a limited partnership shall:

(1) Sign and swear to a certificate, which shall state —

a. The name of the partnership, adding thereto the word “Limited”;

b. The character of the business;

c. The location of the principal place of business;

d. The name and place of residence of each member, general and limited
partners being respectively designated;

e. The term for which the partnership is to exist;

f. The amount of cash and a description of and the agreed value of the other
property contributed by each limited partner;

g. The additional contributions, if any, to be made by each limited partner and

the times at which or events on the happening of which they shall be made;

h. The time, if agreed upon, when the contribution of each limited partner is to
be returned;

i. The share of the profits or the other compensation by way of income which
each limited partner shall receive by reason of his contribution;

j. The right, if given, of a limited partner to substitute an assignee as contributor

in his place, and the terms and conditions of the substitution;

k. The right, if given, of the partners to admit additional limited partners;

l. The right, if given, of one or more of the limited partners to priority over other
limited partners, as to contributions or as to compensation by way of income,
and the nature of such priority;

m. The right, if given, of the remaining general partner or partners to continue

the business on the death, retirement, civil interdiction, insanity or insolvency
of a general partner; and

n. The right, if given, of a limited partner to demand and receive property other
than cash in return for his contribution.

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 (2) File for record the certificate in the Office of the Securities and Exchange
Commission.

A limited partnership is formed if there has been substantial compliance in good

faith with the foregoing requirements.

NOTES FORMATION OF LIMITED PARTNERSHIP:

 A limited partnership is formed if there has been substantial compliance in good faith
with the requirements set forth in Article 1844. (last par.); otherwise, the liability of
the limited partners becomes the same as that of general partners.

REQUIREMENTS FOR FORMATION OF A LIMITED PARTNERSHIP.

Under Article 1844, there are two essential requirements for the formation of a limited
partnership:

(1) The certificate or articles of the limited partnership which states the matters
enumerated in the article, must be signed and sworn to; and

(2) Such certificate must be filed for record in the Office of the Securities and
Exchange Commission. (Does not specify the time within which the certificate must
be filed)

 Thus, a limited partnership cannot be constituted orally kasi may requirement

na certificate.

 A strict compliance with the legal requirements is not necessary.

 It is sufficient that there is substantial compliance in good faith.

 If there is no substantial compliance, the partnership becomes a general

partnership as far as third persons are concerned, in which all the
members are liable as general partners.

 person who files a false certificate thereby renders himself liable as a general
partner.

2. Effect of failure to comply with statutory requirements

o To obtain the privilege of a limited partnership liability, one must conform to the
statutory requirements regulating the formation of limited partnerships.

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RULE WHERE PARTNERSHIP CREDITOR GUILTY OF ESTOPPEL.

- Where a certificate of formation of a limited partnership is defective and shows on its face
that the statutory requirements have not been complied with, it has been held that
a court can on its own motion hold that a limited partnership has not been formed.

- But if attaching creditors recognize and deal with a firm as a limited partnership,
they will be estopped from insisting that there is no such partnership, or that the terms
of the partnership were not sufficiently stated in the notice of its formation.

ART. 1845. The contributions of a limited partner may be cash or other property, but
not services.

LIMITED PARTNER’S CONTRIBUTION.

 A limited partner or special partner is not allowed to contribute services. He can

contribute only money or property;
 otherwise, he shall be considered an industrial and general partner, in which case, he
shall not be exempted from personal liability.

A partner may be a general partner and a limited partner in the same partnership at the
same time,
- provided that this fact shall be stated in the certificate provided for in Article 1844 (Art.
1853.),

A limited partner may not be an industrial partner without being a general partner in
view of Article 1845

- which requires that a limited partner must be a capital contributor. It is not clear whether
the rule still applies if the contribution of services is made after the formation of the limited
partnership.

III. RIGHTS AND OBLIGATIONS OF PARTNERS

1. General Partners
2. Limited Partners (Articles 1846, 1848, 1853)

ARTICLE 1846. The surname of a limited partner shall not appear in the partnership
name unless:

1. It is also the surname of a general partner, or

2. Prior to the time when the limited partner became such, the business had
been carried on under a name in which his surname appeared.

A limited partner whose surname appears in a partnership name contrary to the

provisions of the first paragraph is liable as a general partner to partnership
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 creditors who extend credit to the partnership without actual knowledge that he
is not a general partner.

ARTICLE 1848.

GR: A limited partner shall not become liable as a general partner

EXCEPTION: unless, in addition to the exercise of his rights and powers as a limited
partner, he takes part in the control of the business.

NOTES:

The limited partner takes part in the management of the business and is liable generally
for the fi rm’s obligations where:

(1) The business of the partnership is in fact carried on by a board of directors chosen
by the limited partners.
(2) By the terms of the contract between the parties, an appointee of the limited partner
becomes the directing manager of the firm
(3) The limited partner purchases the entire property of the partnership, taking title in
himself and then carries on the business in his own name and for his own exclusive
benefit; or
(4) He makes or is a party to a contract with creditors of an insolvent fi rm with respect
to the disposal of the fi rm’s assets in payment of the fi rm’s debts. (Ibid.)

The interference contemplated by Article 1848 is with respect to an existing limited

partnership. Accordingly, a limited partner is not subject to general liability for taking part in
the management of the fi rm because he settles its affairs after dissolution. (Ibid.)

SPECIFIC RIGHTS OF A LIMITED PARTNER.

Article 1851 enumerates the specific rights of the limited partner in the partnership.
They are as follows:

(1) To require that the partnership books be kept at the principal place of business of the
partnership (see Art. 1805.);
(2) To inspect and copy at a reasonable hour partnership books or any of them (Ibid.);
(3) To demand true and full information of all things affecting the partnership (see Art.
1806.);
(4) To demand a formal account of partnership affairs whenever circumstances render it
just and reasonable (see Art. 1809.);
(5) To ask for dissolution and winding up by decree of court (see Arts. 1831, 1857, par. 4.);
(6) To receive a share of the profits or other compensation by way of income (Art. 1856.);
and
(7) To receive the return of his contribution provided the partnership assets are in
excess of all its liabilities. (Art. 1857)

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NOTES:

 If the law is not complied with, the attempt to limit the liability of the limited partners
will be ineffective, at least as to creditors who have not recognized, or dealt with, the
firm as a limited partnership.

 However, it may be more accurate to say that sometimes the limited partnership exists
in spite of the failure of the firm to comply with the law, and that the limited partner
is merely made liable for the debts of the fi rm as if he were a general partner.

 Article 1852 grants exemption from liability in favor of one who has contributed to
the capital of a business conducted by a person or partnership erroneously
believing that he has become a limited partner in a limited partnership, or in a general
partnership thinking that it is a limited partnership

 It introduces a substantial modification of liability where there has been a failure to create
a limited partnership.

Status of person erroneously believing

himself to be a limited partner.

1. Conditions for exemption from liability as general partner.

(a) On ascertaining the mistake, he promptly renounces his interest in the profits of
the business or other compensation by way of income (Art. 1852.); (The person,
however, must promptly renounce his interest (e.g., selling it to the general
partners) before the partnership has become liable to third persons who cannot
be blamed for considering him a general partner.)

(b) His surname does not appear in the partnership name (Art. 1846.); and

(c) He does not participate in the management of the business. (Art. 1848.)

2. Necessity of renouncing his interest. —

3. Obligation to pay back profits and compensation already received.

o there is no obligation to return or pay back profits or compensation already received.

ARTICLE 1853. A person may be a general partner and a limited partner in the same
partnership at the same time, provided that this fact shall be stated in the certificate
provided for in article 1844.

A person who is a general, and also at the same time a limited partner, shall have all
the rights and powers and be subject to all the restrictions of a general partner;
except that, in respect to his contribution, he shall have the rights against the other
members which he would have had if he were not also a general partner.

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  This means that while he is not relieved from personal liability to third persons for
partnership debts, he is entitled to recover from the general partners the amount he
has paid to such third persons; and in settling accounts after dissolution, he shall
have priority over general par.

IV. AMENDMENT OR CANCELLATION OF CERTIFICATE

V. DISSOLUTION AND WINDING UP (ARTICLES 1860, 1861)

ARTICLE 1860. The retirement, death, insolvency, insanity or civil interdiction of a

general partner dissolves the partnership, unless the business is continued by the
remaining general partners:

(1) Under a right so to do stated in the certificate, or

(2) With the consent of all members.

ARTICLE 1861. On the death of a limited partner his executor or administrator

shall have all the rights of a limited partner for the purpose of settling his estate,
and such power as the deceased had to constitute his assignee a substituted limited
partner.

The estate of a deceased limited partner shall be liable for all his liabilities as a
limited partner.

ARTICLE 1863. In settling accounts after dissolution the liabilities of the partnership shall be
entitled to payment in the following order:

(1) Those to creditors, in the order of priority as provided by law, except those to limited
partners on account of their contributions, and to general partners;

(2) Those to limited partners in respect to their share of the profits and other compensation
by way of income on their contributions;

(3) Those to limited partners in respect to the capital of their contributions;

(4) Those to general partners other than for capital and profits;

(5) Those to general partners in respect to profits;

(6) Those to general partners in respect to capital.

Subject to any statement in the certificate or to subsequent agreement, limited partners share
in the partnership assets in respect to their claims for capital, and in respect to their claims for
profits or for compensation by way of income on their contribution respectively, in proportion
to the respective amounts of such claims.

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ARTICLE 1847. If the certificate contains a false statement, one who suffers loss by
reliance on such statement may hold liable any party to the certificate who knew
the statement to be false:

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