PEA 5 – Regulatory Framework and

Business Transactions Review

Second Trimester, Schoolyear 2022 – 2023

January 31, 2023

Atty. Manuel R. del Rosario

 PARTNERSHIPS

Articles 1767 – 1867

Civil Code of the Philippines
 WHAT IS A PARTNERSHIP?

A partnership has a legal or juridical personality separate and

distinct from that of each of the partners. (1768)

A partnership divides the profits earned but also shares the

losses in case there are any. This is a necessary corollary of
the principle of sharing profits

Essentially, a partnership is a contract of agency since one

partner can act for and on behalf of the partnership. One
partner can bind the partnership.

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 ESSENTIAL ELEMENTS
OF A PARTNERSHIP

1. There must be a valid contract;

2. Legal capacity among the parties;
3. Mutual contribution of either money, property or work;
4. Object of the partnership must be lawful;
5. Purpose is to obtain a profit for division among the
members

EXAMPLE: An agreement to pray the Holy Rosary everyday

is not a legal partnership.

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 ESSENTIAL ELEMENTS
OF A PARTNERSHIP
Delectus personae – literally "the choice of a person.” The law of
partnership is based on mutual agency – “I act as your agent, and
you act as my agent.” Members of a partnership have the right to
choose a prospective partner.

A partner has a fiduciary duty to the partnership and all partners.

The partners must always place the interest of the partnership
above their personal or business interests. A fiduciary duty is the
obligation to act in another party’s best interest.

EXAMPLES : Attorney to Client; Guardian to Ward; Financial

Advisors to Clients; Estate Administrator to Estate; Partner to
Other Partners. PANGALAGAAN ANG KAPAKANAN NG IBANG
PARTNER.

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 RULES IN DETERMINING WHETHER
A PARTNERSHIP EXISTS (1769)
1. Persons who are not partners to each other are not partners to
third parties

2. Co-ownership or co-possession does not of itself establish

a partnership. Co-owners may establish a partnership but
this is not presumed.

3. The sharing of profits does not of itself establish a partnership.

4. However, if a person receives a share in the profits of a

business, this is prima facie evidence that he is a partner in
the business.

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 SETTING UP A PARTNERSHIP
A partnership may be constituted in any form (oral or written) but
where immovable property or real rights are involved (regardless of
the amount) it must be placed in a public instrument (1771). NO
LONGER PRACTICAL AND USEFUL.

An inventory of all real property contributed must be made, signed

and attached to the articles of partnership (1773).

A partnership with a capital of P3,000 or more in money or property

shall appear in a public instrument and recorded with the Securities
and Exchange Commission (1772). Essentially all partnerships
should be registered because of the very low amount.

Public Instrument: In writing and duly notarized.

TIP: All partnerships must be in a public instrument and

registered with the SEC. Articles of Partnership will be
issued.
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 KINDS OF PARTNERSHIPS

1. Universal Partnership of All Present Property

1.5 Partnership of Some Property
2. Universal Partnership of All of the Profits (Nagpahiram ng
property)

3. Partnership for a Specific Purpose - deadline

4. Partnership for a Fixed Term - deadline

1, 1.5 and 2 are called “partnerships at will” – walang deadline

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 (1) UNIVERSAL PARTNERSHIP OF ALL PRESENT
PROPERTY vs. (2) UNIVERSAL PARTNERSHIP OF
ALL OF THE PROFITS

A universal partnership may refer to (1) all the present

property or (2) all of the profits (1777).

A universal partnership of all present property is NOT

presumed. If the articles are silent, it is a universal partnership
of profits only (1781)

A universal partnership of all present property is when the

partners contribute all their property to a common fund with
the intention of dividing the same among themselves as well
as the profits they may acquire (1778).

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 (1) UNIVERSAL PARTNERSHIP OF
ALL PRESENT PROPERTY

The separate property of one partner will now become common

property of the partnership from the time the partnership is formed,
as well as all the profits which they may acquire (1779).

EXAMPLE: Atty. Marvin and Atty. Julia decided to form a legal

partnership. Atty. Marvin decided to contribute a condominium unit in
Pasig City and Atty. Julia contributed P2,000,000 in cash.
The partnership is now the owner of the condominium and the
P2,000,000 because there is transfer of ownership. Very onerous or
burdensome. Binigay ni Atty. Marvin ang condominium sa partnership.

NOTE: Future property acquired by the partners are not included in

the universal partnership since it involves present property only.

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 (2) UNIVERSAL PARTNERSHIP OF
ALL OF THE PROFITS

A universal partnership of profit (1780) comprises

everything the partners may acquire by their industry or
work during the partnership’s existence.

Property owned by the partners shall continue to pertain

exclusively to each during the partnership. THERE IS NO
TRANSFER OF OWNERSHIP OF THE PROPERTIES.
The partnership may use the property to generate income
or profit, but ownership remains with the original owner

Universal Partnership of All of the Profits is LESS

BURDENSOME.

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 (2) UNIVERSAL PARTNERSHIP OF
ALL OF THE PROFITS

EXAMPLE OF PARTNERSHIP OF ALL OF THE PROFITS: the

Marvin and Julia Law Office utilized the condominium unit owned
by Atty. Marvin as their office. They also used furniture, computers
and office equipment contributed by Atty. Julia.

The condominium is still owned by Atty. Marvin. The furniture,

computer and office equipment are still owned by Atty. Julia.
Nagpahiram ng property.

USUFRUCT: the temporary use and enjoyment of another's

property with the basic obligation of preserving its form and
substance and returning it at a designated time.

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 SETTING UP A PARTNERSHIP (3) FOR A SPECIFIC
PURPOSE OR (4) FOR A FIXED PERIOD

Generally, once a partnership is established its existence continues until its

dissolution.

However, a partnership may also be constituted for (3) a specific purpose

only or (4) or a fixed period of time.

EXAMPLE (3): Jose, Merlin and Bryan constituted a partnership for the
sole purpose of buying an old house and lot, improving the same and then
selling it for a profit. Once the house and lot is sold the partnership ends.
This is called a particular partnership or a partnership for a specific purpose
(1783). It is a partnership even if it involves only a single transaction.

EXAMPLE (4): Atty. Jake and Atty. Tips are new lawyers. They decided to
put up a Law Office for a period of 5 years only so they can learn the ropes
of law practice. After 5 years the partnership will end, and they will close
the Law Office and they will go their separate ways. This is a partnership
for a fixed period.
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(3) PARTNERSHIP FOR A SPECIFIC PURPOSE
AND (4) PARTNERSHIP FOR A FIXED TERM

In case a partnership is continued AFTER the accomplishment of

the specific purpose or AFTER the end of the fixed term, the
rights and duties of the partner remain the same as originally
agreed upon (1785).

HOW DO WE PROVE THIS? If any of the partners continued

to conduct business or continued to act like a partner even after
the specific purpose has been achieved or after the fixed term
has expired, this is prima facie evidence that the partnership
continues.

Prima facie – based on first impression, accepted as correct

until proven otherwise

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 CONTRIBUTIONS TO A NEW PARTNERSHIP

Jose, Merlin and Bryan, who are all CPAs, wanted to form a
professional partnership to practice accounting. They have several
options:

a. They can contribute ALL their present property to the

partnership common fund. This means that the partnership will
own ALL the properties transferred;

b. They can contribute SOME but not all of their present property
to the partnership common fund. This means that the
partnership will own ONLY the specific properties transferred;

c. If it is a partnership of ALL of the profits, permission to use

certain properties is given to the partnership, but ownership is
NOT transferred. Usufruct only.

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OBLIGATIONS OF THE PARTNERS
AMONG THEMSELVES

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 PARTNERSHIP RELATIONS

A partnership gives rise to several juridical relationships:

a. Among the partners themselves;

b. Between the partners and the partnership (because the
partnership has a separate juridical personality);
c. Between the partners and third persons (includes the
government);
d. Between the partnership and third persons.

THREE PLAYERS: Partners, Partnership and Third Persons

LEGAL = JURIDICAL

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 RELATIONSHIP AMONG PARTNERS

Any partner who promises to give or contribute something to the

partnership becomes a debtor of the partnership. This contributor is
also bound for warranty in case of eviction (1786). A partner must
comply with his or her undertaking under the Articles of Partnership.

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 KINDS OF PARTNERS
1. Capitalist partner – contributes money or property
2. Industrial partner – contributes work, effort, industry or
personal service
3. General partner – one whose liability extends to his personal
property and not just what he contributed to the partnership
4. Limited partner – liability is limited to his capital contributions
5. Managing partner – manages the affairs of the partnership
6. Liquidating partner – tasked to wind up a partnership upon
dissolution
7. Continuing partner – continues the business after the
dissolution of the partnership
8. Surviving partner – one who remains in the partnership after it
it has been dissolved by the death of another partner

Nos. 1 to 5 are important concepts.

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 CAPITALIST PARTNER CANNOT ENGAGE IN THE
SAME OR SIMILAR PARTNERSHIP BUSINESS

Capitalist partners cannot engage for their own account in any operation
which is of the kind of business in which the partnership is engaged.
RELATIVE PROHIBITION

Any partner that violates this prohibition shall bring to the common fund
any profits accruing to him from his transactions, and shall personally
bear the loss. (1808)

EXAMPLE 1: Peter, Paul and Mary are CPAs. They put up a partnership
with Peter and Paul contributing money (capitalist partners) and Mary
contributing her services (industrial partner) since she did not have
money to contribute. Peter cannot engage in any accounting work. He
should refer all business to the partnership and not take them on in his
personal capacity. This is part of his fiduciary duty to the partnership.

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 INDUSTRIAL PARTNER CANNOT ENGAGE
IN ANY KIND OF BUSINESS FOR HIMSELF

An industrial partner does not contribute any money or property to the

partnership but rather he promises to contribute his energy, effort, labor
and industry. The partnership has an exclusive right to his services (1789).
ABSOLUTE PROHIBITION

EXAMPLE: Peter, Paul and Mary are CPAs. They put up a partnership with
Peter and Paul contributing money and Mary contributing her service since
she did not have money to contribute. Can Mary teach Accounting subjects
at a local college? Following Art. 1789 the answer is NO.

LEGAL ADVICE: If we want to allow an industrial partner to engage in

some unrelated business activity, we should place clearly in the Articles of
Partnership what the industrial partner can and cannot do. The Articles can
allow the industrial partner to engage in an unrelated business, for example
selling insurance or baking cakes for sale on FB. Bottomline: Magpaalam sa
partnership.

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 Can Work for Included in Shares in Share in
Contribution the Partnership the the
Partnership? Name? Profits? Losses?
money,
Capitalist
property or yes yes yes yes
Partner
industry
Industrial
industry yes yes yes no
Partner
Limited money or
no no yes no
Partner property
 WHY DOES THE INDUSTRIAL PARTNER
NOT SHARE IN THE LOSSES?

Since the industrial partner does not contribute any money

to the partnership, he shares in the profits but not in the
losses. If he has worked diligently for the partnership, but
despite this there are still losses, he already did his share.

An industrial partner is like an employee of the partnership

insofar as losses are concerned.

Kasama sa kita, hindi kasama sa lugi.

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 HOW ARE PARTNERSHIP PROFITS OR
LOSSES DIVIDED AMONG THE PARTNERS?

1. Distribute the profits and losses according to the agreement of the

parties;
2. If there is agreement only on the distribution of profits but none as
to the distribution of losses, they will share in the losses in the
same proportion as profits;
3. If there is no agreement at all, distribute the profits and losses
among the capitalist partners according to their capital
contribution;
4. If there is no agreement as to how much an industrial partner will
receive, give the industrial partner a just and equitable share of the
profits under the circumstances.
5. An industrial partner shares in the profits but DOES NOT SHARE
IN THE LOSSES (1797). VERY IMPORTANT
6. Any stipulation that one partner will not share in the profits or
losses is VOID. (1799).

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A partner’s interest in the partnership is his share of the profits
and surplus. (1812)

EXAMPLE OF PROFIT SHARING: Peter and Paul formed a

partnership to engage in the hardware business. They contributed
a total of P5M as partnership funds. Peter contributed P3.5M or
70% while Paul chipped in P1.5M or 30%.

In Year 1, the hardware business earned a net profit of P2M. If there is

no specific agreement in the Articles of Partnership, the P2M profit will be
divided according to their contributions and Peter will get 70% or P1.4M
and Paul will get 30% or P600K.

First Rule: Divide profits and losses as well as any surplus according
to the Articles of Partnership
Second Rule: If the Articles do not specify this, the percentage of
contribution = percentage share in profits and losses.

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 DESIGNATION OF SHARE OF
PROFITS AND LOSSES
The partners may assign to a third person the designation
(computation) of their share in the profits and losses of the
partnership.

EXAMPLE: Dr. Joseph, Dr. Timmy and Dr. Clarence operate a

medical partnership. They entrusted to SGV and Co the task of
determining the profits and losses of the partnership. They did
this so it is an impartial party who will do the accounting.

The designation of profits and losses can be made to a third

person BUT NOT to another partner. This is to guarantee there is
no bias or favoritism.

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 MANAGING PARTNER

The managing partner appointed in the Articles of Partnership

may execute all acts of administration despite opposition of the
other partners, unless he acts in bad faith. The power of the
managing partner may be revoked for a just or lawful cause by
majority vote of controlling interest in the partnership.

The managing partner appointed AFTER the partnership is

formed may be removed at any time and for whatever reason
(1800).

Note: Mahirap alisin ang Managing Partner na appointed sa

Articles of Partnership. Dapat may just or lawful cause.

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POWERS OF THE MANAGING PARTNER

The managing partner may perform all acts of administration

but not acts of ownership.

Acts of administration include all necessary and corollary

powers to carry out the purpose of the partnership. These
include:

- hiring, managing and firing employees;

- buying and selling items for the partnership;
- lease or rental of property;
- all transactions in the normal course of business

For acts of ownership, get the consent of partners.

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WHEN NO MANAGING PARTNER IS APPOINTED

When no managing partner has been agreed upon, all of

the partners shall be considered managers or agents and
can bind the partnership (1803). In case of disagreement
the controlling interest in the partnership decides the
matter. Very dangerous.

However, the consent of all the other partners is required if

important alterations to real property of the partnership is
needed. If this consent is not given by some partners, the
other partners may go to court.

TIP: It is always best to appoint a managing partner to

avoid disagreements and so the partnership will have a
“face”.

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 CONTRACT OF SUB-PARTNERSHIP

Every partner may associate another person with him in his share
(sub-partner), but the associate shall not be admitted into the
partnership without the consent of all the other partners. (1804)

The arrangement formed between a member of a partnership and a

third person for a division of the profits coming to him from the
partnership enterprise is called a sub-partnership. They DO NOT
affect the existence or operation of the partnership.

EXAMPLE: Ben and Jerry enter into a partnership to operate a

barber shop. Ben takes in his classmate Agaton as a sub-partner so
that Agaton can share in any profit that the barber shop will earn.
This is valid but it does not affect the existence and operation of the
barber shop. Ben does not need the permission of Jerry to take in a
sub-partner. Agaton is not a partner and does not have the rights of
a partner.
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PROPERTY RIGHTS OF A PARTNER

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 PARTNERSHIP BOOKS OF ACCOUNT

The books of the partnership must be kept in the principal place of business.
Every partner shall have access to and may inspect and copy the books at
any reasonable hour (1805).

Partners have a duty to render on demand a true and full information of all
things affecting the partnership to any partner or legal representative of
any deceased partner or one who is under legal disability (1806). DUTY OF
FULL DISCLOSURE of matters affecting the partnership.

A partner must account for any benefit derived by him without the consent of
the others from any transaction connected with the partnership or from his use
of its property (1807). FIDUCIARY DUTY – always act for the common
benefit of the partnership. Bawal ang bantay salakay

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 PRINCIPAL RIGHTS OF A PARTNER

1. His rights in specific partnership property (SPP);

2. His interest in the partnership (profits and surplus) and
3. His right to participate in the management of the
partnership. (1810)

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 COROLLARY RIGHTS OF A PARTNER

1. To be reimbursed for any amount advanced;

2. To have access and the right to inspect partnership books;
3. To be informed about the all things related to the partnership;
4. To receive a formal account of partnership affairs;
5. To have the partnership dissolved.

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 A PARTNER IS CO-OWNER OF
SPECIFIC PARTNERSHIP PROPERTY (SPP)

1. A partner has an equal right with the other partners to

possess SPP for partnership purposes;

2. A partner’s right in SPP is not assignable;

3. A partner’s right in SPP is not subject to attachment or execution

except when the claim is against the partnership;

4. A partner’s right in SPP is not subject to legal support. (1811)

SPP - property owned and in the name of the

partnership

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 CONVEYANCE OF A PARTNER’S
WHOLE INTEREST IN THE PARTNERSHIP
A partner may convey or transfer his interest in the partnership, and
this will not automatically dissolve the partnership.

However, the assignee cannot:

- interfere in the affairs of the partnership (Why not? Delectus

Personae)
- require any information on transactions
- inspect partnership books

The assignee is entitled to receive the profits to which the assignor is

entitled. In case the partnership is dissolved, the assignee can
receive the assignor’s interest and can ask for an accounting of
partnership transactions. (1813)

THE ASSIGNEE HAS LIMITED RIGHTS

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 REMEDIES OF THE
CREDITOR OF A PARTNER

A creditor of any partner cannot go after SPP for the satisfaction of the debt
of any partner. (1811, paragraph 3). Why? Because SPP is owned by the
partnership.

The creditor can go to court and apply for a “charging order.” This order
subjects the interest of the debtor/partner with the payment of the
judgment. (1814)

EXAMPLE: Kim and Arlene run a beauty parlor as a partnership. They

contributed P500,000 each. Because Kim owes Metrobank an unpaid loan of
P200,000, Metrobank sued Kim in court and won. Metrobank cannot run after
SPP of the beauty parlor. But it can ask the court to issue a charging order
that directs the partnership to give to Metrobank any profits that are
supposed to go to Kim. The partnership and Arlene are not affected by the
case filed by Metrobank and is not responsible for the unpaid loan and the
court judgment.

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 PARTNERS MAY HELP OUT
THE DEBTOR / PARTNER
The partners may agree to help a debtor/partner in case a charging order is issued by
a court:

(1) by paying the creditor of the debtor/partner with their separate property;
(2) by paying the creditor with SPP with the consent of all the partners. (1814,
paragraph 2)

EXAMPLE: Kim and Arlene run a beauty parlor as a partnership. They contributed
P500,000 each. Because Kim owes Metrobank an unpaid loan of P200,000 Metrobank
sued Kim in court and won. Metrobank cannot run after SPP of the beauty parlor. But it
can ask the court to issue a charging order that directs the partnership to give to
Metrobank any profits that are supposed to go to Kim.

(1) Arlene in her personal capacity can offer to pay Metrobank the P200,000 debt of
Kim. Arlene now becomes a personal creditor of Kim.

(2) The partnership can also sell SPP and use the proceeds to pay Metrobank.
However, Kim will now owe the partnership P200,000. This is like a cash advance.
Pinautang ng partnership si Kim.

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