Professional Documents
Culture Documents
Legal Definition: 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
profession.
• Contract - signifies intention to make the agreement legally binding, whether written or spoken initially.
• Contributions
Money may be physical cash, cash in banks, or any other things that can be considered as legal tender.
Properties can be sub-classified further: Real and Personal. Real properties are land and buildings, and any
other immovable properties that you can think of. Personal properties are any movable properties. It could be a
thing, animal, or anything that can be considered as a property.
Industry is hard work. A person can contribute his or her skills to be a partner. Any work such as accounting,
auditing, marketing, advertising, drawing, clerical work, other specialized skills depending on the business
being formed by the partnership, anything.
Art. 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.
General rule: Contract maybe made orally or in writing regardless of the value of the contributions.
Art. 1772. - Every contract of partnership having a capital of three thousand pesos 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. Registration of
partnership
TRUE OR FALSE
1. The partner investing a particular kind of assets retains any personal
right to it.
2. Any partner can legally bind all the partners by an action that is part of
the usual conduct of the partnership.
3. An agreement to exclude one partner from profit sharing is void.
4. When the partnership capitalization is below 3,000 , a written
agreement is needed in forming a partnership.
Advantages of Partnership
o It is protected and regulated by law.
o It is easy to get started and inexpensive to organize. The partners can agree to create the
partnership verbally or in writing. A written agreement is required when partnership capital is P
3,000 or more in money or in property.
o More partners, more capital - Higher amount of capital may be raised coming from the
combined existing resources (through assets) and potential resources (from creditors) of the
partners than in a sole proprietorship.
o Better in decision making - There is relative freedom, flexibility, and efficiency in decision-
making. Decisions can be made easily and changes can be effected immediately with less
formalities provided that they are within the confines of the agreement and the partnership
law.
o Access to knowledge, skills, experience and contacts - It is assumed to have better
management and supervision resulting from the participation, combined experience, and
ability of partners than in a sole proprietorship.
o Sharing Burden - The unlimited liability of the partners may be viewed by the creditors
positively thereby granting higher credit limit to the partnership thinking that, in the event of
liquidation, they can always run after the personal assets of any solvent general partner.
Disadvantages of Partnership
o It has more regulatory requirements than a sole proprietorship.
o Easily Dissolved - Admission of a new partner and withdrawal, death, retirement, bankruptcy, and incapacity
of an existing partner dissolve the partnership. Thus, it is less stable than a corporation.
o Limited access to capital- Partnerships cannot raise large amounts of capital from public sources through
sale of securities unlike corporation. Capitalization is limited to what may be invested by the partners.
o More difficult decision making - As it entails mutual consent, transferring ownership interest requires
approval of all the partners. This is not true in sole proprietorships and corporations. Moreover, a partner
may be subject to personal liability for the misdeeds, wrongdoings, or omissions of fellow partners.
o Potential for differences and conflict - It can be expected that several partners participate in business
operations. When that happens, the likelihood of dissension and disagreement will be higher especially
when the partners involved have similar levels of authority in the management of the partnership.
o Unlimited Liability - The partners are personally liable for debts and losses incurred. So if the business runs
into trouble, the personal assets may be at risk of being seized by creditors, which would generally
not be the case if the business was a limited company.
o Profits must be shared - While a sole proprietor retains all the profits of their business, those of a
partnership are shared amongst the partners. Sharing profits equitably can raise difficult questions. What
happens when one partner is seen to be putting in less time and effort into the partnership, but still taking
their share of the profits? It’s easy for resentment to occur if there doesn’t appear to be a fair balance
between effort and reward.
Q&A
5. The advantages of the partnership do not include
A. Ease of formation
B. Unlimited liability
C. Freedom from government regulations
D. Ease of decision making
Classifications of Partnership
As to activities or purpose
1. General partnership: This is a partnership wherein all partners may publicly act on
behalf of the partnership and each partner can be held individually liable, pro-rata
and sometimes solidarily with their personal property, for the obligations of the
partnership.
2. Limited partnership: This is a partnership wherein one or more but not all the
partners have a limited liability. Since a limited partner is answerable for partnership
debts only up to the extent of his or her contribution, the law requires that a limited
partnership should have at least one general partner to protect the interest of the
creditors.
Classifications of Partnership
As to duration
1. Partnership at will: This is a partnership wherein no fixed term for which the
partnership is to exist is agreed-upon or no particular undertaking for which the
partnership is to end is specified. It may be terminated anytime upon the desire of at
least one partner or mutual agreement of partners.
2. Partnership with a fixed term: This is a partnership wherein a fixed term for which
the partnership is to exist is agreed upon or a particular undertaking for which the
partnership is to end is specified. Partnership is considered dissolved when the fixed
term expires or when particular undertaking is completed unless partners decide to
continue.
Classifications of Partnership
As to legality of existence
1. De jure partnership: This is a partnership which has complied with all the legal
requirements for its existence.
2. De facto partnership: This is a partnership which failed to comply with all the legal
requirements for its existence.
Classifications of Partnership
As representation to others
7. A partnership in which the term or period for which the partnership is to exist is agreed upon
A. Partnership with a Fixed Term
B. Partnership at will
C. Universal partnership of all present property
D. Limited partnership
8. All the following statements are true for both general and limited partnerships EXCEPT
A. both are easily dissolved.
B. both must have at least one general partner.
C. all partners can be personally liable for all debts of the partnership.
D. all partners have the right to participate in the profits of the business.
Classifications of Partners
As to contribution
2. Industrial partner: One who contributes industry (labor, skill, talent, service, or
expertise). An industrial partner is not liable for losses.
1. General partner: One whose liability to third persons extends to personal assets or
property
2. Limited partner: One whose liability to third persons is limited only to the extent of
capital contributed to the partnership
Classifications of Partners
As to management
1. Managing partner: One who actively manages the operations and affairs of the
partnership
2. Silent partner: One who does not participate in the management of operations and
affairs of the partnership
Classifications of Partners
Other classifications
a. Liquidating partner: One who takes charge of winding up the operations and affairs of the partnership
upon dissolution
b. Nominal partner: One who is not really a partner and not a party to the partnership agreement but is
made liable as a partner for the protection of innocent third persons
c. Ostensible partner: One who takes an active part in the management of the partnership and is known to
the public as a partner
d. Secret partner: One who takes an active part in the management of the partnership but is unknown to the
public as a partner
e. Dormant partner: One who does not take an active part in the management of the partnership and is not
known to the public as a partner. He or she is both a silent and a secret partner.
f. Continuing partner: One who continues business after dissolution
g. Surviving partner: One who remains after the death of the partner
h. Sub-partner: One who enters into contracts with partners
i. Original partner: One who is a partner at the time of organization
j. Incoming partner: One who is about to become a partner
k. Retiring partner: One who is about to withdraw as a partner
Q&A
TRUE OR FALSE
9. A secret partner is a dormant partner.
10. General partners are personally liable for the partnership’s debts after the exhaustion of its assets.
12. A partner who is appointed to administer the realization and distribution of partnership assets
after dissolution
A. Industrial partner
B. Managing partner
C. Liquidating partner
D. Ostensible partner
QUESTIONS?