PARTNERSHIP: BASIC CONSIDERATIONS AND FORMATION

Definition
Civil Code of the Philippines
→ 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
→ two or more persons can form a partnership for the exercise of a profession
 has juridical personality (separate and distinct from each of the partners)
 each owner is called partner
Characteristics of a Partnership
o Mutual Contribution --- each partner must contribute money, property or industry to a common
fund
o Division of Profit or Losses --- each partner must share the profits and losses
o Co-ownership of the contributed assets --- all assets contributed into the partnership is owned by
the partnership
o Mutual Agency --- any partner can bind the other partners to a contract if he is acting within his
implied authority
o Limited Life
 dissolved by the admission of new partners
 death
 insolvency
 incapacity
 withdrawal of any partner
 expiration of the term
 completion of goal
o Unlimited Liability --- all partners (except limited partners) are liable to all debts incurred by the
partnership --- creditors of the partnership can access the personal assets of the general partner
o Income Taxes --- subjected to tax at the rate of 30% of taxable income, except GPP (General
Professional Partners)
o Partner’s Equity Account --- each partner has a capital and withdrawal account

Advantages and Disadvantages of a Partnership

Advantages over Sole Proprietorship

 greater financial capability

 combines special skills, expertise, and experience of the partners
 freedom and flexibility in decision-making
Advantages over Corporation

 easier and less expensive

 more personal and informal
Disadvantages
  easily dissolved and unstable compared to corporation
 high personal obligations to partners
 less capital compared to corporation
Partnership distinguished from Corporation

Partnership Corporation
Manner of creation o contract; mere agreement of o operation of law
the partners
Number of Persons o two or more o not exceeding fifteen
(One Person corporation –
single stockholder)
Commencement of Juridical o commences from the o date of issuance of
Personality execution of the certificate of incorporation
contract/articles by the SEC
Management o every partner is an agent of o vested on the Board of
the partnership Directors
Extent of Liability o each partner (except limited o stockholders are liable only
partner) is liable to the to the extent of their
extent of his personal assets interest/investment
Right of Succession o no right of succession o has the capacity of
continued existence
Terms of Existence o any period of time stipulated o have perpetual existence
by the partners

Classification of Partnerships
1. According to Object
a. Universal partnership of all present property
o present properties contributed from each of the partners at the time of the constitution of
partnership
o profits which they acquire from all the property contributed
b. Universal partnership of profits - properties contributed are still owned by the partner and not the
partnership, only the profits resulting from the utilization of the properties
o Profits resulting from and individual partner’s industry (salaries, wages, commissions,
etc.)
o Profits from properties acquired AFTER the formation of the partnership are also
excluded, UNLESS there is a stipulation
o Profits results from by chance (lotto, winnings, raffle) are excluded
c. Particular partnership --- the object of the partnership is determinate (formed to do a
particular/specific business)
o its use or fruit
o specific undertaking
o exercise of profession or vocation
2. According to liability
a. General Partnership --- consist entirely of general partners; all partners are liable to the extent of
their separate properties, unlimited liability for the partnership debts
 b. Limited Partnership --- both have general partners and limited partners
o there shall be atleast one general partner
o General partner: unlimited partnership debts
Limited partner: limited liability up to the amount of their personal contributions
Note: Unlimited liability – creditors of the partnership can access the personal assets of the general
partner
3. According to duration
a. partnership with a fixed term or formed upon particular undertaking
b. Partnership at will --- no term is specified and not formed for any particular undertaking
(can be terminated anytime by mutual agreement)
4. According to purpose
a. Commercial or Trading Partnership --- formed for the transaction of business
b. Professional or Non-trading Business --- formed for the exercise of a profession
5. According to legality of existence
a. De jure partnership --- compiled with all the legal requirements for establishments
b. De facto partnership --- failed to comply with all the legal requirements for establishments
Kinds of Partners
1. General partner --- liable to the extent of his separate property
2. Limited partner --- only liable to the extent of his contribution (not allowed to contribute
industry or services only)
3. Capitalist partner --- contributes money or property to a common fund
4. Industrial partner --- contributes his knowledge or personal service
5. Managing partner --- appointed as manager
6. Liquidating partner --- designated to settle the affairs of the partnership after dissolution
7. Ostensible partner --- take active part in the management and known as a partner
8. Dormant partner --- does not take active part in the management of partnership and not known
as a partner (only contributes to the share of profits and losses)
9. Silent partner --- does not take active part in the management of partnership and known as a
partner
10. Secret partner --- takes active part in the business but is not known to be a partner by outside
parties
11. Nominal partner or partner by estoppel --- who is not actually a partner but who represents
himself as one
Articles of Partnership
→ partnership agreements which contains:
 Partnership name, nature, purpose, and location
 Names, citizenship, and residences of the partners
 Date of formation and duration of partnership
 Capital contribution of each partner, procedure for valuing non-cash investments, treatment of excess
contribution (as capital or as loan), and penalties for partner’s failure to invest and maintain the
agreed capital
 Rights and duties of each partner
 Accounting period to be adopted, nature of accounting records, financial statements, and audits by
independent public accountants
 Method of sharing profit and loss, frequency of income measurement and distribution
 Drawing and salaries to be allowed to partners
 Provision for arbitration of disputes, dissolution, and liquidation

Note:
Where an immovable property was contributed to a partnership, it must be made, signed by the parties,
and attached to the public instrument. Otherwise, the contract of partnership is void.

SEC Registration
 When the partnership capital is 3,000 or more (in money or property), it shall appear in a public
instrument and must be recorded with the Securities and Exchange Commission (SEC) --- even if not
registered

Note:
SEC shall not register any corporation organized for the practice of public accountancy

Purpose of registration --- to set conditions for the issuance of license to engage in business or trade (tax
liabilities cannot be invaded)
Basic steps to register a partnership with the SEC
 Business name verified in the verification unit of SEC
 Partnership (shall bear “Company”, or “Co.”)
 Limited partnership (“Limited” or “Ltd.”)
 Professional partnership (“Company”, “Associates”, or “Partners”
 Submit required documents
 Pay registration/filling (1% of the partnership capital but not less than 1, 000) and miscellaneous fees,
and legal research fee (1% of the filling fee)
 Forward the documents to the SEC commissioner for signature
Accounting for Partnerships
Owner’s Equity Account
→ separate capital and drawing accounts are established for each partner
o Partner’s Capital account
 Credited for initial investments (adjusted based on agreements) and additional net investments
(assets contributed less liabilities assumed by the partnership) and credit balance of the drawing
account at the end of the period
 Debited for permanent withdrawals and debit balance of the drawing account at the end of the
period
o Partner’s Drawing Account
 Debited for temporary withdrawals

Note:
  Permanent Withdrawals – permanently decreasing the partner’s capital
 Temporary Withdrawals – regular advances made by the partners

--- Share in Profit or (loss) is credited or debited either to the drawing or capital account (the choice
depends on the intention of the partners)
 Entered in the drawing account – maintaining capital accounts for investments and permanent
withdrawal
 Entered in the capital account – to make profit or (loss) part of their capital account
Loan Receivable from or Payable to partners
 Debit to Loans Receivable-Partner account – partner withdraws amount of money with the
intention of repaying it (separate from other receivables of the partnership)
 Credit to Loans Payable-Partner – advances from partners (separate from outsiders’ liabilities)
Partnership Formation
 Valuation of Investments by partners
 Cash contributions: to be recorded at actual amount of cash contributed (face value)
 Non-cash contributions: recorded at agreed value by the partners; otherwise, it will be recorded
at fair market value of the property at the date of the transfer to the partnership

1. Individuals with no existing business form a partnership - Record contributions to a new set of
books (assets and liabilities assumed) of each partner to their capital account
2. Conversion of a Sole proprietorship to a partnership
a. A sole proprietor and an individual with no existing business form a partnership
Books of Sole Proprietorship
o Adjust. Prior accounts of the proprietorship will be adjusted to their respective capital account.
o Close. Close the books.

Books of the Partnership

o Record investments by each partner.

b. Two or more sole proprietors form a partnership

Books of Sole Proprietorships
o Adjust. Prior accounts of both parties will be adjusted to their respective capital account.
o Close. Close the books.

Books of the Partnership

o Record investments by each partner.

Partnership: Operations and Reporting

Factors to consider in arriving at a plan for deriving profits or losses
 Money, property, or industry (amount of contributions)
 Performance Method (based on specific performance of each partner: referred as bonus)
 Chargeable hours
 Total billings
 Write-offs
 Promotional and civic activities
 Profits in excess of specified levels
Other factors:

 Very solvent partner

  Well known partner in profession
Rules for the distribution of profits or losses
 Profits
a. will be divided according to partner’s agreement
b. absence of agreement
 Capitalist partners: divided according to their capital contributions
 Industrial partners: just and equitable under circumstances; shall receive before the capitalist
partners divide the profits
 Losses
a. will be divided according to partner’s agreement
b. absence of agreement to distribution of losses but there is an agreement as to profits, losses shall
be distributed to the profit-sharing ratio
c. absence of any agreement
 Capitalist partners: divided according to their capital contributions
 Industrial partners: not liable for any losses
Correction for prior period errors
--- omissions from and misstatements of the entity’s financial statements for one or more periods
discovered in the current period.
o Material prior period errors: must be restated (adjusting the opening balances of partner’s equity and
affected assets and liabilities)
Distribution of Profits or Losses Based on Partner’s Agreement
--- recognized as the profit or loss ratio
1. Equally or in other agreed ratio – profit and loss be divided equally
2. Based on partner’s capital contributions:
a. ratio of original capital contributions
b. ratio of capital balances at the beg of the year
c. ratio of capital balances at the end of the year (before drawings and distribution of profits) ---
exclude temporary drawings
d. ratio of average capital balances
o original investments
o additional investments
o permanent withdrawals
3. By allowing interest on partner’s capital and the balance in an agreed ration
o Provision for interest on capital accounts must be honored regardless of whether
operations yielded profits or not
4. By allowing salaries to partner’s and the balance in an agreed ratio
o Salary allowances will be provided even when operations yielded losses.
5. By allowing bonus to the managing partner based of profit and the balance in an agreed ratio
 6. By allowing salaries, interest on partner’s capital, bonus to the managing partner and the balance
in an agreed ratio
7. Interest on drawing --- addition to profit
Financial Reporting
Overall Considerations
 Fair Presentation and Compliance with International Financial Reporting Standards
 Faithful presentation of the effects of transactions in accordance with IASBs new Conceptual
Framework
 Statement of compliance with IFRS in the notes
 Going Concern
 Prepared on a going concern basis
 Accrual basis of Accounting
 Prepare financial statements, except cash flows, using the accrual basis
 Materiality and Aggregation
 Each class of similar items should be separated
 Items dissimilar in nature should be separately disclosed
 Offsetting
 Shall not offset assets and liabilities, income and expenses unless required/permitted by IFRS
 Frequency of Reporting and Comparative Information
 Atleast annually, in a complete set of financial statements
 Consistency of presentation
  Shall retain presentation and classification of items, unless an alternative would be more
appropriate or the change is required by IFRS
 Identification of the Financial Statements
 Shall clearly identify each financial statements and the notes