LAW ON BUSINESS ORGANIZATIONS

Partnerships

PARTNERSHIP (ARTICLE 1768)

TWO OR MORE PERSONS BIND THEMSELVES TO CONTRIBUTE MONEY, PROPERTY OR INDUSTRY TO A

COMMON FUND, WITH THE INTENTION OF DIVIDING PROFITS AMONG THEMSELVES.

TWO OR MORE PERSONS MAY ALSO FORM PARTNERSHIP FOR THE EXERCISE OF PROFESSION

PARTNERSHIP AS JURIDICAL PERSONALITY (ARTICLE 1768): It is separate and distinct from that of each
partner

1.1 Nature and as distinguished from corporation

Nature of Contribution Requisites of a Contract of Characteristics of a Contract of
(MPI) Partnership Partnership
(VCOLE) (CCPBONP)
1. Money 1. Valid contract 1. Consensual
2. Property 2. Contribution 2. Commutative
3. Industry 3. Organized for gain or profit 3. Principal
4. Lawful object or purpose 4. Bilateral
5. Established for the common 5. Onerous
benefit/interest of the partners 6. Nominate
7. Preparatory

Rules in Determining the Existence of Partnership (PCSR)

Rule #1: Persons who are not partners to each other are not partners to as to third persons.
Rule #2: Co-ownership or co-possession does not establish partnership.
Rule #3: Sharing of gross returns does not establish partnership.
Rule #4: Receipt by a person of a share of the profits is prima facie evidence that he is a partner in the
business.
Exceptions to Rule #4: (DWAIC)
a. Debt by installments or otherwise.
b. Wages of an employee or rent to a landlord.
c. Annuity to a widow or representative of a deceased person.
d. Interest on a loan.
e. Consideration for the sale of a goodwill of a business or other property.

PARTNERSHIP AS DISTINGUISHED FROM CORPORATION

PARTNERSHIP CORPORATION
Creation Voluntary agreement of parties Created by the state in the form of a
special character or by a general
enabling the law (The Corporation
Code)
Number of organizers 2 or more Not more than 15 (incorporators)
Powers Can do anything by agreement of Can exercise only such powers and
parties provided only that it is not functions expressly granted to it by law
contrary to law, morals, good customs and those that are necessary or
or public order. incidental to its existence.
Existence No time limit except agreement of Perpetual existence under the Revised
parties Corporation Code
Liability of owners All partners, including industrial ones Limited liability - liable only up to their
(except a limited partner) are liable capital contributions
pro rata with all their property and
after all the partnership property has
been exhausted, for all partnership
liability (Art. 1813)
Transferability of All partners need to consent (delectus Does not need to the consent of other
interest personae) stockholders
Ability of owners to A partner can sue another partner who A stockholder cannot sue a director
bind the firm mismanages who mismanages, it must be in the
name of the corporation, through a
derivative suit
 Nationality A national of the country where it was Generally, under whose laws it was
created, and dependent on percentage created as to whether domestic or
of ownership foreign, and as to nationality, on the
ownership of the outstanding capital
stock
Legal personality From the time the contract begins Generally, from the issuance of COR
Rights of succession None. Death, retirement, insolvency, Yes. Such causes do not dissolve a
civil interdiction, or insanity of a corporation. (strong juridical
partner dissolves the partnership personality)
Dissolution Partners may dissolve their Cannot be dissolved by mere
partnership at will or at any time they agreement of the stockholders. The
deem it fit consent of the State is necessary for it
to cease as a body corporate.

1.2 Kinds of partnerships

AS TO OBJECT
Universal Partnership Particular Partnership
1. Universal Partnership of ALL PROFITS Where the object is/are:
• Only the usufruct of the properties of the a. Determinate things, their use or fruits;
partners become common property; NAKED b. A specific undertaking, or
OWNERSHIP is retained by each of the c. The exercise of a profession or occupation.
partners.
• ALL PROFITS acquired by industry or work of
the partners become common property
(regardless of whether or nor said profits were
obtained through the usufruct contributed)
• Properties acquired by gratuitous transfer?
exclusive property

2. Universal Partnership of ALL PRESENT PROPERTY

• ALL the property belonging to the partners are
contributed both ownership and naked
ownership.
• As a rule, aside from the contributed
properties, only the PROFITS OF THE
CONTRIBUTED PROPERTY.
• Profits from other sources may become
partnership property. But only if there is a
stipulation to such effect.
• Properties subsequently acquired by
inheritance, legacy, or donation, cannot be
included in the stipulation, BUT the fruits
thereof can be included in the stipulation.

AS TO LIABILITY
General Partnership Limited Partnership
where all partners are general partners whose liability where at least one of the partners are liable only up
extends to their individual properties, after the assets to the extent of his contribution
of the partnership have been exhausted;
AS TO TERM
Partnership w/ a Fixed Term or Particular Partnership at Will
Undertaking
upon arrival of the fixed term or fulfillment of a where there is no fixed term or particular
particular undertaking, the partnership is dissolved, undertaking (existence is solely dependent on the
and if continued, it will constitute a partnership at will will of the partners, applying affection societatis
and the rights and duties of the partners remain the and delectus personae)
same, so far as is consistent with a partnership at will.

1.3 Formalities required

General Rule: A partnership may be constituted in any form (consensual in character).
Exception: Formal requirement whenever immovable property is contributed.
A contract of partnership is VOID, whenever immovable property is contributed thereto, if:
(1) An inventory of said property is not made
(2) Signed by the parties, and
(3) Attached to the public instrument.
 When capital is more than P3,000? – The contract of partnership must appear in a public instrument,
which must be recorded in the SEC. This does not in any way affect the validity of the partnership as it
is intended only to affect third persons. (Oral with no immovable property contribution? Still VALID.)

1.4 Rules of management

Rule #1: One Managing Partner
MANAGING PARTNER in the ARTICLES OF PARTNERSHIP (before partnership was created): may
execute all acts of administration, in good faith, even with opposition from the other partners; The
power to execute all acts of administration can only be revoked if (1) with just or lawful cause; and (2)
by a vote of the partners representing the controlling interest.

MANAGING PARTNER AFTER PARTNERSHIP HAS BEEN CONSTITUTED: the power as manager
may be revoked by a vote of the partners representing the controlling interest EVEN WITHOUT just or
lawful cause.

Rule #2: Multiple Managing Partners (minimum 1, maximum none)

a. With stipulation that no Managing Partner may act without the consent of the others - no one can
perform an act of administration without the others’ consent
b. With specification of duties - each Managing Partner can perform an act of administration within
their respective duties
c. Without specification of their respective duties, or without a stipulation that one of them shall not
act without the consent of all the others:
i. Each managing partner may separately execute all acts of administration;
ii. Should one of the managing partners oppose the act of another, the matter shall be
decided by a majority of the managing partners per head count;
iii. Should there be a tie in the votes of the managing partners, the controlling interest of
ALL the partners shall prevail.

Rule #3: No Managing Partner; WITH Stipulation that no partner cannot act without the support
of partners: the concurrence of all shall be necessary for the validity of the acts, and the absence or
disability of any one of them cannot be alleged.
Except: if there is imminent danger of grave or irreparable injury to the partnership.

Rule #4: No agreement as to the management of partnership: All the partners shall be considered
agents and whatever any one of them may do alone shall bind the partnership, without prejudice to
the provisions of Art. 1801 (on Multiple Managing Partners) (any can oppose, controlling interest will
decide)
Except: None of the partners may make important alterations in the immovable property of the
partnership without the consent of the others, even if it may be useful to the partnership.
Exception to the exception: if the refusal of consent by the other partners is manifestly prejudicial to
the interest of the partnership, the court’s intervention may be sought (approval of courts necessary
to make alterations kahit others oppose).

1.5 Obligations of partners

1.5.1 To the partnership and to the partners
OBLIGATIONS OF PARTNERS TO THE PARTNERSHIP AND TO THE PARTNERS
1. To give his contribution
2. To give additional contribution in case of imminent losses
3. Not to engage in another business
4. Credit to the firm payment made by a common debtor to the managing partner

Other obligations:
1. Not to convert partnership funds/property for his own use (malversation) (Art. 1788)
2. To account for and hold as trustee, unauthorized or secret personal profits (Art. 1807)
3. Pay for damages caused by his fault (cannot be reduced just because of a partner's
efforts, except if effort is extraordinary) (Art. 1794)
4. Share with other partners the share of the partnership credit which he has received
from an insolvent firm debtor (Art. 1743)
5. Keep the partnership books in the principal office (except when otherwise agreed) and
allow other partners to have access, inspect, and copy the same.
6. Reimburse the partnership of damages suffered by it through his fault. a. The liability
for damages is not compensable with profits and benefits earned for the partnership;
b. Damages, however, may be decreased by courts if through the partner’s
extraordinary efforts, the partnership earned unusual profits.
7. To inform the other partners on all matters affecting the partnership or relative to
partnership affairs.
8. To observe the diligence of a good father of a family in all his dealings. 9. To adhere to
the partnership agreement and decisions of appointed managing partner.
TO GIVE HIS CONTRIBUTION
1. Unless there is a stipulation to the contrary, the partners shall contribute equal shares
to the capital of the partnership.
2. As a rule, the contribution must be provided upon perfection of the contract, except if
the partners stipulate otherwise.
3. A partner who has undertaken to contribute a sum of money and fails to do so becomes
a debtor for the interest and damages from the time he should have complied with his
obligation. Thus, no demand shall be necessary since the law specifically provides for
the liability in case of delay (demand is not necessary to consider delay of a partner).
a. A partner is likewise liable similar to a vendor:
b. He is bound to deliver the fruits thereof for the time they should have been
delivered, without the need of demand (Art. 1786).
c. A partner must exercise due diligence in preserving the thing promised to be
contributed; otherwise, he shall be liable for loss and deterioration.
d. Warrant the thing delivered against eviction

Risk of loss:
LOSS BORNE BY THE PARTNER:
1. Thing contributed is specific and determinate which is NOT fungible and only their use
and fruits may be for the common benefit (res perit domino); and
2. There is stipulation that he shall bear the loss of the thing brought and appraised in the
inventory.
LOSS BORNE BY THE PARTNERSHIP:
1. Thing contributed are
a. fungible;
b. cannot be kept without deteriorating (depreciation is borne by the
partnership); or
c. they were contributed to be sold; and
2. There was appraisal in the inventory and no stipulation that partner will bear the loss.

TO GIVE ADDITIONAL CONTRIBUTION IN CASE OF IMMINENT LOSSES

In case of an imminent loss of the business of the partnership, any partner who refuses to
contribute an additional share to the capital to save the venture, shall be obliged to sell his
interest (share in the profits and surplus assets) to the other partners.

Except:
Industrial partners except if there is stipulation that he will likewise contribute
If there is stipulation to the contrary

NOT TO ENGAGE IN ANOTHER BUSINESS

Industrial partners - cannot engage in business for himself except when the capitalist
partners permit him to do so.
Effect of non-compliance: The capitalist partners may either
1. Exclude him from the firm or
2. Avail themselves of the benefits which he may have obtained in violation of this
provision

Capitalist partners - the prohibition is limited to businesses in the same industry as that of
the partnership which may result in competition.
Except:
1. When it is expressly stipulated that the capitalist partner can so engage himself;
2. When the other partners allow him to do so, whether expressly or impliedly;
3. During the period of liquidation and winding up, when the partnership is already non-
existent;
4. When the general-capitalist partner becomes a limited partner in a competitive
enterprise.
Effect of non-compliance: The capitalist partners may either
1. He shall bring to the partnership all the profits illegally obtained;
2. He is liable, personally, for all the losses;
3. He may be ousted for loss of trust and confidence.

CREDIT TO THE FIRM PAYMENT MADE BY A COMMON DEBTOR TO THE MANAGING

PARTNER
To prevent the managing partner from furthering his personal interest to the detriment of the
firm, if such managing partner collects a sum from a common debtor who owes money both to
said managing partner and to the partnership:
1. If the managing partner issued a receipt in the name of the partnership, the payment
shall be applied to the partnership credit;
 2. If the managing partner issued a receipt in his name: the payment shall be applied
proportionate to the amounts of the two debts.
Except: when the debt owed by the debtor to the managing partner is more onerous,
the debtor may choose to apply the payment exclusively to such

1.5.2 To third persons (FLAAESSPL)

OBLIGATIONS OF PARTNERS TO THIRD PERSONS:
1. Firm name: Every partnership shall operate under a firm name, which may or may not
include the name of one or more of the partners.

Strangers who include their name in the firm are liable as partners because of estoppel
but do not have the rights of the partners (to protect customers from being misled).

If a limited partner included his name in the firm name, he shall be liable as a general
partner.

2. Liability after exhaustion of partnership assets: All partners, including industrial

ones, shall be liable pro rata with all their property and after all the partnership assets
have been exhausted, for the contracts which may be entered into in the name and for
the account of the partnership, under its signature and by a person authorized to act
for the partnership.

However, any partner may enter into a separate obligation to perform a partnership
contract

Any stipulation to the contrary is VOID (as to third persons), except as to the partners.

3. Authority to act for and in behalf of the partnership: Every partner is an agent of
the partnership for the purpose of its business. The authority of the partner to act in
behalf of the partnership may be:
1. EXPRESS (agreed upon and expressly granted); or
2. IMPLIED - implied from the express authority (inventory manager: buy
inventory); or
3. APPARENT - when he apparently (a) carries on the usual business of the
partnership and (b) the person to whom he is dealing has no knowledge of the
fact that he has no such authority.
If the partner is not carrying on the usual business of the partnership, the act will not
bind the partnership unless it is authorized by the other partners

Consent of ALL partners necessary to:

1. Assign the partnership property in trust for creditors or on the assignee’s
promise to pay the debts of the partnership (dacion en pago);
2. Dispose of the good-will of the business;
3. Do any other act which would make it impossible to carry on the ordinary
business of a partnership (ex: natititrang asset na kailangan);
4. Confess a judgment;
5. Enter into a compromise concerning a partnership claim or liability (receivable
and payable);
6. Submit a partnership claim or liability to arbitration;
7. Renounce a claim of the partnership.

Except when authorized by the other partners or unless they have abandoned the
business.

4. Admissions and notices

Admission of Partners: an admission made by one partner within the scope of his
authority is evidence against the partnership
Notice to a Partner: operates as notice to the partnership, except in case of fraud
committed by such partner

5. Effects of conveyance of property

CONVEYED BY TITLE IS IN THE EXECUTED IN THE EFFECT

NAME OF NAME OF
Any partner Partnership Partnership Title passes to the buyer but the
One or more One or more One or more partnership may recover.
partners partners partners
EXCEPT (no recovery):
 1. If in the usual way of business,
except when the buyer has
knowledge of partner/s’ lack of
authority;
2. Real property was transferred
to an innocent buyer
Any partner Partnership Partner Passes the equitable interest of the
One or more Partner/ Partner partnership provided the conveyance
partners Partnership was in the usual way of business
All partners All partners All partners Passes all the rights in such property

6. Solidary liability for quasi-delict/ torts: Where, by any wrongful act or omission
of any partner acting in the ordinary course of the business of the partnership or with
the authority of co-partners, loss or injury is caused to any person, not being a partner
in the partnership, or any penalty is incurred, the partnership is liable therefor to the
same extent as the partner so acting or omitting to act.

7. Solidary liability for misappropriation

The partnership is bound to make good the loss, in two situations:
1. Pertains to partner as receiver: Where one partner acting within the scope of
his apparent authority receives money or property of a third person and
misapplies it.
2. Pertains to partnership as receiver: Where the partnership in the course of its
business receives money or property of a third person and is misapplied by any
partner while it is in the custody of the partnership.
In cases of both Torts and Misappropriation, all the partners are solidarily liable as to
each other and the partnership.

8. Partner by estoppel (whether there arises partnership liability)

1. One who represents himself as a partner of an existing partnership with or
without consent of the partnership:
a. When the partnership consented - a partnership by estoppel is created
between the original members and the deceiver. A partnership liability
results.
b. When the partnership did NOT consent - deceiver becomes a partner
by estoppel where he is liable as a partner but does not acquire the
rights thereof. No partnership liability exists.
2. One who represents himself as a partner of a NON-existent partnership.
Liability of parties is pro rata, since there is no partnership liability. (no
separate juridical personality)

9. Liability of new (incoming) partner

1. Debts incurred prior to admission: liable up to his contribution (except if there
is stipulation)
2. Debts incurred after admission: liable up to his personal assets (he could have
objected)

1.6 Rights of a partner

RIGHTS OF A PARTNER:
1. Right to share in profits
2. Property rights
Other rights:
1. To associate with another person in his share (Art. 1804) but the associate shall not be
admitted into the partnership without the consent of all the other partners, even if the partner
having an associate should be a manager. (staff only, not a partner)
2. To inspect and copy partnership books (Art. 1805) kept in the principal place of business
unless otherwise agreed.
3. To demand a formal account (Art. 1809) in the ff. cases:
a. A partner was wrongfully excluded from the partnership business or possession of its
property by his co-partners; When there is a stipulation granting such right
b. As to information affecting partnership affairs, such as secret profits earned by other
partners;
c. Whenever just and reasonable.
4. To ask for a dissolution of the firm at the proper time (can either be completion of a specific
undertaking, arrival of a specific term, or anytime if the partnership is at will) and the right to
return of capital and advancements - subject to the rules of distribution of partnership assets
during liquidation.
 5. Right to compensation only if there is an agreement or stipulation granting such right or
entitlement
6. Right to reimbursement for the amounts he may have disbursed on behalf of the partnership
and for the corresponding interest from the time the expense was made

1.7 Sharing of profits and losses

DISTRIBUTION OF PROFITS:
1. In accordance with the agreement;
2. In proportion to contribution and the industrial partner shall receive such share as may be just
and equitable. (bayaran muna ang industrial partner then prorata na sa capitalist partner)
(what is just & equitable? Smallest share of capitalist partner)
3. Equal
DISTRIBUTION OF LOSSES:
1. In accordance with the agreement; If there was agreement as to profits but not losses, same
proportion;
2. In proportion to contribution but the industrial partner shall not be liable for losses (if may
stipulation, industrial partner can be liable for loss)
3. Equal
Pactum Leonina: stipulation which excludes one or more partners from any share in the profits or
losses - VOID. (industrial partner, valid pag loss)

1.8 Dissolution and winding up

• Dissolution - 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
On dissolution, the partnership is not terminated but continues until the winding up of the partnership
affairs is completed.
• Winding up: the process of settling the business affairs after dissolution
• Termination: the point where all the partnership affairs have been wound up (assets had been sold,
creditors had been paid, remaining balance distributed to partners)

GROUNDS FOR DISSOLUTION OF A PARTNERSHIP

EXTRAJUDICIAL
(no involvement of court)
1. Without violation of the agreement between the
partners (no liability for damages) (voluntary);
a. By the termination of the definite term or
particular undertaking specified in the
agreement;
b. By the express will of any partner, who must act
in good faith, when no definite term or
particular is specified;
c. By the express will of all the partners who have
not 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. By the expulsion of any partner from the
business bona fide (justified ground) in
accordance with such a power conferred by the
agreement between the partners
2. In contravention of the agreement between the
partners, where the circumstances do not permit a
dissolution under any other provision of this article, by
the express will of any partner at any time (liable for
damages) (involuntary);
Note: that the partnership may be dissolved with or
without contravention to the agreement of the parties,
but if it is dissolved in contravention to the agreement,
the partner who causes the dissolution will be liable for
damages.
JUDICIAL
(requires trial, court intervention is necessary)
1. A partner has been declared insane in any
judicial proceeding or is shown to be of unsound
mind;
2. A partner becomes in any other way incapable
of performing his part of the partnership contract
(physical, mental disability, etc.);
3. A partner has been guilty of such conduct as
tends to affect prejudicially the carrying on of the
business;
4. A partner willfully or persistently commits a
breach of the partnership agreement, or otherwise
so conducts himself in matters relating to the
partnership business that is not reasonably
practicable to carry on the business in partnership
with him (obligation of a partner to conduct
business in due diligence);
5. The business of the partnership can only be
carried on at a loss;
6. Other circumstances render a dissolution
equitable. (to establish the facts)

3. By operation of law (automatic dissolution):

a. By any event which makes it unlawful;
b. When a specific thing which a partner had
promised to contribute to the partnership,
perishes before the delivery; in any case by the
 loss of the thing, when the partner who
contributed it having reserved the ownership
thereof, has only transferred to the partnership
the use or enjoyment of the same; but the
partnership shall not be dissolved by the loss of
the thing when it occurs after the partnership
has acquired the ownership thereof (not
dissolved);
c. By the death of any partner;
d. By the insolvency of any partner or of the
partnership; By the civil interdiction of any
partner;
EFFECTS OF DISSOLUTION
1. The mutual agency is terminated. As a rule, the partners can no longer act to bind the partnership, subject
to the following rules:
a. If the cause of the dissolution is Acts, Insolvency or Death (AID) - NOTICE should be given by the
partners to terminate the mutual agency
b. If the cause is NOT AID - the mutual agency is terminated and the dissolution is binding even without
notice.
2. The following acts are still binding even after dissolution:
a. acts to wind-up the affairs of the partnership
b. contracts with creditors who had no notice of the dissolution
3. The partners may continue the partnership after dissolution of the old partnership. Such continuation still
dissolves the old partnership. Such continuation still dissolves the old partnership and a new partnership is
created. The creditors of the old partnership are also creditors of the person or partnership continuing the
business.

1.9 Limited Partnership

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. (at least one general partner and at
least one limited partner)

Limited liability: a limited partners’ liability is limited only to his capital contribution. Such that, after
exhaustion of partnership assets, he cannot be made to contribute to answer the remaining liabilities
to third parties.