BUSINESS LAW AND TAXATION

LAW ON BUSINESS ORGANIZATIONS (Part I)

LAW ON PARTNERSHIP
The Law

Article 1767. 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.

Discussion of Law

A partnership is an association of two or more persons to carry on as co-owners of a business for profit.
The definition does not include religious associations, conjugal partnerships, and others of a similar
nature because a partnership as defined by law refers only to associations the purpose of which is to
obtain profits to be distributed among the partners. A partnership contract is based on trust and
confidence. Hence, the fiduciary relation in a partnership stems from the principle of delectus personae,
where in no one can become a partner in a partnership without the consent of all the partners.

The Essential Requisites Of A Partnership

(1) An agreement to contribute money, property, industry to a common fund. This is complied with if:

(a) each one of the partners brings or is obliged to bring something to the partnership and

(b) that which is brought becomes common property.

(2) Intent to divide the profits among themselves. This is complied with if:

(a) partnership is established to obtain profits;

(b) profit must be common to all parties; and

(c) profit or loss must be divided among the partners.

Advantages of Forming a Partnership

1. Easy to form
2. Improved growth possibilities
3. Freedom from bureaucracy

Disadvantages of Forming a Partnership

1. Instability
2. Difficulty in obtaining large sums of capital
3. Firm is tied to the acts and judgment one of partner as agent

Classification of Partnerships

(1) According to subject matter:

(a) Universal partnership - a partnership where all of the partners contribute all of their
properties to the common fund and speaks of no particular purpose or subject matter, as long as
the purpose in forming a partnership is to obtain profits and is not contrary to law, morals, public
order and public policy.

(b) Particular partnership - a particular partnership has for its object determinate things, their
use or fruits, or a specific undertaking, or the exercise of a profession or vocation.

(2) According to liability:

 (a) General partnership - composed of general partners where liabilities extend to their personal
properties.

(b) Limited partnership - (usually attaches the word "Ltd" or "Limited" at the end of the company
name), one formed by two or more persons having as members one or more general partners
and one or more limited partners, where the liability of the latter to third persons is limited to
their capital contribution."

(3) According to the duration:

(a) Partnership for a fixed term - is one in which the term of its existence has been agreed upon
expressly (as when there is a definite period) or impliedly (as when a particular enterprise or
transaction is undertaken). The expiration of the term thus fixed or the accomplishment of the
particular undertaking specified will cause the automatic dissolution of the partnership.

Forms of Partnership

A partnership can be in any form, even if not recorded at the Office of the Securities and Exchange
Commission except:

(1) when it is stipulated;

(2) when immovable property or real rights are contributed, in which case there must be a public
instrument to which is attached an inventory of the immovable properties and signed by the parties,
otherwise the partnership is void.

(3) In case of limited partnership, the parties must:

(a) sign and swear to a certificate, which shall state, among others the name of the partnership
adding the word "Limited," and the character of the business;

(b) file for record the certificate before the SEC.

*Failure to comply with the following requirements will make the partnership a General
Partnership

Obligations of the Partners

(1) Where contribution is money or property. If a partner promises to continue money during the
celebration of the contract and he fails to do so, he shall pay the interest and damages from the
time he should have complied without need of any demand.
If a partner promises to contribute specific determinate things, he must:
(a) preserve the property;
(b) deliver the fruits from the time of agreement;
(c) warrant against eviction and hidden effects;
(d) transfer ownership on delivery to the partnership; (
e) pay damages for the delay without necessity of demand; and
(f) bear the risk of loss before delivery.

(2) Where contribution is industry. An industrial partner (a partner who merely contributed industry or
services to the common fund) cannot engage in business for himself, unless the partnership expressly
permits him to do so; and if he should fail to do so, the capitalist partners may either exclude him from
the firm or avail themselves of the benefits which he may have obtained in violation of this provision,
with a right to damages in either case.63

(3) Obligation of the capitalist partner. A capitalist partner (a partner who contributed money and
property to the common fund) is prohibited from engaging in a business in competition with the
partnership, unless there is stipulation to the contrary, otherwise all profits of such partner belong to the
partnership and all losses shall be for his account.
(4) Responsibility between partnership and partner. The partnership shall be responsible to every
partner for the amounts he may have disbursed on behalf of the partnership. It shall also answer to each
partner for the obligations he may have contributed in good faith in the interest of the partnership
business and for the risk in consequence of its management.

On the other hand, the partner is liable to the partnership: (a) for interest and damages from the time of
conversion for any sum of money which he may have taken from the partnership coffers and converted
to his own use; (b) for damages suffered by the partnership through his fault; (c) for any benefit derived
by him without the consent of the other partners from any transaction connected with formation
conduct, or liquidation of the partnership or from any use by him of its property.

(5) Sharing the profit and loss among partners. The distribution of profits and losses shall be in
conformity with the agreement. If only the share in the profits is agreed upon, the share in the losses
shall be in the same proportion. A stipulation which excludes one or more partners from any share in the
profits or losses is void, but an industrial partner shall not be liable for losses. In the absence of
stipulation, the share in the profits and losses shall be in proportion to their respective capital
contribution, except the industrial partner who shall receive a share of the profits as may be just
equitable under the circumstances.

The designation of losses and profits cannot be entrusted to one of the partners but may be left to the
third person whose designation is valid unless manifested inequitable. However, it cannot be impugned
by a partner who has begun to execute the same or who fails to impugn within three months from
knowledge."

(6) Property rights of a partner. A partner cannot assign his right with respect to the specific partnership
property for the partner's individual debts or for legal support. However, a partner can sign his share in
the profits to a third person." The right to participate in the management is governed by stipulation of
the partners; if none, all of the partners participate in the management. The powers of the managing,
partner appointed in the Articles of Partnership cannot be revoked despite opposition, except by
partners representing controlling interest and provided there is a just and lawful cause." However,
powers of the managing partner appointed after the formation of the partnership can be revoked
anytime. If two or more partners are appointed managing partners, each one may separately execute all
acts of administration but if opposed, the majority among the managing partners shall prevail; if there is
no majority, the partners owning, controlling interest will decide.

(7) Liability of individual partners to third persons. All partners, including the industrial partner, are liable
pro rata with all their properties for contracts with third persons provided: (a) they were entered into in
the name and for the account of the partnership; (b) under its signature; (c) by persons authorized to act
for the partnership; (d) the partnership assets are already exhausted.

All partners are liable solidarily with the partnership" for: (a) wrongful acts and omissions causing loss to
a non-partner"* and (b) conversion or misappropriation of funds belonging to a stranger received in the
usual course of business by partnership.

(8) Liability of the limited partner. A limited partner is liable as a general: (a) when he allows his surname
to appear in the partnership name" and (b) when he takes part in the control of the business. In this
case, he shall have all the rights and powers and be subject to all the restrictions of a general partner
except that as to the other partners, he shall be preferred as to the return in his contribution and share
in the profits.

Dissolution and Winding Up of a Partnership

The Law

Article 1830. Dissolution is caused:

(1) Without violation of the agreement between the partners:

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 undertaking is specified;
c. By the express will of all the partners who have not assigned their interest or suffered them
to be charged for their separate debts, either before or after the termination of any specified
term or particular undertaking; and
d. By the expulsion of any partner for the business bona fide in accordance with such power
conferred by the agreement between

(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;

(3) By any event which makes its unlawful for the business of the partnership to be carried on or of
the members to carry it on in partnership;

(4) When a specific thing, 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;

(5) By the death of any partner; By the insolvency of any partner of the partnership;

(6) By the civil interdiction of any partner; and

(7) By decree of court under the following article. (1700a and 1701a)

Article 1831. On application by or for a partner; the court shall decree a dissolution whenever: (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;
(3) A partner has been guilty of such conduct as trends to affect prejudicially by the carrying on
of the business;
(4) A partner willfully or persistently commits breach of the partnership agreement, or otherwise
so conducts himself in matters relating to the partnership business that it is not reasonably
practicable to carry on the business in partnership with him;
(5) The business of the partnership can he only be carried on at a loss; and
(6) Other circumstances render dissolution equitable

Order of Liquidation for a General Partnership

The Law

Article 1839. In settling accounts between the partners after dissolution, the following rules shall be
observed subject to any agreement in the contrary. The liabilities of the partnership shall rank in order of
payment, as follows:

a. Those owing to creditors other than the partners;

b. Those owing to partners other than for capital and profit;
c. Those owing to partners in respect of capital; and
d. Those owing to partners in respect of profits.