Forms of Business Organization

1. Sole proprietorship
Forms of Business Organization
2. Partnership

Art. 1767
By the contract of partnership, 2 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 a

partnership for the exercise of a profession.
Forms of Business Organization
3. Corporation
CONCEPT OF PARTNERSHIP
Contract Association Legal relation

Joint undertaking
Status arising out
Organization to share in profits
of a partnership
and loss

Entity distinct
and apart from its
members
Characteristics/Elements of
Partnership
Consensual Nominate Bilateral

Onerous Preparatory Principal

Commutative
Essential Features of Partnership
There must be a valid contract

The parties must have legal capacity to enter into the contract

The object must be lawful

There must be mutual contribution of money, property or industry

to a common fund

The primary purpose must be to obtain profits and to divide the

same among themselves

Articles of partnership must not be kept secret among the

members otherwise there is no legal personality.
 Partnership, a juridical person

Art. 1768. The partnership has a juridical personality

separate and distinct from that of each of the partners,
even in case of failure to comply with the requirements of
Article 1772, first paragraph.

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 SEC.
• 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.
Art. 1769 Rules in determining
whether a partnership exists
(1)Persons who are not partners as to each other are not
partners as to third persons

(2) Co-Ownership or co-possession does not of itself establish a

partnership, whether such co-owners or co-possessors do or do not
share any profits made by the use of the property.

(3) The sharing of gross returns does not of itself establish, whether or
not the person sharing them have a joint or common right or interest
in any property from which the return are derived.

(4) The receipt by a person of a share of the profits of a business is

prima facie evidence that he is a partner in the business, but no such
inference shall be drawn if such profitswere received in payment:
cont.
(a) As a debt by installments or otherwise;

(b) As wages of an employee or rent to a landlord;

(c) As an annuity to a widow or representative of a deceased partner ;

(d) As interest on a loan, though the amount of payment vary with the
profits of the business;

(e) As the consideration for the sale of a goodwill of a business or other

property by installments or otherwise.
Art. 1770 Object or Purpose of
the Partnership
 The parties possess absolute freedom to choose the
transactions they must engage in, the only limitation is
that the object must be lawful and the common benefit
of the partners.
 Illegality of the object will not be presumed; it must
appear to be of the essence of the relationship.
Effects of Unlawful Partnership
 Consequences
1. The contract is void ab initio and the partnership
never existed in the eyes of the law
2. The profits shall be confiscated in favor of the
government
3. The instruments or tools and proceeds of the crime
shall also be forfeited in favor of the government
4. The contributions of the partners shall not be
confiscated unless they fall under no. 3.
Juridical decree unnecessary
 A juridical decree is not necessary to dissolve a
prtnership.
 Third person who deal with the partnership without
being aware of the illegal purpose or character are
protected unless such knowledge can be presumed as
where the transaction is plainly unlawful.
Effect of Partial Illegality of
Partnership Business
 Where, without the knowledge or participation of the
partners, the firm’s profits in a lawful business have
been increased by wrongful acts, innocent partners are
not precluded as against the guilty partners from
recovering their share of profits.
Effect of Subsequent Illegality of
the Partnership Business
 The happening of an event subsequent to the making
of a valid partnership contract which would render
illegal the business of the partnership as planned, will
not nullify the contract.
 Where the business for which the partnership is
formed is legal when the partnership is entered into
but afterward becomes illegal, an accounting may be
had as to the business transacted prior to such time.
 Article 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.
(1667a)
 Article 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. (n)
 Article 1773. A contract of partnership is void, whenever
immovable property is contributed thereto, if an inventory of
said property is not made, signed by the parties, and attached to
the public instrument. (1668a)
 Article 1774. Any immovable property or an interest therein may
be acquired in the partnership name. Title so acquired can be
conveyed only in the partnership name.
Form of Partnership Contract
(Art. 1771)
 General Rule:
1. No special form is required for the validity or
existence of the contract of partnership.
2. The contract may be made orally or in writing
regardless of the value of the contributions.
Exceptions to the General Rule

When immovable property or real rights are contributed (Art.

1771/1773)
- requires the execution of a PUBLIC INSTRUMENT for the
validity of a contract of partnership whenever the immovable
property is contributed thereto together with an inventory of
said property, signed by the parties, and attached to the public
instrument.
- to affect third persons, the transfer of real property to the
partnership must be duly registered in the Registry of Property of
the province or city where the property is located.
Art. 1775 – Secret Partnership
• Associations and societies, whose articles are kept secret
among the members, and wherein any one of the
members may contact in his own name with third
persons, shall have no juridical personality, and shall be
governed by the provisions relating to ownership.

Importance
• For the protection not only of the members themselves
but also of third persons from fraud and deceit to which
they would otherwise be easy victims.
 • AS TO THE EXTENT OF ITS SUBJECT MATTER
Classification
of Partnership

• Universal Partnership of all Present Property

Universal • Universal Partnership of Profits
Partnership

• It is one which has for its objects determinate things, their

use or fruits, or specific undertaking, or the exercise of a
Particular
Partnership profession or vocation.
 Universal Partnership of all Present
Property
Partners contribute all the
property which actually
belongs to them to a common
fund
- Property which belongs to
each of the partners at the
time of the constitution of
the partnership There is an intention to There is an intention to
- Profits which they may divide profits among divide the profits they may
acquire from the property themselves acquire.
contributed
NOT INCLUDED:
Properties subsequently
acquired by inheritance,
legacy or donation CANNOT
be included by stipulation
except the fruits
Universal Partnership of Profits
 UNIVERSAL PARTNERSHIP OF PROFITS - comprises
all that the partners may acquire by their industry or
work during the existence of the partnership

 Note: Persons who are prohibited from giving

donations or advantage to each other cannot enter into
a universal partnership (Art. 1782)
As to LIABILITY OF PARTNERS
 A. GENERAL PARTNERSHIP - consists of general
partners who are liable pro rata and subsidiarily and
sometimes solidarily with their separate property for
partnership debts.
 B. LIMITED PARTNERSHIP - one formed by 2 or more
persons having as members one or more general
partners and one or more limited partners , the latter
not being personally liable for the obligations of the
partnership.
As to DURATION
a. PARTNERSHIP AT WILL - one in which no time is
specified and is not formed for a particular
undertaking or venture which may be terminated
anytime by mutual agreement.
b. PARTNERSHIP WITH A FIXED TERM - the term for
which the partnership is to exist is fixed or agreed
upon or one formed for a particular undertaking.
As to LEGALITY OF EXISTENCE
a. DE JURE PARTNERSHIP - one which has complied
with all the legal requirements for its establishment.

b. DE FACTO - one which has failed to comply with all

the legal requirements for its establishment
As to REPRESENTATION TO OTHERS
a. ORDINARY OR REAL PARTNERSHIP - one which
actually exists among the partners and also as to 3rd
persons.

b. PARTNERSHIP BY ESTOPPEL - one which in reality

is not a partnership but is considered a partnership
only in relation to those who, by their conduct or
omission, are precluded to deny or disprove its
existence.
As to PUBLICITY
a. SECRET PARTNERSHIP - one wherein the existence
of certain persons as partners is not avowed or made
known to the public by any of the partners.

b. OPEN OR NOTORIOUS PARTNERSHIP - one whose

existence is avowed or made known to the public by
the members of the firm.
As to PURPOSE
a. COMMERCIAL OR TRADING PARTNERSHIP - one
formed for the transaction of business.

b. PROFESSIONAL OR NON TRADING

PARTNERSHIP - one formed for the exercise of a
profession.