NATURE OF PARTNERSHIP

BUSINES
 DEFINITION OF PARTNERSHIP
• “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 a profession.”
 Major Characteristics of a
Partnership
1. Based on Contract
2. Association of Individuals
3. Ease of Formation
4. Unlimited liability
5. Mutual Agency
6. Income Participation
7. Co-ownership
8. Limited Life
9. Assignment of Interest
 Based on Contract
• The relation of partners arises from contract and not from
statute, operation of law or inheritance. The agreement of
partnership - whether in oral or in writing - becomes a
contract that binds all the partners.
 Association of Individuals
• At least two persons, having reciprocal rights and obligations
towards each other, are necessary to constitute partnership. A
partnership is formed based on the “trust and confidence” of
the individuals to each other. The trust and confidence is the
“cord” that binds the partnership.
•
• It also means that a partnership is formed with a voluntary
volition of each partner.
 Ease of Formation
• Basically, partnership is perfected by the mere consent of
the parties.
• An oral agreement is sufficient in forming a partnership.
Partners do not need the permission from the Security and
Exchange Commission (SEC) or Bureau of Internal Revenue
(BIR) to form a partnership, unless the partnership’s
capitalization is P3,000 or more and/or the investment
involves real property.
 Co-ownership of Partnership
Property
• Assets invested by any of the partners become the property
of the partners because they co-own the partnership.
 Assignment of Partner’s Interest

• A partner (assignor) can assign his interest to an assignee.

This act does not necessarily mean an admittance of a new
partner to the partnership because the assignee has no right
to participate in managing the affairs of the partnership
business. His rights are limited to receiving share in the
partnership profits and losses or the assignor’s proceeds in
case the partnership is dissolved.
 Mutual Agency
• Every partner is assumed as an agent of the partnership for the purposes of
its business.
•
• Accordingly, any partner can legally bind all the partners by an action that is
part of the usual conduct of the partnership business.
 Income Participation
• The partnership business must be carried on with the object
of sharing profits among the partners. Accordingly, all
partners have the right to share in the income of the
partnership.
•
• A stipulation of partnership contract excluding a partner
from profit sharing is null and void.
 Unlimited Liability
• Each partner places at risk his personal assets for
partnership debts in the event the partnership becomes
insolvent. A general partner may be required to use his
personal assets to pay partnership debts authorized by any
partner. An industrial partner may also be liable to pay
partnership obligations using his personal assets.
 Limited Life
• A partnership is automatically dissolved when there is a
change in the relationship among the partners as this
condition terminates partnership contracts. A partnership is
dissolved when a new partner is admitted or when one of the
partners withdraws, dies, is forced into personal bankruptcy,
or becomes incapacitated.
 Kinds of Partnerships
1. As to nature of business
•
a. Trading Partnership – also known as “business co-partnership,” it
buys and sells finished merchandise or manufactures goods as its
primary operational activity. Examples of these partnerships are
groceries, stores and factories.
•
• Non-Trading Partnership – renders service only for a fee. Examples
are vulcanizing service, computer rentals, laundry business or
practice of profession.
 Kinds of Partnerships
2. As to purpose
•
a. Commercial partnership – engages in trading, merchandising or
manufacturing of goods for a profit. A partnership rendering
service may be classified as a commercial partnership if it engages
in service activities other than the practice of a profession.
•
• General professional partnership – organized for the exercise of a
common profession, and usually renders service based on the
partners’ acquired profession. Examples are CPAs, medical
doctors, and lawyers.
 Kinds of Partnerships
3. As to object
•
a. Universal partnership
1) Of all present property – partners contribute all their present property to
a common fund with the intention of dividing among themselves the
property and all the profits they may acquire therewith
2) Of profits – the partners retain ownership of the things they have placed
into the common fund. Their actual contribution will be their industry
and the use of the things they have placed into the common fund. As a
result, only the profits that the partners may acquire by their industry
during the existence of the partnership will be divided among
themselves. Civil Code of the Philippines, Arts. 1777; 1778 and 1779.
 Kinds of Partnerships
1. Particular partnership – a partnership which has for its object determinate
things, their use or fruits, or a specific undertaking, or exercise of a
profession or vocation.
 Kinds of Partnerships
4. As to Liability
•
a. General partnership – comprised of general partners or a
combination of general and industrial partners. They are
personally liable for the partnership’s debts after the exhaustion
of its assets.
b. Limited partnership – comprises both limited and general
partners. Only the limited partner shall be liable to the extent of
his contribution to the partnership. At least one of the partners
must be a general partner to assume the partnership’s unpaid
liability.
 Kinds of Partnerships
1. As to duration
•
a. Partnership at will – formed for a particular undertaking and
may be terminated any time by the will of any of the
partners or by mutual agreement of the partners. In other
words, this partnership has no fixed period of existence.
•
• Partnership with a fixed term – formed with a specified period
of existence.
 Kinds of Partners
• As to contribution
•

1. Capitalist partner- Contributes money or property to the partnership.

2. Industrial partner- Contributes only his skills, knowledge, industry or
personal service to the partnership.
3. Capitalist-Industrial partner- Contributes money, property and
industry to the partnership.
 Kinds of Partners
• As to Liability
•

1. General partner- Assumes unlimited liability, i.e., he is liable for the

partnership debts to the extent of his personal assets.
2. Limited partner- Liable to the extent of his capital contribution to the
partnership.
 Kinds of Partners
• As to Participation
•

1. Managing partner- Appointed to run the business of the partnership. His

appointment may either be in the Articles of Co-Partnership or may come after
the formation of the partnership.
2. Silent partner- Known as partner but does not take active participation in
running the affairs of the partnership.
3. Liquidating partner- Appointed to liquidate partnership assets and settle
unfinished transactions of the partnership after dissolution.
 Kinds of Partners
• As to Third Persons
•

1. Secret partner- Not known as partner but takes active part in running the
partnership business.
2. Dormant partner- Not known as partner and inactive in the partnership.
3. Nominal partner or Ostensible partner- A partner in name only by
permitting the use of his name either for accommodation or for consideration.
He is subject to liability by the doctrine of estoppel.
 Articles of Partnership
• The “Articles of Co-partnership” is a written contract made by the
partners. It is needed to appear in a public instrument and to be
registered in the Office of the Securities and Exchange Commission
(SEC) if partners contributed a real property or real rights or if the
total partnership capital amounted to P3,000 or more.
•
• If a partnership fails to register with SEC, it cannot acquire legal
personality to maintain an action against third persons, but the
partners may file a suit jointly against third party persons.
 Articles of Partnership
• The partnership agreement commonly contains the following
information:
•
1. Name of the partnership
2. Names and addresses of the partners
3. Kinds of partners whether general or limited partners
4. Principal place and purpose of business
5. Effectivity and duration of the contract
6. Contributions of the partners
7. Duties and rights of each partner
8. Conditions for withdrawals
9. Salary and the profit and loss agreement
10.Dissolution procedures