PARTNERSHIP

AND
CORPORATION
 PARTNERSHIP
BUSINESS ORGANIZATION

POLICIES AFFECTING BUSINESS

INTEREST

In the Phil., operation and management of

business organizations is governed by the
agreement of the parties.

However, the Constitution provides for the

basic policies governing businesses and
setting forth limitations
 POLICIES AFFECTING BUSINESS
INTEREST
Under Article XII, XIII and XIV of the 1987
Constitution, there are certain limitations
imposed by law as far as businesses
impressed with public interest are concerned.
There are businesses which the Constitution
limits only to Filipinos with no foreign
intervention. There are those which the
foreign participation is restricted.
 PARTNERSHIP
DIFFERENT TYPES OF BUSINESS
ORGANIZATION
A. Sole proprietors are
unincorporated businesses.
He or she will have unlimited
liability for all debts of the
business, and the income or loss
from the business will be reported
on his or her personal income tax
return.
 DIFFERENT TYPES OF BUSINESS
ORGANIZATION

B. Corporations are incorporated

businesses. It is considered a separate
entity, and this often provides a
measure of legal and financial
protection for the shareholders.
 DIFFERENT TYPES OF BUSINESS
ORGANIZATION

C. Partnerships are unincorporated

businesses. Like corporations,
partnerships are separate entities
from the shareholders. Partnerships
must have at least two shareholders.
 PARTNERSHIP
BASIC CONCEPT OF PARTNERSHIP

NATURE
Within the context of Philippine
law, partnership is treated as
an artificial being created
by operation of law with a
legal personality separate and
distinct from the partners
thereof.
Governing Law
Articles 1767 to 1867 of the
Civil Code of the
Philippines
 PARTNERSHIP
Partnership, how formed; registration
requirement: 
Partnerships are required to be
registered with the SEC by filing
the Articles of Partnership.
The Articles of Partnership set
forth all the terms and
conditions mutually agreed by
the partners thereto.
The documents required are as follows
 Name Verification Slip (on-line or at the
Name Verification Unit, 2nd floor, SEC Bldg.)
Articles of Partnership (For Limited
Partnerships, this should be executed under
oath “JURAT”)
Written Undertaking to Change Corporate
Name by any Partner **
Form F – 105 for partnerships with Foreign
Equity
Proof of Inward Remittance by foreign
partners
Information provided with SEC

1. Name of the Partnership

2. Principal Office Address
3. Telephone Number
4. Name, citizenship, address, birthday
and TIN of partners
5. Capital contribution
6. Purpose of the Partnership
 PARTNERSHIP
CONCEPT OF PARTNERSHIP

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.
Two or more persons may also form a
partnership for the exercise of a
profession
In our jurisdiction, partnerships, except
general professional partnerships, are
treated for income tax purposes as
corporations and subject to tax as such.
Paragraph 2 relates to the exercise of a
profession.
Strictly speaking, the practice of a
profession is not a business or an
enterprise for profit.
However, the law allows the joint
pursuit thereof by two or more
persons as partners
 PARTNERSHIP

For tax purposes, the National

Internal Revenue Code defines
general professional
partnerships as those
“formed by persons for the sole
purpose of exercising their
common profession, no part of
the income of which is derived
from engaging in any trade or
business.’’
 PARTNERSHIP
Characteristic elements of
partnership
1. Consensual, because it is
perfected by mere consent, that
is, upon the express or implied
agreement of two or more
persons;
2. Nominate, because it has a
special name or designation in
our law;
 Characteristic elements of partnership

3. Bilateral, because it is entered

into by two or more persons and
the rights and obligations arising
therefrom are always reciprocal;
4. Onerous, because each of the
parties aspires to procure for
himself a benefit through the
giving of something;
Characteristic elements of partnership
(5) Commutative, because the
undertaking of each of the
partners is considered as the
equivalent of that of the others;
(6) Principal, because it does not
depend for its existence or
validity upon some other
contracts; and
 PARTNERSHIP
Characteristic elements of partnership

(7) Preparatory, because it is

entered into as a means to an
end, i.e., to engage in business
or specific venture for the
realization of profits with the
view of dividing them among the
contracting parties.
 PARTNERSHIP
Essential features of partnership
1.There must be a valid contract;
2.The parties must have legal
capacity to enter into the
contract;
3.There must be a mutual
contribution of money, property,
or industry to a common fund;
 Essential features of partnership

4. The object must be lawful;

5. The primary purpose must be to

obtain profits and to divide the same
among the parties.
 PARTNERSHIP
Essential features of partnership

1. Existence of a valid contract

a. Partnership is a voluntary relation created by

agreement of the parties (partnership relation is
the result of the contract)
b. The relation is evidenced by the terms of the
contract which may be oral or written, express or
implied from the acts and declarations of the
parties, subject to the provisions of Articles 1771
to 1773 and to the Statute of Frauds.
 PARTNERSHIP
c. It is customary to embody the terms of the
association in a written document known as
“Articles of Partnership

d. Since partnership is fundamentally

contractual, all the essentials of a valid
contract must be present.
i. Consent and capacity of the contracting
parties;
ii. Object which is the subject matter of the
contract; and
iii. Cause which is established (Art. 1318.)
 PARTNERSHIP

EXAMPLE:

A bought a secondhand car. He told B

that he would give B half the profit of
its sale if B would repair the car. B did
not repair the car. A hired C to do the
work and later sold the car at a profit.
Obviously, B is not entitled to any of the
profit. There was no partnership
between A and B because of the
absence of consideration for A’s
promise.
 PARTNERSHIP
ILLUSTRATIVE CASE:
Action seeks to compel the execution of a
partnership contract.

Facts: A and B entered into an agreement to

form a partnership. Because of A’s refusal to
comply with the agreement, B brought an
action to compel the execution of a partnership
contract.
Issue: May A be compelled against his will to
carry out the agreement or execute the
partnership papers?
 PARTNERSHIP

Held: No. Under Article 1167,7 A has an

obligation to do, not to give. The law
recognizes the individual’s freedom or liberty
to do an act as he has promised to do, or not
to do it, as he pleases. It falls within what
Spanish commentators call a very personal act
(acto personalismo), of which courts may not
compel compliance, as it is considered an act
of violence to do so. (Woodhouse vs. Halili, 83
Phil. 526 [1953].)
 PARTNERSHIP
Essential features of partnership

2. Legal capacity of the parties to enter into

the contract
As a general rule, any person may be a partner
who is capable of entering into contractual
relations. Consequently, any person who cannot
give consent to a contract cannot be a partner.
* at least 18 y.o; mental capacity
Who cannot give consent to a contract of
Partnership?
a. Unemancipated minors;
b. Insane or demented persons;
 PARTNERSHIP
Who cannot give consent…?

c. Deaf-mutes who do not know how to write;

d. Persons who are suffering from civil
interdiction; and
e. Incompetents who are under guardianship
f. a Persons who are prohibited from giving
each other any donation or advantage
g. corporation is without capacity or power to
enter into a contract of partnership unless
authorized by statute or by its charter
 PARTNERSHIP
Essential features of partnership

3. Contribution of money, property, or industry to

a common fund
The partners must have a proprietary interest in the
business or undertaking, that is, they must
contribute capital which may be money or property,
or their services, or both, to the common business.

Money –refers to currency which is legal tender in the Phils

( checks, promissory notes? – mere representatives of money)
Property—personal, corporeal or incorporeal
(promissory or evidence of obligation or good will √)
Industry -- active cooperation, the work of the party associated,
which may be either personal manual efforts or intellectual
 Essential features of partnership

4. Legality of the object ( capital )

The object is unlawful when it is contrary
to law, morals, good customs, public
order, or public policy. (Art. 1306.)
(if unlawful, no partnership can arise—
inexistent and void ab initio)

* Also Unlawful purpose ( business itself),

it is, the partnership will be dissolved and
the profits will be forfeited in favor of the
government
Examples of illicit object/ purpose
to carry on gambling (Arbes vs. Polistico, 53 Phil.
489 [1929].);

to engage in smuggling;

to lease furnished apartments to prostitutes;

 Essential features of partnership
5. Purpose to obtain profits— the very reason for
existence of partnership
a. Sharing of profits ( presumptive evidence of
partnership)
Since the partnership is engaged for the common
benefit or interest of the partners (Art. 1770.), it is
necessary that there be an intention to divide the
profits among the members, although not
necessarily in equal shares
b. Sharing of losses
under Article 1767 refers to “profits” only and is
silent as to “losses.” The reason is that the object of
a partnership is primarily the sharing of profits,
while the distribution of losses is but a “consequence
of the same.”
 PARTNERSIP, A JURIDICAL PERSON
PARTNERSIP, 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.

Consequently, the partnership retains its

juridical personality even if it fails to register,
so long as the contract of partnership has the
essential requisites ( Sunga-Chan v. Chua,
G.R. No. 143340)
 RULES TO DETERMINE EXISTENCE OF A
PARTNERSHIP ( Art. 1769)

1.General Rule: Persons who are

not partners as to each other are
not partners as to third persons
Exception: Partnership by
estoppel
 EXAMPLE FOR (1)
If Joe and Jane say PUBLICLY that they are not
partners, then according to this Art., if they told
Jack that they are partners and Jack enters into a
contract with them, then Joe and Jane are in a
PARTNERSHIP OF ESTOPPEL
PARTNERSHIP OF ESTOPPEL
Legally binding partnership that may arise where,
in fact, no formal partnership agreement is in
effect. A person who by conduct or words
represents, or allows him/herself to be
represented, as a partner in a firm is liable for
the credit or loans obtained by firm on the basis
of such representation.
 RULES TO DETERMINE EXISTENCE OF A
PARTNERSHIP ( Art. 1769)
2. Co-ownership of a property does
not itself establish a partnership
EXAMPLE:
If Kay and Boy inherited a land from their
parents and subsequently leased the land
out for P50,000/month, then it can be said
that they share profits, but are they in
partnership?
Answer: No, they are merely co-owners.
The P50,000 profit is merely incidental and
besides, it was not derived from business
operations.
 Example for (2)
If Kay and Boy bought the land ( not inherited)
for P1M each and later sold it for P2.5M, then
there is 500t profit, are they partners?
Ans: No, because even if there is 500t profit,
this is merely incidental to the sale and not
from business operation.

If the land was instead used to build an

apartment that is rented out? Is there
partnership?
Ans: Yes, because Kay and Boy share profits
from renting, this can be considered business
operations.
 RULES TO DETERMINE EXISTENCE OF A
PARTNERSHIP ( Art. 1769)

3. Sharing of gross returns alone does

not indicate a partnership
Example:
If a person owns a big tract of land for planting rice
and entered into an agreement with a farmer that
they will divide the harvest. Is the person and the
farmer partners?
No because of the following reasons, to wit:
1. The farmer had no contribution
2. The farmer has no say in the disposition of the land
3. The farmer has no say in management
4. In case of loss, only the owner will carry the
burden
RULES TO DETERMINE EXISTENCE OF A
PARTNERSHIP ( Art. 1769)

4. Receipt of share in the profit is a

prima facie evidence that he is a
partner in the business, but not if the
profits were received in payment as:
a. Debt Wages of employee or rent

b. Anuity to a widow/representative
of a deceased partner
c. Interest of a loan

d. Considerarion for the sale of

goodwill of business or property
 Example for (4)

A Partnership borrowed P50,000 and

agreed to give the lender/creditor 1%
of the partnership’s annual gross
profit. Is the lender/ creditor a
partner?
Ans: No, because the receipt of the
share in the gross profit serves as
payment of the P50,000.
 FORM OF PARTNERSHIP CONTRACT

General Rule: A partnership may be

constituted in any form ( to be valid and
enforceable)

Exceptions:
1.If real property or real right is
contributed
A. the contract itself must be in writing
in a public instrument ( art 1771)
 Exceptions:
B. An inventory of the property
contributed, signed by the parties is
attached to the public instrument ( Art
1773)
*PERSONAL PROPERTY
1. If capital is less than P3,000--- no
special form is required
2. where the contract of partnership
has a capital of 3,000 pesos or more,
in money or property ----must be in a
public instrument and must be
recorded in the office of SEC
 Exceptions:
3. If it is covered by the Statute
of Frauds

Statute of Frauds—is the

requirement that some contracts
must be in writing to be enforceable
aside from having the essential
requisites of a contract (consent,
object, consideration)
 STATUTE OF FRAUDS

1. An agreement that by its terms

is not to be performed within a
year from the making thereof;
2. A special promise to answer for
the debt, default, or miscarriage of
another;
3. An agreement made in
consideration of marriage, other
than a mutual promise to marry;
 STATUTE OF FRAUDS
4. An agreement for the sale of
goods, chattels or things in action,
at a price not less than five hundred
pesos;
5. An agreement for the leasing for
a longer period than one year, or for
the sale of real property or of an
interest therein;
6. A representation as to the credit
of a third person.
 Exceptions:
4. A limited partnership cannot be
constituted orally; otherwise the
liability of the partners becomes as
that of general partners.
Problem:
A and B promised to contribute to
their partnership money (P1M) each
within 1 year from their agreement. A
contributed early but B failed to do
within a year. . Can A compel/force B
to give his promised contribution of
P1M?
Ans:
No, A cannot compel B to pay
his contribution to the
partnership.
Because the agreement between
them was purely oral and never
written and the one year already
expired.
 CLASSIFICATIONS OF PARTNERSHIP

(1)As to the extent of its subject

matter.
(a)Universal partnership or one which
refers to all the present property or
to all profits. (Art. 1777.)
• It is virtually a DONATION to each other of
the partner’s properties (or at least, the
usufruct) (Article 1781)
• Hence, persons who are prohibited to donate
to each other, should not be allowed to enter
into this kind of Partnership
 CLASSIFICATIONS OF PARTNERSHIP

Who cannot enter into a Universal

Partnership?
1. legally married spouse except a particular
partnership like exercise of a profession or
vocation
2. Common law spouses
3. Persons found guilty of adultery or
concubinage at the time of the donation
4. Persons who were guilty of the same criminal
offense, in consideration thereof
5. A person and public officer or his wife or
ascendants or descendants, by reason of his
office.
 CLASSIFICATIONS OF PARTNERSHIP

UNIVERSAL PARTNERSHIP
1. Partnerhsip of all present property.
This is defined in Art. 1778;

What comprises it?

* all property actually belonging to
all partners and;
* the profits acquired from this
properties
 CLASSIFICATIONS OF PARTNERSHIP

UNIVERSAL PARTNERSHIP
2. Partnership of profits. This is defined in
Art. 1780
(ownership of the contributed property remains
to the partner who contributed it)
What comprises it?
Only the usufruct ( the use and fruits) of the
properties of the partners becomes a common
property of the partners and the partnership

All the profits acquired through the industry or

work of the partners become a common property
(b) Particular Partnership --This is
defined in Article 1783.

Examples:
1. Formed for the acquisition and sale of
property (determinate thing)

2. Exercise of profession (Law or

Accounting firms)
(2) As to liability of the partners
(a) General partnership or one
consisting of general partners who
are liable pro rata and subsidiarily
(Art. 1816.) and sometimes
solidarily (Arts. 1822-1824.) with
their separate property for
partnership debts
* They have unlimited liability for the debts
of the partnership as they are the ones
responsible for management of the
business
 As to the extent of subject matter

Liability of the GENERAL Partners

1. PRO RATA and SUBSIDIARY ( Art.
1816)
Pro Rata means equally liable to third
persons in proportion to their
contribution;
Subsidiary means that the partner
shall only be liable with their property
after all the partnership assets have
been exhausted
Liability of the GENERAL Partners
2. SOLIDARILY LIABLE in the ff.
A.When by an unlawful act or
omission, LOSS or INJURY is
caused to 3rd person

Ex. A, B, and C are partners. C injured D

(with a damages worth P50,000) a 3rd
person. D can go after any of the 3, all
of them or the partnership to satisfy his
claim for damages.
 Liability of the GENERAL Partners
2. SOLIDARILY LIABLE in the ff.
B. A partner, within the scope of his
authority, receives money or
property from a third person and
misapplies it.
Ex. A, B and C are partners engaged in
pawnshop business. D pawns his jewelry
to the partnership of A, B and C. C
received the pawn item from D, a 3rd
person and sells it for his own personal
benefit. All partners are liable.
 Liability of the GENERAL Partners
2. SOLIDARILY LIABLE in the ff.
C. The partnership, in its ordinary
course of business, receives money
or property from a 3rd person and a
partner misapplies it while in the
custody of the partnership.
In the example, the jewelry received
from D as pawn item was kept in the
vault. A stole and sold it. All partners are
liable to D.
 As to liability of partners
(b) Limited partnership or one
formed by two 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. (Art. 1843.)
(b) Limited partnership
• It is sufficient that there is 1 General
partner and 1 limited partner
• The reason for the existence of a limited
partnership is to address the needs of all
those who wish to join a partnership without
the risk of losing personal property
• Limited partners contribute capital and
cannot participate in managerial decision or
in a day-to-day operation of the business
and are not liable personally for partnership
debts
 Classifications of partnership

(3) As to its duration

(a)At will– no particular
undertaking and can be
dissolved at any time
(b)With a Fixed Term– may
only be dissolved upon the
end of its term unless
continued by the partners
 CLASSIFICATIONS OF PARTNERSHIP

(4) As to the legality of its

existence
(a)De jure partnership or one which
has complied with all the legal
requirements for its establishment
(b) De facto partnership or one
which has failed to comply with all
the legal requirements for its
establishment.
 Classifications of partnership
(5) As to representation to others
(a)Ordinary or real partnership or one
which actually exists among the
partners and also as to third persons
(b)Ostensible partnership or
partnership by estoppel or one
which in reality is not a partnership,
but is considered a partnership only
in relation to those who, by their
conduct or admission, are precluded
to deny or disprove its existence
 Classifications of partnership
(6) As to publicity
(a)Secret partnership or one
wherein the existence of certain
persons as partners is not
avowed or made known to the
public by any of the partners; or
(b)Open or notorious partnership
or one whose existence is
avowed or made known to the
public by the members of the
firm
 Classifications of partnership

(7) As to purpose
(a) Commercial or trading
partnership or one formed for
the transaction of business27
(Art. 1767.); or
(b) Professional or non-trading
partnership or one formed for
the exercise of a profession.
 KINDS OF PARTNER

(1)Under the Civil Code

(a)Capitalist– contributes money/
property
(b)Industrial– contributes
industry/service
(c)General– liability extends to
personal property
(d)Limited– liability up to contribution
only
(e)Managing– manages the
partnership
 Under the Civil Code
(e) Liquidating– responsible
during dissolution
(f) By estoppel– not really a
partner
(g) Continuing– continues
business after dissolution
(h) Surviving– remains after
partner’s death
(i) Sub-partner– contracts with
partners
 Other Classifications
1. Ostensible– active, known to the
public
2. Secret– active, unknown to the public
3. Silent– inactive, known to the public
4. Dormant– inactive, unknown to the
public
5. Original– member at time of
organization
6. Incoming– about to become a member
7. Retiring– about to withdraw