LAW ON BUSINESS ORGANIZATIONS

CHAPTER I
By: Atty. John Richard A. Delos Reyes
 PARTNERSHIP

GENERAL PROVISIONS
(ARTS. 1767-1783, NEW CIVIL CODE)
 Art. 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.
 Definition of Partnership

Partnership is a contract whereby two or more persons bind themselves

to contribute money, property or industry to a common fund with the
intention of dividing profits among themselves.
 Characteristics of Partnership
1. Consensual – perfected by mere consent.

2. Bilateral – formed by two or more persons creating reciprocal rights and obligations.

3. Preparatory - entered into as a means to an end.

4. Nominate – has a special name or designation in law.

5. Onerous – contributions in the form of either money, property and/or industry must be made.

6. Commutative – the undertaking of each partner is considered as the equivalent of that of the others.

7. Principal – its existence or validity does not depend on some other contract.
 Elements of Partnership
1. Intention to form a contract of partnership;

2. Participation in both profits and losses; and

3. Community of interests.
 Essential Requisites

1. There must be a valid contract;

a. The partnership relation is fundamentally contractual. The essential elements of a
contract (Consent, Object, and Consideration), must be present.
b. It is fiduciary in nature.
• Principle of Delectus Personae (choice of persons) – It involves trust and
confidence among the partners. A partner has the right to select persons with whom he
wants to be associated with in partnership. Hence, no one can become a member of the
partnership without the consent of all the other partners.
• The principle applies only to general partners.
 Essential Requisites

2. The partners must have legal capacity to enter into the contract;
a. Partnership as partner – There is no prohibition against a partnership being a
partner in another partnership.
b. Corporation as partner – A corporation is without capacity or power to enter into a
contract of partnership, unless authorized by a statute or by its charter. The Supreme
Court, however, has recognized the distinction between a partnership and joint venture,
and has held that although a corporation cannot enter into a partnership contract, it
may, however, engage in a joint venture if the nature of the venture is authorized by its
charter. (Mendiola v. Court of Appeals, G.R. No. 159333, July 31, 2006)
 Essential Requisites

3. There must be mutual contribution of money, property, or industry to a common fund;

a. Money – must be in legal tender. Checks, drafts, promissory notes and other mercantile
documents are not money until they have been cashed.
b. Property – may be either real, personal, corporeal or incorporeal property. Thus, credit and
goodwill may be contributed.
c. Industry – means the active cooperation, which may be either personal manual efforts or
intellectual, and for which he receives a share in the profits (not merely salary) of the business.
d. Common Fund – co-ownership by the partners of the property and business of the partnership and
which implies joint powers of management and control of the partnership and in sharing of profits
and losses.
 Essential Requisites

4. The object or purpose must be lawful;

5. The primary purpose must be to obtain profits and to divide the same
among the partners;
6. There must be at least one (1) general partner.
 Business of partnership need not be continuing in nature

The carrying on of a business of a continuing nature is not essential to

constitute a partnership. An agreement to undertake a particular piece of
work or a single transaction or a limited number of transactions and
immediately divide the resulting profits would seem to fall within the
meaning of the term “partnership” as used in the law.
 Partnership for the Practice of Profession;
To organize a partnership not an absolute right

Two or more persons may also form a partnership for the exercise of a
profession. The right to practice a profession is not a natural or
constitutional right but a privilege or franchise which may be enjoyed only
under such terms as the State may deem necessary.
 Transparency of the Articles of Partnership

The Articles must not be kept secret among the partners; otherwise, the
association shall have no legal personality and shall be governed by the
provisions of the Civil Code relating to co-ownership.
 Art. 1768
The partnership has a juridical personality separate and distinct from that of
each of the partner.
 Partnership as a juridical person

As an independent juridical person, a partnership may enter into contracts,

acquire and possess property of all kinds in its name, as well as incur obligations
and bring civil or criminal actions. Thus, a partnership may be declared insolvent
even if the partners are not. It may enter into contracts and may sue and be sued in
its firm name or by its duly authorized representative. It is sufficient that service
of summons be served on any partner.
Partners cannot be held liable for the obligations of the partnership unless it is
shown that the legal fiction of a different juridical personality is being used for a
fraudulent, unfair or illegal purpose.
 Kinds of persons under the law
1. Natural persons - Human beings created by God through the intervention of parents; and
2. Juridical persons – Those created by law, such as:
a. State and its political subdivisions (public corporations) – the corporate existence shall
commence upon the election and qualification of its Chief Executive and a majority of the
members of the Sanggunian, unless some other time is fixed therefor by the law or ordinance
creating it (Sec. 14, R.A. No. 7160);
b. Corporations for public interest (quasi-public corporations) – governed either by the
Corporation Code or their special charters passed by the legislature. Their personality begins
as soon as they have been constituted according to law (Art. 44, par. 2, Civil Code); and
 Kinds of persons under the law
c. Corporations, partnerships and associations for private interest – Corporations are governed by
the Corporation Code. Their personality exists from the moment a certificate of incorporation is
granted to it from the SEC (Sec. 19, Corporation Code).
Partnerships are governed by the contract between the partners and the provisions of the Civil Code
on Partnership.
Note: A sole proprietorship does not possess a juridical personality separate and distinct from the
personality of the owner of the enterprise. (Excellent Quality Apparel, Inc. v. Win Multi-Rich
Builders, Inc., G.R. No. 175048, February 10, 2009)
 Rights of Juridical Persons

1. To acquire and possess property of all kinds;

2. To incur obligations; and
3. To bring civil or criminal actions.
 Effect of failure to comply with statutory requirements

Under Art 1772

Partnership retains its juridical personality despite failure to comply with the requirements
of execution of public instrument and registration of name in SEC, so long as the contract
has the essential requisites. (Sunga-Chan v. Chua, G.R. No. 143340, August 15, 2001)

Under Arts 1773 and 1775

Partnership with immovable property contributed, if without requisite inventory, signed and
attached to a public instrument, shall not acquire any juridical personality because the
contract itself is void. This is also true for secret associations or societies.
 Rules to determine the existence of a partnership

In general, to establish the existence of a partnership, all of its essential

features or characteristics must be shown as being present. The issue as to
whether a partnership exists is a factual matter decided on the basis of all
circumstances and no single factor is controlling. In case of doubt, however,
the rules provided under Article 1769 shall apply.
 Persons not partners as to each other

General Rule: Persons who are partners as between themselves are partners
as to third persons.

Generally, the converse is true: if they are not partners between themselves,
they cannot be partners as to third persons. Partnership is a matter of intention,
each partner giving his consent to become a partner. However, whether a
partnership exists between the parties is a factual matter. Where parties declare
they are not partners, this, as a rule, settles the question between them.
 Persons not partners as to each other

Exception: Partnership by estoppel

Where a person misleads third persons into believing that they are partners in a non-
existent partnership, they become subject to liabilities of partners. Whether or not the
parties call their relationship or believe it to be a partnership is immaterial. Thus, with the
exception of partnership by estoppel, a partnership cannot exist as to third persons if no
contract of partnership has been entered into between the parties themselves.
 Illustration:

If A and B are not partners as to each other, neither will they be partners
with respect to C, a third person. But if A, with the consent of B, represents
to C that they are partners, then A and B will be considered partners as to C
even if they are not really partners.
 Co-ownership or co-possession

There is co-ownership whenever the ownership of an undivided thing or right belongs to different persons.
Co-ownership does not of itself establish the existence of a partnership, although it is one of its essential elements. This is
true even if profits are derived from the joint ownership.
The profits must be derived from the operation of business by the members of the association and not merely from
property ownership. The law does not imply a partnership between co-owners because of the fact that they develop or
operate a common property, since they may rightfully do this by virtue of their respective titles or common dominion over
the property. There must be a clear intent to form a partnership.
Partners have a well-defined fiduciary relationship between them. Co-owners do not. Should there be dispute; the remedy
of partners is an action for dissolution, termination and accounting. For co-owners it would be one, for instance, for non-
performance of the contract. People can become co-owners without a contract but they cannot become partners without
one.
 Illustration:

A and J inherited from their father an apartment which is leased to third

persons. They are merely co-owners and not partners. There must be a clear
intent to form a partnership.
 Illustration:

O, the owner of a passenger jeepney, agrees with D, a driver, that the latter
shall have full control and use of the jeepney to carry passengers, pay for
gasoline and oil, and shoulder the cost of repairs, and that the gross receipts
are to be divided between them
 Is there a partnership formed?
No.

The sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which
the returns are derived.
Reason for the rule: In a partnership, the partners share profits after satisfying all of the
partnership liabilities. Partners are interested in both failures and successes; it is the chance
of loss or gain that characterizes a business. Where the contract requires a given portion of
gross returns to be paid over, the portion may be paid over as commission, wages, rent, etc.
 Art. 1770
A partnership must have a lawful object or purpose, and must be
established for the common benefit or interest of the partners.
When an unlawful partnership is dissolved by a judicial decree, the
profits shall be confiscated in favor of the State, without prejudice to the
provisions of the Penal Code governing the confiscation of the instruments
and effects of a crime.
 Object or Purpose of Partnership

The provision of the 1st paragraph reiterates 2 essential elements of a

contract of partnership:
1. Legality of the object; and
2. Community of benefit or interest of the partners - The parties possess
absolute freedom to choose the transaction or transactions they must engage
in. The only limitation is that the object must be lawful and for the common
benefit of the members. The illegality of the object will not be presumed.
 Effects of an unlawful partnership

1. The contract is void 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 #3.
 Right to receive profits where partnership is unlawful

Law does not permit action for obtaining earnings from an unlawful
partnership because for that purpose, the partner will have to base his action upon
the partnership contract, which is null and without legal existence by reason of its
unlawful object; and it is self-evident that what does not exist cannot be a cause
of action.
Profits earned do not constitute or represent the partner’s contribution. It
would be immoral and unjust for the law to permit a profit from an industry
prohibited by it. Therefore, there cannot be no accounting demanded of a partner
for the profits which may be in his hands, nor can there be recovery.
 Effect of subsequent illegality of partnership business

Contract will not be nullified. 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.
 Form of partnership contract

General rule:
No special form is required for the validity or existence of the contract of
partnership. The partnership contract may be made orally or in writing
regardless of the value of the contributions.
 Exceptions

1. Where real property or real right is contributed: The execution of a public instrument is necessary for validity of
contract of partnership. To affect third persons, the transfer of real property to the partnership must be duly registered in
the Registry of Property.
2. When partnership agreement covered by the Statute of Frauds: An agreement to enter in a partnership at a future time,
which by its term is not to be performed within a year from the making thereof, is covered by the Statute of Frauds. Such
agreement is unenforceable unless it is in writing or at least evidenced by some note or memorandum.
Illustration:
Q: Today, A and J orally agreed to form a partnership one and one half years from today, each one to contribute P1,000. If
at the arrival of the period, J refuse to go ahead with the agreement, can A enforce the agreement?
A: No. Since the agreement is to be enforced after one (1) year form the making thereof, the same should be in writing as
prescribed under the Statute of Frauds.
3. Limited partnership which cannot be constituted orally: The requirements of the statute must be substantially
complied with; otherwise, the liability of the limited partners becomes the same as that of general partners.
 Registration of Partnership

Form if personal property is contributed

• If capital is less than P3,000: No special form is required for its validity or existence;
• Partnership with capital of P3, 000 or more:
1. The contract must appear in a public instrument;
2. It must be recorded or registered with the SEC.

However, failure to comply with the above requirements does not prevent the formation of the
partnership or affect its liability and that of the partners to third persons. But any partner is granted
the right by law to compel each other to execute the contract in a public instrument.
 Registration of Partnership

Form if real property or real right is contributed, regardless of the value:

1. The contract must be in writing in a public instrument;
2. An inventory of the property contributed must be made, signed by the parties,
and attached to the public instrument.

Moreover, to be effective against third parties, the partnership must also be

registered in the Registry of Property of the province where the real property
contributed is located.
 Adverse effect of failure to comply with registration requirements

If there is no inventory, the partnership will not acquire juridical

personality. The contract of partnership will likewise be VOID in the sense
that the partners are deemed to be acting for themselves when they entered
into the partnership contracts and transactions. Thus, partners can be held
directly and primarily liable by partnership creditors for all contracts entered
into, and all obligations assumed, in the name of the partnership.
 Acquisition or conveyance of property by partnership

Since partnership has juridical personality of its own, it may acquire

immovable property in its own name. Title so acquired can be conveyed
only in the partnership name.
 Secret partnerships without juridical
personality
Associations and societies, whose articles are kept secret among the
members, and wherein any one of the members may contract in his own
name with third persons, shall have no juridical personality, and shall be
governed by the provisions relating to co-ownership.
 Classifications of Partnership

1. As to object
• Universal partnership. (Art. 1777)
a. Of all present property. (Art. 1778)
b. Of profits. (Art. 1780)
• Particular partnership. One which has for its object:
a. Determinate things;
b. Their use and fruits;
c. A specific undertaking; and
d. The exercise of a profession or occupation (Art. 1783).
 Classifications of Partnership

2. As to liability of the partners

• General partnership: one consisting of general partners who are liable pro rata and subsidiary and sometimes
solidarily with their separate property for partnership debts.
• Limited partnership: 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.
3. As to duration
• Partnership at will: one in which no time is specified and is not formed for a particular undertaking or venture and
which may be terminated at any time by mutual agreement of the partners, or by the will of any one partner alone; or
one for a fixed term or particular undertaking which is continued after the end of the term or undertaking without
express agreement. The partner who wishes to dissolve a partnership at will must, however, act in good faith, not that
the attendance of bad faith can prevent the dissolution of the partnership but it can result in a liability for damages.
• Partnership with a fixed term: one which the term for which the partnership is to exist is fixed or agreed upon or
one formed for a particular undertaking.
 Classifications of Partnership

4. As to the legality of its existence

• De jure partnership: one which has complied with all the legal requirements for its
establishment.
• De facto partnership: one which has failed to comply with all the legal requirements for its
establishment.
5. As to representation to others
• Ordinary or real partnership: one which actually exists among the partners and also as to third
persons.
• Ostensible partnership or partnership or 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
admission, are precluded to deny or disprove its existence.
 Kinds of partners

1. As to the nature of contribution

• Capitalist partner: one who contributes money or property to the
common fund.
• Industrial partner: one who contributes only his industry or personal
service.
 Kinds of partners

2. As to liability
• General partner: one whose liability to third persons extends to his separate property.
• Limited partner: one whose liability to third persons is limited to his capital contribution.

3. As to management
• Managing partner: one who manages the business or affairs of the partnership.
• Silent partner: one who does not take any active part in the business although he may be known
to be a partner; thus, he need not be a secret partner.
• Liquidating partner: one who takes charge of the winding up of partnership affairs upon
dissolution.
 Kinds of partners

4. As to exposure to public perception

• Ostensible partner: one who takes active part and known to the public as a partner, whether or not he has
actual interest in the firm;
• Secret partner: one who takes active part in the business but is not known to be a partner by outside parties
nor held out as a partner by the other partners. He is an actual partner.
• Dormant partner: one who does not take active part in the business and is not known or held out as a
partner. He would be both a silent and a secret partner.

5. As to membership
• Real partner: one who is really a contributing member of an existing legal partnership;
• Partner by estoppel: a quasi-partner; one who is not really a partner but is liable as a partner for the
protection of innocent third persons. He is one represented as being a partner but who is not so between the
partners themselves.
 Kinds of partners

6. As to nature of membership
• Original partner: one who is a member of the partnership from the time of its commencement as a
juridical person.
• Incoming partner: one who becomes a member subsequent to the establishment of the firm or one
who is about to be admitted by the consent of all the members.
• Continuing partner: one who continues the business of a partnership after it has been dissolved by
reason of the admission of a new partner, or the retirement, death or expulsion of one or more partners.
• Retiring partner: one withdrawn from the partnership; a withdrawing partner.
• Surviving partner: one who remains after a partnership has been dissolved by the death of any
partner.
• Subpartner: one who, not being a member of the partnership, contracts with a partner with reference
to the latter’s share in the partnership.
 Universal partnership of all present property explained

A universal partnership of profits is one which comprises all that the partners
may acquire by their industry or work during the existence of the partnership and
the usufruct of movable or immovable property which each of the partners may
possess at the time of the celebration of the contract. In this kind of partnership,
the following become the common property of all the partners:
a) Property which belonged to each of them at the time of the constitution of
the partnership;
b) Profits which they may acquire from the property contributed.
 Contribution of future property

General rule:
Future properties cannot be contributed. The very essence of the contract of
partnership that the properties contributed be included in the partnership requires the
contribution of determinate things. The position of a partner is like that of a donor,
and donations cannot comprehend future property.
Thus, property subsequently acquired by inheritance, legacy, and donation cannot
be included by stipulation except the fruits thereof. Hence, any stipulation including
property so acquired is void. Profits from other sources (not from properties
contributed) will become common property only if there is a stipulation to that effect.
 Illustration:

Q: Partners A and B entered into a universal partnership of all present property. No stipulation
was made regarding other properties. Subsequently, A received a parcel of land by inheritance
from his father; and another parcel of land from Batangas State University as remuneration for
A’s work as a professor therein.
May the two (2) parcels of land and their fruits be enjoyed by the partnership?

A: No, because there was no stipulation regarding future properties or their fruits. If there be a
stipulation, the land acquired as salary as well as its fruits will belong to the partnership; but the
land acquired by inheritance will not belong to the partnership since this cannot be stipulated
upon.
 Universal partnership of profits explained

A universal partnership of profits is one which comprises all that the partners may
acquire by their industry or work during the existence of the partnership and the usufruct
of movable or immovable property which each of the partners may possess at the time
of the celebration of the contract.
The following become the common property of all partners:
1. All of which the partners may acquire by their industry or work during the existence
of the partnership; and
2. The usufruct of movable or immovable property which each of the partners may
possess at the time of the celebration of the contract.
 Ownership of present and future property

The partners retain their ownership over their present and future
property. What passes to the partnership are the profits or income and the
use or usufruct of the same. Consequently, upon dissolution, such property is
returned to the partners who own it.
Fruits of property subsequently acquired by the partners do not belong to
the partnership. Such profits, however, may be included by express
stipulation.
 Illustration:

Q: Partners A and B entered into a universal partnership of profits. Later, A

purchased a parcel of land. Will the fruits of said land belong to the
partnership?
A: Generally, no. It is because the usufruct granted to the partnership under
Article 1780 par. 2 refers only to the property possessed by the partner at the
time of the celebration of the contract. It follows that fruits of after-acquired
properties do not belong to the partnership as a matter of right.
 Presumption in favor of universal partnership of profits

Articles of universal partnership, entered into without specification of its

nature, only constitute a universal partnership of profits.

Reason for presumption: universal partnership of profits imposes less

obligations on the partners, since they preserve the ownership of their
separate property.