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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 the profits among themselves, or in order to exercise a profession.
CHARACTERISTICS:
1. Consensual – it is perfected by mere consent or the meeting of minds between parties (Art. 1305).
2. Bilateral or Multilateral – it is entered into between two or more persons;
3. Nominate – it is designate by a specific name;
4. Principal – its existence does not depend on the life of another contract;
5. Onerous – certain contributions have to be made;
6. Preparatory – in the sense that after it has been entered into, other contracts essential in the carrying out of its purposes can
be entered into.
There must be affection societatis – the desire to formulate an ACTIVE union with people among whom there exist mutual
confidence and trust.
PARTNERSHIP CORPORATION
Creation: Voluntary agreement of parties. Created by the state in the form of a special character or by
a general enabling law (The Corporation Code)
Existence: No time limit except agreement of parties. Not more than 50 years.
Liability: may extend to private property. Liable only for payment of their subscribed capital stock.
Transferability of Interest: All partners need to consent to Does not need the consent of the other stockholders.
the transfer of interest to another.
Ability to bind the firm: Generally, partners acting on behalf Generally, stockholders cannot bind corporations since its
of the partnership are agents thereof; official acts are through a board of directors
Mismanagement: A partner can sue another partner who A stockholder cannot sue a director who mismanages, it
mismanages must be in the name of the corporation.
Nationality: A partnership is a national of the country where Generally, under whose laws it was created
it was created.
Legal Personality: from the time the contract begins From registration with the Securities and Exchange
Commission
Dissolution: Death, retirement, insolvency, civil interdiction, Such causes do not dissolve a corporation.
or insanity of a partner dissolves the partnership.
SEPARATE JURIDICAL PERSONALITY: The partnership has a judicial personality separate and distinct from that of each of the
partners. The partnership can, in general:
(a) acquire and possess property of all kinds;
(b) incur obligations;
(c) bring civil or criminal actions;
(d) adjudged insolvent even if the individual members be each financially solvent.
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.
2. Capital is more than P3,000 – the contract of partnership must appear in a public instrument, which must be recorded in the
SEC.
KINDS OF PARTNERSHIPS:
According to OBJECT:
1. Universal:
a. With all present property in which the partners contribute all the property which actually belongs to them to a common
fund, with the intention of dividing the same among themselves, as well as all the profits which they may acquire therewith.
The property which belongs to each of the partners at the time of the constitution of the partnership, becomes the common
property of all the partners, as well as all the profits which they may acquire therewith.
This does not, however, cover properties subsequently acquired by the partners through inheritance, legacy or donation,
except the fruits thereof which may be included by stipulation.
b. With all profits where all the properties are continued to be owned by the partners, but the usufruct thereof passes to
the firm.
It comprises all that the partners may acquire by their industry or work during the existence of the partnership.
Articles of Universal Partnership which does not specify the nature, constitute only universal partnership of profits.
• Persons not allowed to form a universal partnership: those who cannot donate to each other, namely:
1. Husband and Wife (Art. 133)
2. Those guilty of adultery and concubinage (Art. 739);
3. Those guilty of the same criminal offense, if the partnership was entered into in consideration of the same (Art. 739);
A universal partnership is virtually a donation to each other of the partner’s properties (or at least their usufruct). Therefore, if
persons are prohibited by law to donate to each other, they should not be allowed to do indirectly what the law forbids directly.
According to LIABILITY:
1. General where all the partners are general partners whose liability extends to their individual properties, after the assets of the
partnership have been exhausted;
2. Limited where at least one of the partners are liable only up to the extent of his contribution.
According to TERM:
1. Partnership with a fixed term or particular undertaking - upon arrival of the fixed term or fulfilment of a particular
undertaking, partnership is dissolved, and if continued, it will constitute a partnership at will and the rights and duties of the
partners remain the same, so far as is consistent with a partnership at will.
2. Partnership at will – when there is no fixed term or particular undertaking.
Risk of Loss:
LOSS BORNE BY THE PARTNER:
(1) Thing contributed is specific and determinate which is NOT fungible and only their use and fruits may be for the common
benefit; and
(2) There is stipulation that he shall bear the loss of the thing brought and appraised in the inventory.
2. Not to convert partnership funds/ property for his own use (Art. 1788)
3. Not to engage in unfair competition (applicable to capitalist partner); not to engage in any other industry at all without the
consent of the partnership (applicable to industrial partner) (Art. 1808)
4. To account for and hold as trustee, unauthorized personal profits (Art. 1807)
5. Pay for damages caused by his fault (Art. 1794)
6. Credit to the firm the payment made by a debtor who owes both the partnership and the partner (Art. 1792)
7. Share with other partners the share of the partnership credit which he has received from an insolvent firm debtor (Art. 1743)
2. Capitalist partners – the prohibition is limited to businesses in the same industry as that of the partnership which may result in
competition. Exceptions:
a. When it is expressly stipulated that the capitalist partner can so engage himself;
b. When the other partners expressly allow him to do so;
c. When the other partners impliedly allow him to do so, as when all are violation the article.
d. During the period of liquidation and winding up, when the partnership is already non-existent.
e. When the general-capitalist partner becomes a limited partner in a competitive enterprise.
Effect of non-compliance:
a. He shall bring to the partnership all the profits illegally obtained;
b. He is liable, personally, for all the losses;
c. He may be ousted for loss of trust and confidence.
FORCED SALE OF PARTNER’S INTEREST: In case of an imminent loss of the business of the partnership, any partner who refuses
to contribute an additional share to the capital to save the venture, shall he obliged to sell his interest to the other partners. Except:
1. Industrial partners except if there is stipulation that he will likewise contribute
2. If there is stipulation to the contrary
MANAGING PARTNER COLLECTING FROM A COMMON DEBTOR: To prevent the managing partner from furthering his personal
interest to the detriment of the firm, if such managing partner collects a sum from a common debtor who owes money both to said
partner and to the partnership:
1. If the managing partner issued a receipt in the name of the partnership: the payment shall be applied to the partnership credit;
2. If the managing partner issued a receipt in his name: the payment shall be applied proportionate to the amounts of the two
debts. EXCEPT: When the debt owed by the debtor to the managing partner is more onerous, the debtor may choose to apply
the payment exclusively to such
ILLUSTRATION: D owed ABC partnership and A, the managing partner, P7,000 and P3,000, respectively. A was able to collect
P5,000 from D.
• If A issued a receipt in the name of the partnership, the whole amount of P5,000 will be applied to the partnership credit.
• If A issued a receipt in his own name, the P5,000 shall be applied as follows:
a. P3,500 (P5,000 * P7,000/P10,000) to the partnership credit;
b. P1,500 (P5,000 * P3,000/P10,000) to A’s credit.
DISTRIBUTION OF LOSSES:
1. In accordance with agreement; If there was agreement as to profits but not losses, same proportion;
2. In proportion to contribution but the industrial partner shall not be liable for losses.
An industrial may be made liable for losses only if there was stipulation to that effect.
Void Stipulation: A stipulation which excludes one or more partners from any share in the profits or losses.
RULES ON MANAGEMENT
MANAGING PARTNER in the ARTICLES OF PARTNERSHIP: May execute all acts of administration, in good faith, even with
opposition from the other partners;
The power to execute all acts of administration can only be revoked if (a) with just or lawful cause; and (2) by a vote of the partners
representing the controlling interest.
MANAGING PARTNER AFTER PARTNERSHIP HAS BEEN CONSTITUTED: The power as manager may be revoked by a vote of
the partners representing the controlling interest EVEN WITHOUT just or lawful cause.
MULTIPLE MANAGING PARTNERS: If two or more partners have been intrusted with the management of the partnership without
specification of their respective duties, or without a stipulation that one of them shall not act without the consent of all the
others:
1. Each partner may separately execute all acts of administration;
2. Should one of the managing partners oppose the act of another, the matter shall be decided by a majority of the managing
partners per head count;
3. Should there be a tie in the votes of the managing partners, the controlling interest of ALL the partners shall prevail.
STIPULATION THAT NO PARTNER CANNOT ACT WITHOUT THE SUPPORT OF PARTNERS: the concurrence of all shall be
necessary for the validity of the acts, and the absence or disability of any one of them cannot be alleged, unless there is imminent
danger of grave or irreparable injury to the partnership.
ASSOCIATE: Every partner may associate another person with him in his share, but the associate shall not be admitted into the
partnership without the consent of all the other partners, even if the partner having an associate should be a manager.
PROPERTY RIGHTS OF A PARTNER:
1. His rights in specific partnership property – a partner is a co-owner with his partners of specific partnership property. The
incidents of such co-ownership are:
a. A partner, subject to any agreement between the partners, has an equal right with his partners to possess specific
partnership property for partnership purposes; but he has no right to possess such property for any other purpose without
the consent of his partners;
b. A partner's right in specific partnership property is not assignable except in connection with the assignment of rights of
all the partners in the same property;
c. A partner's right in specific partnership property is not subject to attachment or execution, except on a claim against
the partnership. When partnership property is attached for a partnership debt the partners, or any of them, or the
representatives of a deceased partner, cannot claim any right under the homestead or exemption laws;
d. A partner's right in specific partnership property is not subject to legal support.
2. His interest in the partnership - A partner's interest in the partnership is his share of the profits and surplus.
Strangers who include their name in the firm are liable as partners because of estoppel but do not have the rights of partners.
– this is to protect customers from being misled.
Under Art. 1846, if a limited partner included his name in the firm name, he shall be liable as a general partner.
2. LIABILITY AFTER EXHAUSTION OF PARTNERSHIP ASSETS: All partners, including industrial ones, shall be liable pro rata
with all their property and after all the partnership assets have been exhausted, for the contracts which may be entered into in
the name and for the account of the partnership, under its signature and by a person authorized to act for the partnership.
However, any partner may enter into a separate obligation to perform a partnership contract.
A, B, C and D partners of ABCD Partnership agreed on equal distribution of profits. As regards third parties, however, they
exempted C, an industrial partner. Total Assets of the partnership amounted to P200,000 while the liabilities are now at
P800,000. In this case:
• The liabilities can be settled first through the remaining partnership assets of P200,000
• The P600,000 shall be borne by all partners: A, B, C and D, because as to third persons, the stipulation exemption C
from liability from such third parties do not apply.
• C, however, if made to pay P150,000 can seek reimbursement from A, B and D, since the agreement exempting him
is valid as to the partners.
3. AUTHORITY TO ACT FOR AND IN BEHALF OF THE PARTNERSHIP: Every partner is an agent of the partnership for the
purpose of its business.
The authority of the partner to act in behalf of the partnership may be (a) express; or (b) implied when he apparently carries on
the usual business of the partnership. In the latter, the act of the partner would bind the partnership, unless (i) he has in fact
no authority to act in behalf of the partnership; and (ii) the person to whom he is dealing has knowledge of the fact that he has
no such authority.
If the partner is not carrying on the usual business of the partnership, the act will not bind the partnership unless it is authorized
by the other partners.
Except when authorized by the other partners or unless they have abandoned the business, one or more but less than all the
partners have no authority to:
(1) Assign the partnership property in trust for creditors or on the assignee's promise to pay the debts of the partnership;
(2) Dispose of the good-will of the business;
(3) Do any other act which would make it impossible to carry on the ordinary business of a partnership;
(4) Confess a judgment;
(5) Enter into a compromise concerning a partnership claim or liability;
(6) Submit a partnership claim or liability to arbitration;
(7) Renounce a claim of the partnership.
5. SOLIDARY LIABILITY OF THE PARTNERSHIP WITH THE PARTNER: Where, by any wrongful act or omission of any
partner acting in the ordinary course of the business of the partnership or with the authority of co-partners, loss or injury is
caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the
same extent as the partner so acting or omitting to act.
6. MISAPPROPRIATION: The partnership is bound to make good the loss, in two situations:
a. Pertains to partner as receiver: Where one partner acting within the scope of his apparent authority receives money or
property of a third person and misapplies it.
b. Pertains to partnership as receiver: Where the partnership in the course of its business receives money or property of a
third person and the money or property so received is misapplied by any partner while it is in the custody of the partnership.
In both 5 and 6 above, all partners are solidarily liable with the partnership.
7. PARTNER BY ESTOPPEL:
a. One who represents himself as a partner of an existing partnership with or without consent of the partnership:
(1) When the partnership consented – a partnership by estoppel is created between the original members and the
deceiver. A partnership liability results.
(2) When the partnership did NOT consent – deceiver becomes a partner by estoppel where he is liable as a partner but
does not acquire the rights thereof. No partnership liability exists.
b. One who represents himself as a partner of a NON-existent partnership. Liability of parties is pro rata, since there is no
partnership liability.
Dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the
carrying on as distinguished from the winding up of the business.
On dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed.
Winding up: on the other hand, is the process of settling business affairs after dissolution.
Termination: is the point where all the partnership affairs have been wound up.
CAUSES OF DISSOLUTION:
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 operation of law:
a. By any event which makes it unlawful for the business of the partnership to be carried on or for the members to carry
it on in partnership;
b. When a specific thing which 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;
c. By the death of any partner;
d. By the insolvency of any partner or of the partnership;
e. By the civil interdiction of any partner;
Judicial causes: where the dissolution of the partnership is decreed by the court:
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 tends to affect prejudicially the carrying on of the business;
4. A partner wilfully or persistently commits a 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 only be carried on at a loss;
6. Other circumstances render a dissolution equitable.
EFFECTS OF DISSOLUTION:
1. Act, Insolvency or Death:
a. If the cause of the dissolution is AID – NOTICE should be given by the partners to terminate the mutual agency
b. If the cause is NOT AID – the mutual agency is terminated and the dissolution is binding even without notice.
2. The following acts are still binding even after dissolution:
a. Acts to for winding-up of the affairs of the partnership
b. Contracts with creditors who had no notice of the dissolution
3. The partners may continue the partnership after dissolution of the old partnership. Such continuation still dissolves the old
partnership and a new partnership is created. The creditors of the old partnership are also creditors of the person or partnership
continuing the business.
WINDING UP OR LIQUIDATION
This is the process of liquidating the partnership assets and the distributing the proceeds to satisfy the claims against the partnership.
Partner’s Liability: in case the assets of the partnership are not sufficient to cover the liabilities, the remaining claims may be
satisfied against the separate assets of the partners.
However, where a partner has become insolvent, the claims against his separate property shall be satisfied in the following order:
1. Those owing to separate creditors;
2. Those owing to partnership creditors;
3. Those owing to partners by way of contribution.
LIMITED PARTNERSHIP
Limited Partnership: is one formed by two or more persons under the provisions of the following article, having as members one
or more general partners and one or more limited partners.
Limited liability: a limited partners’ liability is limited only to his capital contribution. Such that, after exhaustion of partnership
assets, he cannot be made to contribute to answer the remaining liabilities to third parties.
The said certificate will be filed with the SEC and a limited partnership is formed if there has been substantial compliance in good
faith with the foregoing requirements
Otherwise, a limited partner whose name appears in the partnership name, not covered by the above exemptions, is liable as a
general partner.
3. The limited partner cannot take part in the management of the partnership. Otherwise, he shall be liable as a general partner.
b. The substitute has all the rights and powers and is subject to all the restrictions and liabilities of his assignor except those
liabilities of which he was ignorant at the time he became a limited partner and which could not be ascertained from the
certificate.
(1) The substitution does not release the original limited partner from liability to the partnership.
(2) If the assignee does not become an substitute, he has no right to require any information or account of the partnership
books; he is only entitled to receive the share of the profits or other compensation by way of income or the return of
his contribution to which his assignor would otherwise be entitled; The assignee is still an OUTSIDER to the
Partnership.
Grounds: The retirement, death, insolvency, insanity or civil interdiction of a GENERAL PARTNER dissolves the partnership. Except:
If the partnership business is continued by the remaining general partners under a right to do so as stated in the Certificate of Limited
Partnership OR with the consent of all the partners.
A limited partner may have the partnership dissolved and its affairs wound up when he rightfully but unsuccessfuly demands the
return of his contribution.