REGULATORY FRAMEWORK for BUSINESS TRANSACTIONS

Partnership XPN:
It is a contract whereby two or more persons bind Corporation sole
themselves to contribute money, property, or From the
From the date of
Commenceme moment of
industry to a common fund, with the intention of issuance of the
nt of Juridical execution of the
dividing the profits among themselves (Art. 1767, certificate of
Personality contract of
incorporation
NCC). partnership
Partner may not Stockholder has
NOTE: Two or more persons may also form a dispose of his a right to
Disposal/Tran
individual transfer shares
partnership for the exercise of a profession (Art. sferability of
interest unless without prior
1767, NCC). Interest
agreed upon by consent of other
all partners stockholders
Characteristics of a partnership In absence of
stipulation to
1. Bilateral – it is entered into by two or more
contrary, a
persons and the rights and obligations arising Power to Act Management is
partner may bind
therefrom are always reciprocal with 3rd vested with the
partnership –
Persons BOD
2. Onerous – each of the parties aspires to each partner is
procure for himself a benefit through the giving of agent of
partnership
something
Death of a Death of
3. Nominate – it has a special name or designation partner results stockholder does
in our law Effect of Death
in dissolution of not dissolve the
4. Consensual – perfected by mere consent, upon partnership corporation
the express or implied agreement of two or more May be dissolved
Can only be
at any time by
persons dissolved with
Dissolution the will of any or
5. Commutative – the undertaking of each of the the consent of
all of the
partners is considered as the equivalent of that of the State
partners
the others In case of a
6. Principal – it does not depend for its existence general partner,
his separate and
or validity upon some other contracts
personal GR: The
7. Preparatory – because it is entered into as a property shall obligation to
means to an end, i.e. to engage in business or also be liable if third persons is
Liability
specific venture for the realization of profits with the assets of the limited to the
the view of dividing them among the contracting partnership is assets of the
not sufficient to corporation
parties. satisfy the
obligation to
Partnership vs Corporation third persons

BASIS PARTNERSHIP CORPORATION Essential Features of Partnership

Created by 1. There must be a valid contract.
contract or by 2. The parties (two or more persons) must have
Creation Created by law
mere agreement legal capacity to enter into the contract.
of the parties 3. There must be a mutual contribution of
Has juridical Has juridical
money, property, or industry to a common fund.
personality personality
Juridical separate and separate and 4. The object must be lawful.
Personality distinct from distinct from 5. The primary purpose must be to obtain profits
that of each that of each and to divide the same among the parties. (De
partner corporators Leon, 2010)
Depends in
Realization of Articles of Formation of Partnership
Purpose
profits Incorporation It is created by agreement of the parties
(AOI)
(consensual). There is no such thing as a
50 years
maximum, partnership created by law or by operation or
Duration/ implication of law alone (De Leon, 2005).
extendible for
Term of No limitation
not more than 50
Existence
years in any one Commencement of Contract of Partnership
instance A partnership is a consensual contract; hence, it
GR:
Number of Minimum of 2 exists from the moment of the celebration of the
Minimum of 5
incorporators persons contract by the partners.
persons

1|Page
 PARTNERSHIP
Formalities needed for the creation of a
partnership
GR: No special form is required for its validity or
existence (Art. 1771, NCC). The contract may be
made orally or in writing regardless of the value
of the contributions.
XPN: If property or real rights have been
contributed to the partnership:
1. Personal property
a. Less than P3,000 – may be oral
b. P 3,000 or more – must be:
i. In a public instrument; and
ii. Registered with Securities and
Exchange Commission (Art.
1772, NCC) NOTE: Even if the
partnership is not registered
with SEC, the partnership is still
valid and possesses a distinct
personality
2. Real property or real rights – must be:
a. In a public instrument (Art. 1771,
NCC)
b. With an inventory of said property
i. Signed by the parties
ii. Attached to the public
instrument (Art. 1773, NCC)
iii. Registered in the Registry of
Property of the province, where
the real property is found to bind
third persons
3. Limited partnership – Must be registered as
such with SEC, otherwise, it is not valid as a
limited partnership but may still be considered a
general partnership with juridical personality
DIFFERENT KINDS OF PARTNERS
A. Under the Civil Code
1. Capitalist – Contributes money or property to
the common fund
2. Industrial – Contributes only his industry or
personal service
3. General – One whose liability to 3rd persons
extends to his separate or personal property
4. Limited – One whose liability to 3rd persons is
limited to his capital contribution
5. Managing – Manages the affairs or business of
the partnership; he may be appointed either in
the articles of partnership or after the
constitution of the partnership. He is also known
as general or real partner.
6. Liquidating – Takes charge of the winding up
of partnership affairs upon dissolution
7. Partner by estoppel – Is not really a partner
but is liable as a partner for the protection of
innocent 3rd persons; he is also known as the
partner by
implication or nominal partner or a quasi-partner
8. Continuing partner – Continues the business
of a partnership after it has been dissolved by
reason of the admission of a new partner,
retirement, death or expulsion of one of the
partners
9. Surviving partner – Remains after a
partnership has been dissolved by death of any
partner
10. Sub-partner – Is not a member of the
partnership; contracts with a partner with
reference to the latter's share in the partnership
B. Other Classifications
11. Ostensible – Takes active part and known to
the public as partner in the business, whether or
not he has an actual interest in the firm. Thus,
he may be an actual or a nominal partner.
12. Secret – Takes active part in the business but
is not known to be a partner by outside parties
13. Silent – Does not take any active part in the
business although he may be known to be a
partner. If he withdraws from the partnership, he
must give notice to those persons who do
business with the firm to escape liability in the
future
14. Dormant – Does not take active part in the
business and is not known or held out as a
partner; the term is also synonymous with a
“sleeping partner”
15. Original partner -one who is a member of the
partnership from the time of its organization
16. Incoming partner - a person lately, or about
to be, taken into an existing partnership as a
member
17. Retiring partner - one withdrawn from the
partnership; a withdrawing partner
CLASSIFICATIONS OF PARTNERSHIP
1. Object
a. Universal partnership
i. Of all present property (Art.
1778, NCC) – 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 profits they may
acquire therewith.
 PARTNERSHIP

ii. Of all profits (Art. 1780, NCC)
– Comprises all that the partners may
acquire by their industry or work during
the existence of the partnership
b. Particular partnership – It is one
which has for its object, determinate things, their
use and fruits, or a specific undertaking or the
exercise of a profession or a vocation. (Art. 1783,
NCC)
b. Notorious or open partnership – It is known
not only to the partners, but to the public as well.
7. Purpose
a. Commercial or trading – One formed for the
transaction of business.
b. Professional or non-trading – One formed for
the exercise of a profession
General v. Limited partner/partnership

2. Liability of partners BASIS GENERAL LIMITED

a. General partnership – One where all partners Personally
Composition Liability extends
are general partners who are liable even with liable for
/ only to his capital
partnership
respect to their individual properties, after the Membership contributions
obligations
assets of the partnership have been exhausted When manner
b. Limited partnership – One formed by 2 or of management
more persons having as members one or more has not agreed
general partners and one or more limited upon, all
Right in general No participation
partners, the latter not being personally liable for Management partners have in management
the obligations of the partnership. (Art. 1843) an equal right
in the
3. Duration management of
the business
a. Partnership at will – Partnership for a
Contribute
particular undertaking or venture which may be Contribute cash
money,
terminated anytime by mutual agreement; one for Contribution or property only,
property or
not services
a fixed term or particular undertaking which is industry
continued by the partners after the termination Interest is not
assignable
of such term or particular undertaking without Assignment Interest is freely
without
express agreement of Interest assignable
consent of
b. Partnership with a fixed period – The term other partners
for which the partnership is to exist is fixed or It must also
agreed upon or one formed for a particular operate under a
firm name,
undertaking.
followed by the
word “Limited.”
4. Legality of existence
It must operate
a. De jure partnership – One which has complied GR: The surname
under a firm
with all the requirements for its establishment of a limited
name, which
partner shall not
b. De facto partnership – One which has failed may or may not
appear in the
to comply with all the legal requirements for its include the
partnership
name of one or
establishment. name.
more of the
c. Ostensible or partnership by estoppel – partners.
When two or more persons attempt to create a XPNs:
1. It is also the
partnership but fail to comply with the legal NOTE: Those,
Firm Name surname of a
personalities essential for juridical personality, who, not being
general partner;
members of the
the law considers them as partners, and the partnership,
2. Prior to the
association is a partnership insofar as it is time when the
include their
limited partner
favorable to third persons, by reason of the names in the
became such, the
equitable principle of estoppel (MacDonald et. al. firm name,
business had
v. Nat’l. City Bank of New York, G.R. No. L-7991, shall be subject
been carried on
to the liability
May 21, 1956) under a name in
of a partner.
which his
(Art.1815)
surname
6. Publicity appeared.
a. Secret partnership – Partnership that is not
known to many but only as to its partners. NOTE: A limited
partner whose
surname appears
 PARTNERSHIP

in a partnership Extent of Power

name is liable as 1. If he acts in good faith, As long as he is a
a general partner he may do all acts of manager, he can perform
to partnership administration (despite all acts of administration
creditors who opposition of (if others oppose, he can
extend credit to his partners) be removed)
the partnership
without actual 2. If he acts in bad faith,
knowledge that he cannot
he is not a
general partner. Scope of the power of a managing partner
(Art. 1846)
The capitalist As a general rule, a partner appointed as manager
partner cannot has all the powers of a general agent as well as all
engage for their the incidental powers necessary to carry out the
own account in object of the partnership in the transaction of its
any operation
business. The exception is when the powers of the
which is of the
kind of manager are specifically restricted (De Leon,
business in 2010).
Prohibition
which the No prohibition
to Engage in
partnership is against engaging Rule when the manner of management has not
Other
engaged, in business
Business been agreed upon
unless there is
a stipulation to
the contrary If 1. All partners shall be considered agents and
he is an whatever any one of them may do alone shall bind
industrial the partnership, without prejudice to the
partner- in any
business for
provisions of Art. 1801. This right is not
himself. dependent on the amount or size of the partner’s
Retirement, capital contribution or services to the business.
Does not have
Effect of death,
same effect;
Death, insolvency, NOTE: If two or more partners have been
rights are
Insolvency, insanity of
Retirement, general partner
transferred to entrusted with the management of the
legal partnership without specification of their
Insanity dissolves
representative
partnership respective duties, or without a stipulation that
Composed of at one of them shall not act without the consent of
Composed only
Extent of least one general all the others, each one may separately execute
of general
Liability partner and one
partners all acts of administration, but if any of them
limited partner.
should oppose the acts of the others, the decision
MANAGEMENT OF THE PARTNERSHIP of the majority shall prevail. In case of a tie, the
matter shall be decided by the partners owning
Modes of appointment of a manager the controlling interest (Art. 1801, NCC).

Appointment through Appointment Other 2. None of the partners may, without the consent
the Articles of Than in the Articles of the others, make any important alteration in
Partnership the immovable property of the partnership. (Art.
Power is irrevocable Power to act is revocable 1803, NCC)
without just or lawful anytime, with or without
cause cause (should be done
bythe controlling Rules regarding distribution of profits and
NOTE: Vote required for interest) losses
removal of manager
1. Distribution of profits
1. For just cause – Vote
of the controlling a. The partners share in the profits
partners (controlling according to their agreement
financial interest) b. In the absence of such:
2. Without cause or for i. Capitalist partner – in
unjust cause –
proportion to his contribution
Unanimous vote
ii. Industrial partner – what is
just and equitable under the
circumstances
 PARTNERSHIP

NOTE: If the industrial partner has Dissolution, Winding Up and Termination,

contributed capital other than his distinguished
services, he shall also receive a share in
the profits in proportion to his capital. Dissolution
Winding
Termination
up
2. Distribution of losses A change in
Point in time
the relation of
a. The partners share in the losses when all
the partners Settling the
according to their agreement partnership
caused by any partnership
affairs are
b. In the absence of such, according to partner ceasing business or
wound up or
their agreement as to profits to be affairs after
completed; the
associated in dissolution
c. In the absence of profit agreement, in end of the
carrying on the
proportion to his capital contribution partnership life
business.
It is that point
Rule regarding a stipulation excluding a in time when
partner in the sharing of profits and losses the partners
cease to carry
It signifies the
on the
GR: Stipulation is void. end of the
business It is the final
partnership
together. It step after
life. It takes
XPN: Industrial partner is not liable for losses represents the dissolution in
place after
(Art. 1797(2), NCC). However, he is not exempted demise of a the termination
both
partnership. of the
from liability insofar as third persons are Thus, any time partnership.
dissolution and
concerned. winding up
a partner
have occurred.
leaves the
NOTE: Loss is different from liability business, the
partnership is
dissolved.
Effects of the acts of partners acting as an
agent of the partnership
Causes of dissolution
1. Without violating the agreement:
ACTS OF A PARTNER EFFECT
a. Termination of the definite term or
With binding effect
except: specific undertaking
b. Express will of any partner in good
1. When the partner so faith, when there is no definite term and
acting has in fact no no specified undertaking
authority to act for the
Acts for apparently partnership in the
c. Express will of all partners (except
carrying on in the usual particular matter, and those who have assigned their interests
way the business of the or suffered them to be charged for their
partnership 2. The person with whom separate debts) either before or after the
he is dealing has termination of any specified term or
knowledge of the fact
that he has no such particular undertaking
authority. (Art. 1818, d. Expulsion of any partner in good faith
par. 1, NCC) of a member

Do not bind partnership

2. Violating the agreement
Acts not in the ordinary unless authorized by
course of business other partners (Art. 3. Unlawfulness of the business
1818, NCC) 4. Loss of a Specific thing promised as
GR: One or more but less contribution is lost or perished before delivery
than all the partners 5. Death of any of the partners
Acts of strict dominion
have
or ownership: 6. Insolvency of any partner or of the partnership
no authority
7. Civil interdiction of any partner
XPNs: Authorized by the 8. By decree of court under Art. 1831
other partners a. A partner has been declared insane or
Partnership is not liable of unsound mind
to 3rd persons having
Acts in contravention of b. A partner becomes in any other way
actual or presumptive
a restriction on incapable of performing his part of the
knowledge of the
authority partnership contract
restriction (Art. 1818,
par.4, NCC)
 PARTNERSHIP

c. A partner has been guilty of such
conduct as tends to affect prejudicially
the carrying on of the business
d. A partner wilfully or persistently
commits a breach of the partnership
agreement
e. The business of the partnership can
only be carried on at a loss
f. Other circumstances render a
dissolution equitable
Effects of dissolution
1. Partnership is not terminated
2. Partnership continues for a limited purpose
3. Transaction of new business is prohibited (De
Leon, Comments and Cases on Partnership,
Agency, and Trust,p. 229, 2005 ed)
In setting accounts after dissolution, the
liabilities of the partnership shall be entitled
to payment in the following order
1. Those to creditors, in the order of priority as
provided by law, except those to limited partners
on account of their contributions, and to general
partners
2. Those to limited partners in respect to their
share of the profits and other compensation by
way of income on their contributions
3. Those to limited partners in respect to the
capital of their contributions
4. Those to general partners other than for
capital and profits
5. Those to general partners in respect to profits
6. Those to general partners in respect to capital
(Art.1863, NCC)

Winding up of the partnership SUMMARY OF RIGHTS AND OBLIGATIONS OF

PARTNERS
It is during this time after dissolution that
partnership business or affairs are being settled
GENERAL PARTNER LIMITED PARTNER
(De Leon, 2005). Rights
1. Right in specific 1. To have partnership
Order of payment in winding up partnership property books kept at principal
1. Those owing to creditors other than partners place of business
2. Interest in the
2. Those owing to partners other than for capital
partnership (share in 2. To inspect/copy
or profits the profits and surplus) books at reasonable
3. Those owing to partners in respect of capital hours
4. Those owing to partners in respect to profits 3. Right to participate in
(Art. 1839 (2) , NCC) the management 3. To have on demand
true and full
4. Right to associate information of all things
Limited Partnership another person with him affecting partnership
It is one formed by two or more persons having as in his share without the
members one or more general partners and one consent of other 4. To have formal
or more limited partners, the latter not being partners account of partnership
affairs whenever
personally liable for partnership debts (Art. 1843, 5. Right to inspect and circumstances render it
NCC). copy partnership books just and reasonable
at any reasonable hour.
Characteristics of limited partnership 5. To ask for dissolution
6. Right to a formal and winding up by
1. It is formed by compliance with the statutory
account as to decree of court
requirements. partnership affairs
2. One or more general partners control the 6. To receive share of
business and are personally liable to creditors. a. if he is wrongfully profits/other
3. One or more limited partners contribute to the excluded from compensation by way of
partnership business or income
capital and share in the profits but do not
possession of its
participate in the management of the business property by his 7. To receive return of
and are not personally liable for partnership copartners. contributions, provided
obligations beyond their capital contributions. b. if right exists under the partnership assets
4. The limited partners may ask for the return of the terms of any are in excess of all its
agreement. liabilities
their capital contributions under conditions c. as provided in Art.
prescribed by law. 1807
5. Partnership debts are paid out of common fund d. whenever the
and the individual properties of general partners circumstances render it
just and reasonable.
 PARTNERSHIP

Obligations a. Knowledge of partner the formation of limited

Obligations of partners To the partnership acting in the particular partnerships
among themselves matter acquired while a
1. Contribution of Since limited partners partner
property are not principals in the b. Knowledge of the
transaction of a partner acting in the
2. Contribution of partnership, their particular matter then
money and money liability as a rule, is to present to his mind
converted to personal the partnership, not to c. Knowledge of any
use the creditors of the other partner who
partnership. reasonably could and
3. Prohibition in should have
engaging in business for The general partners communicated it to the
himself cannot, however waive acting partner
any liability of the
4. Contribute additional limited partners to the 5. Partners and the
Capital prejudice of such partnership are
creditors. solidarily liable to 3rd
5. Managing partner persons for the partner's
who collects debt tort or breach of trust

6. Partner who receives 6. Liability of incoming

share of partnership partner is limited to:
credit a. His share in the
partnership property for
7. Damages to existing obligations
partnership b. His separate
property for subsequent
8. Render information obligations

9. Accountable as 7. Creditors of
fiduciary partnership are
Obligations of partners To the partnership preferred in partnership
to 3rd persons creditors and other property & may attach
partners partner's share in
1. Every partnership 1. A limited partner is partnership assets
shall operate under a liable for partnership Other obligations To separate creditors
firm name. Persons who obligations when he 1. Duty to render on As in a general
include their names in contributed services demand true and full partnership, the creditor
the partnership name instead of only money or information affecting of a limited partner may,
even if they are not property to the partnership to any in addition to other
members shall be liable partnership partner or legal remedies allowed under
as a partner representative of any existing laws, apply to
2. When he allows his deceased partner or of the proper court for a
2. All partners shall be surname to appear in any partner under legal charging order
liable for contractual the firm name disability. subjecting the interest
obligations of the in the partnership of the
partnership with their 3. When he fails to have 2. Duty to account to debtor partner for the
property, after all a false statement in the the partnership as payment of his
partnership assets have certificate corrected, fiduciary. obligation.
been exhausted: knowing it to be false
a. Pro rata
b. Subsidiary 4. When he takes part
in the control of the
3. Admission or Business
representation made by
any partner concerning 5. When he receives
partnership affairs partnership property as
within the scope of his collateral security,
authority is evidence payment, conveyance,
against the partnership or release in fraud of
partnership creditors
4. Notice to partner of
any matter relating to 6. When there is failure
partnership affairs to substantially comply
operates as notice to with the legal
partnership except in requirements governing
case of fraud: