Law on Partnerships

Regulatory Framework for Business Transactions (RFBT)

INTEGRATED REVIEW II | ATTY. ALMANZOR S. MACMOD, CPA
Course Outline:
1. Definition as a contract
2. Kinds of Partnership organization and Partners
3. Elements of a Partnership
4. Rights and Obligation of Partners
5. Dissolution
6. Liquidation
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Partnership, as a contract
- Meeting of minds between 2 or more persons to contribute money, property or
industry to a common fund with the purpose of dividing profits among
themselves.
Note: No “charitable” partnership as in corporations (e.g. Eleemosynary)
Characteristics: [C ¿ ¿ 2 B P2 NO ] ¿
1. Consensual – GR: valid in any form (e.g. orally or in writing), provided there is
meeting of minds between the parties.
XPN1: If contribution involves Real Properties it must appear in a
public instrument plus the list of real properties contributed, otherwise
void absolutely.
XPN2: In cases of Limited Partnership, it must be SEC-registered
(all requirements and filing fees complied) and it must show “LTD.” in its
name to serve as notice to the public.
2. Commutative – not determined by risk
3. Bilateral or Multilateral – all partners have obligation (e.g. Property contri.)
4. Principal – can stand-alone
5. Preparatory – will lead to new contracts always! (to earn profits)
Note: There are only two preparatory contracts, Partnership & Agency.
6. Nominate – it has name on the civil code. One of the special contracts
7. Onerous – 2 reasons: (1) The cause and consideration for is the distribution of
profits; (2) to be a partner, one must have contribution to the common fund
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Kinds of Partnership
1. As to object
a. Universal – may be: for all present property or for profits (right of use
only)  #32 & 33 MC
b. Particular – as in General Professional Partnership (GPP)  #57 MC
2. As to liability
a. General – all are general partners
b. Limited – with one or more general/limited partners
Note: The characters “LTD.” is mandatory to be indicated in their name
3. As to term
a. With a fixed term – fixed number of years only
b. At will – may be dissolved anytime
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Kinds of Partners
1. As to liability
a. General – liable beyond his contributed capital
b. Limited – liable up to his contributed capital
c. General-Limited – within the organization: up to his contributed capital
- within 3rd persons: beyond his contributed capital
(e.g. Limited Partner  surname included in company name)
2. As to contribution
a. Capitalist – contributed money or property
b. Industrial – contributed services
c. Capitalist-Industrial – contributed money and services

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 3. As to management
a. Managing partner – active in management
b. Silent partner – “mukhang pera” partner
- inactive in management but active in profits
4. As to other kinds/relationship
a. Ostensible – publicly known as such (e.g. SGV)
b. Secret – not publicly known as such
c. Dormant – both silent and secret partner
d. Nominal/Partner by estoppel – without capital contribution but
represents himself as a partner in effect, he has to share with the
liabilities/losses of the company but not in the profits that it may
incur.
e. Leonine – “tanga partner” despite his capital contribution, he is willing
to share only to the liabilities and losses of the company and waives his
right in the profit sharing.
f. Newly-admitted partner – all must have consented regarding his
admission.
i. Old liabs: liable up to CC only unless stated beyond CC
ii. New liabs: fully liable unless limited partner
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General vs. Limited Partners
General Partner Limited Partner
1) Where to find? General and limited Limited Partnerships only
partnerships
2) Extent of liability Beyond his contributed Up to his contributed
capital capital
3) Contribution a. Capitalist  a. Capitalist 
b. Industrial  b. Industrial,  as a
rule otherwise liable
as General Partner
4) Management Can be a managing GR: cannot be a managing
partner partner
XPN: liable as a General
partner
5) Surname inclusion in Available (Refer to the rule below)
company name
Rule on Limited Partner’s surname inclusion:
GR: Surname cannot be included in the company name
XPN 1: Company name is using the same name before his entry
XPN 2: Limited partner has the same surname as General Partner
XPN 2 XPN: When dealing with 3rd persons, he must reveal his real position in
the company; otherwise, liable as General Partner
6) Participation in other Capitalist – YES, in any
businesses or Capitalist – YES, if not business with or without
organization same nature with the consent
partnership business
Otherwise: He may be
expelled plus damages; or
The profits that he earned
during his tenure may be
confiscated including
other business profits plus
damages
Industrial – NO, in any
other business without
consent of all partners

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Elements of a Partnership
1. Consent – meeting of minds of partners. Partners may only be natural persons
with capacity to contract
2. Object – common fund (money, property or industry) in carrying a lawful
business activity. If unlawful, 3 effects:
1. No partnership exists in the eyes of law
2. State will confiscate all profits, not the
CC unless it is also illegal
3. Criminal or Civil liability awaits those
guilty partners
3. Cause or Consideration – profits to be divided among partners:
GR: When a person shares in the profits of a partnership, it is a prima
facie evidence that he is a partner.
XPN: Said profits are received as payment for: [DWAIC]
(1) Debts – payable in installment
(2) Wages to an employee or rent payable to the lessor or landlord
(3) Annuity to a widow/heirs of a dead partner
(4) Interest on a loan
(5) Consideration for sale of goodwill
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Rights of a Partner
1. Property rights
a. Right to specific partnership property
b. Right to share in the profits
c. Right to participate in the management
2. Assign to 3rd persons his share in the profits
3. Ask for formal accounting of specific partnership transactions
4. Demand dissolution, in good faith
5. Inspect partnership books/records
6. Share during liquidation
Right to share in Profits
- Each partner is a co-owner of the company  Trust Fund doctrine
Right to assign
- Is consent required? NO, because he is a mere assignee only hence do not
acquire the same rights of the partner itself. No violation of Delectus Personae
incurred.
Substituted Limited Partner
- he acquired the rights of the limited partner who left the company
- GR: before admission, consent of all partners is required
XPN: if consent already reserved in the certificate of partnership
Right to ask for formal accounting/audit
#79, MC  All of the above! Article 1807 CC – Secret Profits
#8, MC  A, since B&C acted in bad faith
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Profits and Losses rule:
1. Follow the stipulation of the partners  P&L ratio
a. If No loss ratio provided, use profit ratio for losses
b. If no profit ratio provided, use the capital contribution (pro-rata) do not
use the Loss ratio!
2. Follow the capital contribution
3. Without 1 and 2: Profits and losses shall be shared equally
4. In case of an Industrial Partner:
(a) c/o number 1;
(b) just and equitable share for his efforts

In case of a Capitalist-Industrial partner:

(a) In so far as his capital contribution is concerned  use 1 to 3
(b) In so far as his industrial contribution is concerned  use 4

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Note: Same rules will apply to Leonine Partners a.k.a. Tanga partner

Management Rules:
1. With agreement (stipulation on the Articles of Partnership
a. Appointed managing partner
i. GR: cannot be removed XPN: for valid cause
ii. GR: his decisions on office matters are always superior
XPN: for valid cause or other partners will override his decision
b. If 2 or more managing partners
i. They can act separately
ii. If their acts contradict  majority vote will prevail (per head
voting)
 in case of tie in voting, the partner with
controlling interest will resolve the matter.
c. All other management rules are allowed so long as it is not contrary to law
2. Without agreement
GR: Apply mutual agency rule. Every partner is an agent of the
partnership. He can legally represent their organization in any contract,
provided in connection with their ordinary business as if he is a
managing partner.
XPN: the following acts require consent of all partners: ¿ ¿]
1. Disposition of Goodwill
2. Discontinuation of Partnership operations (if he is a managing
partner) even if temporary, or branch only.
3. Compromise Partnership case/confession of judgment
4. Arbitration of Partnership case
5. Admission of a new partner (Doctrine of Delectus Personae)
6. Assign Partnership property
7. Waive partnership claims
8. All acts of strict dominion or ownership (e.g. to mortgage
partnership property)
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Obligation of Partners
1. Contribution to a common fund
a. Timing: Start of business operations – for all partners
Later/During business operations – for capitalist partners only
Note: For all partners: they must perform on due date without need of demand,
otherwise it constitutes an automatic delay  #22, MC ans: C
For capitalist partners: to make additional investment in an effort to save
their company. May a partner refuse to contribute without valid cause? No,
partners must compel him to sell his share to willing partners #19, MC ans: D
since there is valid cause otherwise, ans: A)

2. Unfair competition rule: prohibited to engage (Review General vs Limited

Partner)
3. Damages, if due to his fault, company suffered losses
1. If act is a quasi-delict (e.g. Vehicular accident) vs. 3rd person in connection
with carrying business operations, all partners are liable. In cases where the
partnership assets are insufficient, the separate properties of a general
partner may be exhausted.
2. If act constituted a delict, crime or any wrongful act plus fraud, only the
guilty partner is liable both criminally and civilly.
4. Accounting obligation rule
a. All partners must render full accounting. All income/receipts in
connection with their partnership (including indirect/secret profits)
b. For managing partners only, to credit/share proportionately to the
company any payment to him by his debtor who is also a debtor of the
company.
Illustration:

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 Mr. X has debts to the partnership, P2M and to Mr. A, P1M.
Mr. X paid Mr. A P600k as partial payment. A issued his own
receipt.

(1) Obligation of Mr. A as managing partner

a. 600k  2/3 to the Company = 400k
¼ to himself = 200k
(2) Obligation of Mr. A if not managing partner = he can
keep it all
(3) Obligation of Mr. A as managing partner if payment
received is for their corporation. = he must give it all to
the corporation
5. Share in the losses/liabilities of the company
a. Losses
 Internal; no 3rd persons involved
 GR: Industrial partner is exempt in sharing
XPN: stipulation/agreement
As in #39, MC ans: B since there is P&L if none, then ans: A
As in #76, MC ans: A since there is no P&L
b. Liabilities
 External; 3rd persons are involved
 ALL partners are liable including Industrial partners but they may
ask for reimbursement. Note: P&L ratio is not binding to 3rd
persons.
As in #75, MC ans: B since 100k/4 – 25k
As in #82, MC ans: C since 90k-30k=60k/4 =15k
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Dissolution of Partnership
- Dissolution and Liquidation may be evaded if a compromise is entered into by
partners. (e.g. SGV)
- During dissolution and liquidation, the partnership still exists hence can enter
into contracts provided that such contracts are for the purpose of liquidation
When dissolution exists? At least 1 partner left the partnership
Grounds for dissolution:
1. Automatic modes: (c/o SEC only) [WISEDIC]
a. Without violating Partnership agreement [ AT E2 ]
i. Accomplishment of purpose
ii. Termination of Period fixed
iii. Expulsion of Partner in a General Partnership
iv. Express will of a partner in a general partnership  Pshp @will
b. In violation of Partnership agreement (e.g. sudden resignation of a
partner)
c. Separate property is lost before delivery
d. Events  Partnership business became unlawful to continue because of
new laws
e. Death
f. Insolvency
g. Civil Interdiction (imprisonment of >12 years)
2. Judicial modes: (with need of court intervention or hearing) [B ¿ ¿ 2 I 2 GO]¿
a. Business  if it will surely lead to losses if continued
b. Breach of Partnership Agreement  willful interest/persistent
c. Insanity of a General Partner  In limited partnerships, it is automatic.
Illustration: 1GP and 1LP  GP is MP  GP nabaliw, LP becomes
MP which is not allowed in law.)
d. Incapacity to perform duties (e.g. Illness)
e. Guilty conduct prejudicial to the company (e.g. crime commission)
f. Other analogous modes (e.g. MP refuses to render acctg.)
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Liquidation of Partnership

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 - Provides the order of payment when in the course of liquidation
Procedure:
1. Pay the creditors
a. Public – Taxes (w/ priority)
b. Private
2. Pay the obligation to partners, other than CC and profits (e.g. Advances). The
limited partner/s shall be prioritized.
3. Pay obligation to General Partners for their Contributed Capital
4. Pay obligation to General Partners for their share in Profits (enter Industrial
Partner’s share first)

Illustration:
ABC, General Partners; D, Industrial Partner
Stipulation: D will receive 20% of profits
SFP: Total Assets 525M
Total Liabs 300M
P. Equity 225M (50M each) – 150M; Profits – 75M
Liquidation:
Total Assets 525M
Less: Total Liabs 300M (Procedure 1)
Total 225M
Payment of advances, if any -0- (Procedure 2)
Total 225M
Payment of GP for CC 150M (Procedure 3)
Enter: D’s share (20% of 75M) 15M (Procedure 4, prio)
Total 60M
ABC’s share in profits(divide 3) 20M (Procedure 4)

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