Baliwag Polytechnic College

Dalubhasaan Kong Mahal

Institute of Business and Accountancy

ACT13 – Partnership and Corporation Accounting M. Manayao, CPA ​Chapter 1 – Basic 

Considerations and Formation  

LEARNING OBJECTIVES:  
​Define partnership.  
​Identify the characteristics of a partnership.  
​Explain the advantages and disadvantages of a partnership.  
​Distinguish between partnership and corporation.  
​Identify and describe the different classifications of partnerships and the different kinds of partners. 
​Outline the essential contents of the articles of co-partnership.  

DEFINITION  
In  a  contract  of  partnership,  two  or  more persons bind themselves to contribute money, property, or industry 
to  a  common  fund,  with  the  intention  of  dividing  profits  among  themselves.  Two  or more persons may also 
form a partnership for the exercise of a profession ​(Civil Code of the Philippines, Article 1767)  

CHARACTERISTICS OF A PARTNERSHIP  
1. ​Mutual Contribution. ​There cannot be a partnership without contribution of money, property or industry 
(i.e., work or services) to a common fund.  
2. ​Division of profits or losses​. The essence of partnership is that each partner must share in the profits or 
losses of the venture.  
3. ​Co-ownership of Contributed Assets. ​All assets contributed into partnership are owned by the partnership 
by virtue of its separate and distinct juridical personality.  
4. ​Mutual Agency. A ​ ny partner can bind the other partners to a contract if he is acting within his express or 
implied authority.  
5. ​Limited Life.​ A partnership has a limited life. It may be dissolved by the admission, death, insolvency, 
incapacity, withdrawal of a partner or expiration of the term specified in the partnership agreement. 6. 
Unlimited Liability.​ All partners (except limited partners), including industrial partners, are personally liable 
for all debts incurred by the partnership.  
7. ​Income Taxes.​ Partnerships, except general professional partnerships, are subject to tax at the rate of 30% 
(per R.A. 9337) of taxable income.  
8.  ​Partners’  Equity Accounts​. Accounting for partnerships are much like accounting for sole proprietorships. 
The  difference  lies  in  the  number  of  partners’  equity  accounts.  Each  partner  has  a  capital  account  and  a 
withdrawal account that serves similar functions as the related accounts for sole proprietorships.  

ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP  

A partnership offers certain advantages over a sole proprietorship and a corporation. It also has a number of 
disadvantages. They are as follows:  
Advantages versus Proprietorships   Advantages versus Corporations 
 1. Brings greater financial capability to the  1. Easier and less expensive to 
business.   organize. 2. More personal and 
2. Combines special skills, expertise and  informal. 
experience of the partners.  
3. Offers relative freedom and flexibility of action 
in decision-making. 

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Disadvantages  
1. Easily dissolved and thus unstable compared to a corporation.  
2. Mutual agency and unlimited liability may create personal obligations to partners. 
3. Less effective than a corporation in raising large amounts of capital.  

PARTNERSHIP DISTINGUISHED FROM CORPORATION  

Manner of Creation   A partnership is created by mere agreement of the partners 
while corporation is created by operation of law. 

Number of persons   Two or more persons may for a partnership, in a corporation, 

not exceeding fifteen (15). 

Commencement of  In a partnership, juridical personality commences from the 

Juridical Personality  execution of the articles of partnership; in a corporation, from the 
issuance of certificate of incorporation by the Securities and 
Exchange Commission. 

Management  In a partnership, every partner is an agent of the partnership if 

the partners did not appoint a managing partner; in a 
corporation, management is vested on the Board of Directors. 

Extent of Liability  In a partnership, each of the partners except limited partner is liable 
to the extent of his personal assets; in a corporation, stockholders 
are liable only to the extent of their interest or investment in the 
corporation. 

Right of Succession   In a partnership, there is no right of succession; in a corporation, 

there is right of succession. 

Terms of Existence  In a partnership, for any period of time stipulated by the partners; in 
a corporation, shall have perpetual existence unless its articles of 
incorporation provides otherwise. 

CLASSIFICATIONS OF PARTNERSHIPS  

1. According to Object  
a. ​Universal partnership of all present property. A​ ll contributions become part of the partnership fund. b. 
Universal partnership of profits. ​All that the partners may acquire by their industry or work during the 
existence of the partnership and the use of whatever the partners contributed at the time of the institution 
of the contract belong to the partnership,  
c. ​Particular partnership. ​The object of the partnership is determinate – its use or fruit, specific 
undertaking, or the exercise of a profession or vocation.  

2. According to Liability  
a. ​General. ​All partners are liable to the extent of their separate properties.  
​ he limited partners are liable only to the extent of their personal contributions.  
b. ​Limited. T
3. According to Duration  
a. ​Partnership with a fixed term or a particular undertaking​.  
b. ​Partnership at will.​ One in which no term is specified and is not formed for any particular undertaking.  

4. According to Purpose  
a. ​Commercial or trading partnership. ​One formed for the transaction of business. b. 
​ ne formed for the exercise of profession. 
Professional or non-trading partnership. O

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5. According to Legality of Existence  
a. ​De jure partnership.​ One which has complied with all the legal requirements for its establishment. b. 
De facto partnership.​ One which has failed to comply with all the legal requirements for its 
establishment.  

KINDS OF PARTNERSHIP  
General partner   One who is liable to the extent of his separate property after all the 
assets of the partnership are exhausted. 

Limited partner   One who is liable only to the extent of his capital contribution. 

Capitalist partner   One who is contributes money or property to the common fund of 
the partnership. 

Industrial partner   One who contributes his knowledge or personal service to the 
partnership. 

Managing partner   One whom the partners has appointed as manager of the partnership. 

Liquidating partner   One who is designated to wind up or settle the affairs of the 
partnership after dissolution. 

Dormant partner   One who does not take active part in the business of the partnership 
and is not known as a partner. 

Silent partner   One who does not take active part in the business of the partnership 
though may be known as a partner. 

Secret partner   One who takes active part in the business but is not known to be a 
partner by outside parties. 

Nominal partner or partner  One who is actually not a partner but who represents himself as one. 
by estoppel 

ARTICLES OF CO-PARTNERSHIP  
A partnership may be constituted orally or in writing. In the latter case, partnership agreements are embodied 
in the Articles of Co-Partnership. The following essential provisions may be contained in the agreement: 1. 
The partnership name, nature, purpose and location;  
2. The names, citizenship and residences of the partners;  
3. The date of formation and the duration of the partnership;  
4.  The  capital  contribution  of  each  partner,  the procedures for valuing non-cash investments, treatment of 
excess  contribution  (as  capital  or  as  loan)  and  the  penalties  for  a  partner’s  failure  to  invest  and 
maintain the agreed capital;  
5. The rights and duties of each partner;  
 6. The accounting period to be adopted, the nature of accounting records, financial statements and audits 
by independent public accountants;  
7. The method of sharing profit or loss, frequency of income measurement and distribution, including any 
provisions for the recognition of differences in contributions;  
8. The drawing or salaries to be allowed to partners;  
9. The provision for arbitration of disputes, dissolution, and liquidation.  

A contract of partnership is void whenever immovable property or real rights are contributed and a signed 
inventory of the said property is not made and attached to a public instrument.  

- ​End ​- 

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I. TRUE or FALSE  
1. In a 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 profit among themselves.  
2. In a limited partnership, none of the partners has unlimited liability for the business debts. 3. A silent 
partner takes active part in the business of the partnership and is not known by outsiders to be a partner.  
4. A limited partnership must have at least one general partner.  
5. A partnership may be established for charity.  
6. A disadvantage of partnerships over corporation is the partners’ unlimited liability. 
7. There is no income tax imposed on a partnership.  
8. A partnership has a juridical personality separate and distinct from that of each of the partners. 
9. All partnerships are subject to tax at the rate of 30% of taxable income.  
10. A dormant partner is one who does not take active part in the partnership business though may be known 
as a partner.  
11. In a general partnership, each partner’s liability for losses is limited to his investment in the firm. 12. A 
partnership has a limited life because any change in the relationship of the partners dissolves the 
partnership.  
13. One advantage of a partnership over a corporate form of organization is the unlimited liability of 
partners. 14. A partner by estoppel is one who is actually not a partner but who represents himself as one. 
15. A partnership is created by mere agreement of the partners.  

II. MULTIPLE CHOICE QUESTIONS. ​Choose the best answer in each of the following questions.  
1.  Penetrante  owns  and  operates  a  large  hardware  store  in  Cabanatuan  City  that  employs  about  forty-five 
personnel.  She  delegates  some  of  the  decision  making  to  two  supervisors.  Penetrante’s  business  is 
organized as a  
a. corporation.  
b. partnership.  
c. sole proprietorship.  
d. limited partnership.  
2.  Jumawan  loves  to  cook.  She  receives  unqualified  praise  whenever  she  prepares  a  meal  for  someone. 
Encouraged  by  these  compliments  and  eager  to  put  her  culinary  talents  to  good  use, Jumawan decides to 
open  a  boutique  restaurant  in  Dumaguete  City.  Since  she  plans  to  maintain  complete  control  of  the 
business, she will most likely organize it as a  
a. limited partnership.  
b. corporation.  
c. general partnership.  
d. sole proprietorship.  
3.  A  budding  entrepreneur  wants  to  start  a  business  but  is  unsure  of  the  legal  form  suited  for  her.  Short  of 
cash,  she  has  to  take  the  form  that  is  least  expensive  and  most  flexible  in  terms  of  decision  making  and 
implementation. Which would you recommend?  
a. Joint venture.  
b. Partnership.  
c. Sole proprietorship.  
d. Cooperative.  
e. Corporation.  
4. Unlimited liability means  
a. there is no limit on the amount an owner can borrow.  
b. creditors will absorb any loss from nonpayment of debt.  
c. the business can borrow money for any type of purchase.  
d. the owner is responsible for all business debs.  
e. shareholders can borrow money from the business. 

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5.  Cabrera  inherited  a  large  amount  of  money  from  his  parents.  Cabrera  wishes  to  start  his own business in 
Batangas.  His  lawyers  encourage  him  to  make  it  a  corporation.  What  disadvantage  of  a  sole 
proprietorship are the lawyers trying to avoid?  
a. Unlimited liability.  
b. Lack of management skills.  
c. Retention of all profits.  
d. Lack of money.  

6.  After  Russell  has  maximized  her  standby  credit  limit  from  the  CDO  Bank  and  still  cannot  cope  with the 
working  capital  needs  of  her  fast-growing  business,  what  is  her  recourse  if  she  wants  her  company  to 
continue growing?  
a. Obtain a partner or form a corporation to access more funds.  
b. Hire more employees.  
c. Turn away potential new customers.  
d. Continue to plead with bank for more money.  
e. Hold a fundraising campaign.  

7.  Daganta’s  partnership  agreement  with  two  partners  was  done  haphazardly  and  thus  caused  some 
limitations.  One  of  the  concerns  was  uneven  productivity  among  the  partners.  The  agreement  required 
each  partner  to  contribute  every  aspect  of  the  business  to  receive  an  equal  portion  of  the  profits.  This 
agreement did not reflect the idea that  
a. partners need not be “equal” because each bring varied talents and knowledge into the partnership. 
b. general partners are required to be active in day-to-day business operations.  
c. customers and creditors of a limited partnership need not be protected.  
d. the Limited Partnership Law requires every general partnership to have at least one limited partner. 
e. each partner may enter into contracts on behalf of all the other.  

8. The person who assumes full co-ownership of a partnership including unlimited liability is a 
a. sole proprietor.  
b. shareholder.  
c. limited partner.  
d. general partner.  

9. The partner who can lose only what he has invested in a business is the   
a. general partner.  
b. sole proprietor.  
c. manager.  
d. employee.  
e. limited partner.  
10. Alibangbang and Sol decided to go into business together. They started by listing the essential terms of 
their agreement along with their rights and duties. Alibangbang and Sol created a(n) ​a. articles of 
co-partnership.  
b. licensing agreement.  
c. articles of incorporation.  
d. division of partnership agreement.  

- ​End ​- 

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