CHAPTER 2

NATURE AND FORMATION OF A PARTNERSHIP

PARTNERSHIP
(Nature And Formation)

Accounting for Partners'

Formation of a Partnership
Nature of a Partnership Initial Investments
 Kinds of partnerships
 Characteristics  Cash contributions
 Classes of partners
 Advantages  Non-cash asset
 Articles of Co-Partnership
 Disadvantages contributions
 Registration requirements
 Contribution of industry

DEFINITION

A partnership is defined in Article 1767 of the Civil Code of the Philippines as "a contract whereby
two or more persons bind themselves to contribute money, property, or industry into a common fund
with the intention of dividing profits among themselves.

CHARACTERISTICS OF A PARTNERSHIP

1. Mutual agency. Any partner may act as agent of the partnership in conducting its affairs.
2. Unlimited liability. The personal assets (assets not contributed to the partnership) of any partner
may be used to satisfy the partnership creditors' claims upon liquidation, if partnership assets are
not enough to settle the liabilities to outsiders.
3. Limited life. A partnership may be dissolved at any time by action of the partners or by operation
of law.
4. Mutual participation in profits. A partner has the right to share in partnership profits.
5. Legal entity. A partnership has legal personality separate and distinct from that or each of the
partners.
6. Co-ownership of contributed assets. Property contributed to the partnership are owned by the
partnership by virtue of its separate legal personality.
7. Income tax. Partnerships, except general professional partnerships (i.e., those organized for the
exercise of professions like CPAs, lawyers, engineers, etc.) are subject to the 30% income tax.

ADVANTAGES OF A PARTNERSHIP

1. It is easy and inexpensive to organize, as it is formed by a simple contract between two or more
persons.
2. The unlimited liability of the partners makes it reliable from the point of view of creditors.
3. The combined personal credit of the partners offers better opportunity for obtaining additional
capital than does a sole proprietorship.
4. The participation in the business by more than one person makes it possible for a closer
supervision of all the partnership activities.
5. The direct gain to the partners is an incentive to give close attention to the business.
6. The personal element in the characters of the partners is retained.

DISADVANTAGES OF A PARTNERSHIP

1. The personal liability of a partner for firm debts deters many from investing capital in a
partnership.
2. A partner may be subject to personal liability for the wrongful acts or omissions of his/her
associates.
3. It is less stable because it can easily be dissolved.
4. There is divided authority among the partners.
5. There is constant likelihood of dissension and disagreement when each of the partners has the
same authority in the management of the firm.

KINDS OF PARTNERSHIPS

1. As to activity
a. Trading partnership - one whose main activity is the manufacture and sale or the purchase
and sale of goods.
b. Non-trading partnership - one which is organized for the purpose of rendering services.

2. As to object
a. Universal partnership
1. Universal partnership of all present property - one in which the partners contribute, at
the time of the constitution of the partnership, all the properties which actually belong to
each of them into a common fund with the intention of dividing the same among
themselves as well as the profits which they may acquire therewith.

All assets contributed to the partnership and subsequent acquisitions become common
partnership assets.

2. Universal partnership of all profit - 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 institution of the contract.

Partnership assets consist of assets acquired during the life of the partnership and only the
usufruct or use of assets contributed at the time of partnership formation. The original
movable or immovable property contributed do not become common partnership assets.

b. Particular partnership - one which has for its object determinate things, their use or fruits, or
a specific undertaking or the exercise of a profession of vocation.
3. As to liability of partners
a. General co-partnership - one consisting of general partners who are liable prorata and
sometimes solidarily with their separate property for partnership liabilities.
b. Limited partnership - one formed by two or more persons having as members one or more
general partners and one or more limited partners, who as such are not bound by the
obligations of the partnership. The word "LIMITED” or "LTD." is added to the name of the
partnership to inform the public that it is a limited partnership.

4. As to duration
a. Partnership at will - one for which no term is specified and is not formed for a particular
undertaking or venture and which may be terminated any time by mutual agreement of the
partners or the will of one partner alone.
b. Partnership with a fixed term - one in which the term or period for which the partnership is
to exist is agreed upon. It may also refer to a partnership formed for a particular undertaking
and upon the expiration of that term or completion of the particular undertaking the
partnership is dissolved; unless continued by the partners.

5. As to representation to others
a. Ordinary partnership - one which actually exists among the partners and also as to third
persons.
b. Partnership by estoppel - one which in reality is not a partnership but is considered as one
only in relation to those who, by their conduct or omission are precluded to deny or disprove
the partnership's existence.

6. As to legality of existence
a. De jure partnership - one which has complied with all the requirements for its establishment
b. De Saco partnership - one which failed to comply with one or more of the legal requirements
for its establishment.

7. As to publicity
a. Secret partnership - one wherein the existence of certain persons as partners is not made
known to the public by any of the partners.
FORMATION

1. Create an Articles of Partnership

2. Submit it to SEC – Securities and Exchange Commission – maintain and monitor the businesses
3. Registered na

A. Individuals with no existing business form a partnership

Juan and Pedro formed a partnership. New Books (Journal Entry). Record the investment in the
book. Contributions – asset, liabilities

Juan
Cash xx
Non-Cash Asset xx
Liabilities xx
Juan, Capital xx

Pedro
Cash xx
Pedro, Capital xx

Fair Value – the price at which an asset or liability could be exchanged in a current transaction
between knowledgeable, unrelated willing parties. Lahat ng amount na ilalagay ay based on
fair value.

B. A sole proprietorship and another individual form a partnership. BIR wants a new set of book.
Juan – has no book.
Pedro Store – has book. Remove from the old book and transfer into the new book.
Step on how to transfer.
a. Adjust the amount
- Outdated amount – old books
- If kulang, dagdagan, if sobra, bawasan
- Irevalue sa capital book nung proprietor.
b. Close
- Close even the real accounts
- Close in capital book
c. Transfer

C. Two or more sole proprietorship for a partnership

Juan Store
Pedro Store

Matatransfer parehas sa new book and ang value ay 500k at 50k

Accounts Receivable 500k
Allowance for Bad Debts 50k
 =450k
Equipment lang ang matatransfer at ang value ay 800k
Equipment 1m
Accumulated Depreciation 200k
= 800k

Agreed Value – napag-usapan

Fair Value – gagamitin pa rin