Nature and Operation of Partnership

Partnership CHARACTERISTICS
❑ A contract whereby two or more persons bind ❑ Mutual Agency ❑ Voluntary Association
themselves to contribute money, property or industry ❑ Based on Contract ❑ Limited Life
to a common fund with the intention of dividing the ❑ Unlimited Liability ❑ Income Tax
profits among themselves (Article 1767 of the
❑ Mutual Participation in Profits
Partnership Law);
❑ Separate Legal Entity ❑ Ease of Formation
❑ Two or more persons may also form a partnership for
❑ Co-ownership of Contributed Assets
the exercise of a profession; ❑ Owners are called
partners
❑ A partnership is formed by two or more persons
entering into a contract either orally or in writing. CLASSIFICATIONS
❑ Immovable/real rights ❑ Capital is 3,000 pesos or
more. Activity
ESSENTIAL FEATURES Trading -the main activity is buying and selling
Partnership of goods or manufacturing of goods.
❑ A valid contract;
Non Trading -organized for a specific purpose or
❑ Legal capacity;
Partnership project or for rendering services
❑ Mutual contribution of money, property, or industry
LIABILITY PARTNERS
to a common fund;
❑ Object must be lawful; General -all of the partners are general
❑ Purpose to gain profits and divide the same among Partnership partners
the parties. Limited -one or more general partners with
Articles of Co-Partnership Partnership one or more limited partners.
❑ Written agreement governing formation, operation OBJECT OF PARTNERSHIP
and dissolution of the partnership;
❑ Required by the SEC Universal -universal partnership of all present
Partnership property & universal partnership of
❑ Required when:
profits
❑ Immovable or real rights are contributed
Particular -one which has for its object
❑ Capital of the partnership is three thousand pesos or Partnership determinate things
more (money or property)
DURATION
CONTENTS Partnership -no time specified and may be
❑ Name, nature, purpose and location of the business At Will terminated at any time by the will
❑ Names of the partners indicating whether they are Partnership -period of existence of the partnership
general or limited partners, addresses of the partners With A is specified
❑ Amount of cash, incase of property contribution, Fixed Term
indicate the description and the agreed value of said REPRESENTATION TO OTHERS
property to be originally contributed by each partner
and any additional contributions that may be made by Ordinary -in reality existing among the partners
the partners Partnership as well as to the third parties
❑ Term of existence or duration of the partnership Partnership in reality not a partnership but
By Estoppel considered as a partnership only in
❑ Duties and powers of each partner
relation to those who by their conduct
❑ Manner of dividing the profits and losses among the
or omission are precluded to deny or
partners
disapprove its existence.
❑ Conditions covering the withdrawals by partners for LEGALITY OF EXISTENCE
personal use
❑ Provisions regarding salaries, interest on partners’ De Jure -complied with all the legal
capitals shall be allowed or not Partnership requirements for its existence
❑ Manner of keeping the books of accounts, the length De Facto -one which has not complied with all
of the accounting period, the starting date and the end Partnership the legal requirements for its
❑ Provision pertinent to dissolution and liquidation existence
❑ Other special provisions and stipulations. PUBLICITY

Secret -existence of certain partners is not

Business Organizations
Partnership made known to the public by any of
AS TO OWNERSHIP AS TO PURPOSE the partners
Open -existence is made known to the
-Sole Proprietorship -Service Organizations Partnership public by the partners of the firm
-Partnership -Trading / Merchandising
-Cooperative -Manufacturing
-Corporation -Agriculture
 CHARACTERISTICS ELEMENTS income tax if it is a ❑ Disagreement might
general professional occur;
❑ Consensual is perfected by mere consent, that partnership; ❑ Partners may suffer
is, upon the express or implied ❑ Flexibility of from the consequence of
agreement of two or more persons
operations; the negligence or wrong
❑ Nominate it has a special name or designation
❑ More reliable from action of other partners;
in our law
the point of view of the ❑ The partner can’t
❑ Bilateral entered into by two or more
creditor; easily sell his interest or
persons and the rights and
❑ More capital to be withdraw from the
obligations arising there from are
generated; partnership. Consent
always reciprocal
❑ More and better from all the remaining
❑ Onerous each of the parties aspires to
business opportunities partners is needed
procure for himself a benefit
through the giving of something
ACCOUNTING
❑ Commutative the undertaking of each of the
partner is considered as the ❑ Accounting for a partnership is basically the same
equivalent of that of the others with that of a sole proprietorship.
❑ Principal it does not depend for its existence ❑ The difference in accounting procedures exists only
or validity upon some other in the areas of formation, profit distribution, dissolution
contract. It can stand alone and liquidation.
❑ Preparatory it is entered into as a means to an ❑ The capital and drawing accounts are as many as the
end number of partners
❑ A partnership contract, in its essence, is a contract
Capital Account
of agency.
❑ The capital account balance represents the net
Partners investment of a partner in the business firm.
Capital
CLASSIFICATION
❑ Permanent withdrawal ❑ Original investment
Liability Contribution Management of of capital (partner by the partner
Business Firm decreased his/her capital ❑ Additional
GeneralPartner Capitalist Partner Managing Partner ❑ Share in the loss of investments made by
Limited Partner Industrial Partner Silent Partner partnership’s operation the partner after
❑ Drawing account closed formation
to capital account at the ❑ Share in the net
OTHER CLASSIFICATION end of the period income of the
partnership’s operation
Liquidating -in charge of the winding up of the
Partner partnership affairs in case of dissolution.
Drawing Account
Ostensible -takes active part in the partnership and
❑ Drawing account represents temporary withdrawals
Partner known to the public as a partner in the
by the partners;
partnership whether or not he has an
actual interest in the firm ❑ has a debit balance and will be closed to capital
account at the end of the accounting period.
Nominal -is not really a partner having no
DRAWING
Partner financial interest in the partnership nor
a party to the agreement of the ❑ Personal ❑ Share in the income
partnership, but represented as being in withdrawal by the of the partnership’s
fact a partner and make liable as a partner (for personal operation (may be
partner use as share in the credited to capital
Secret -has financial interest in the firm and profits) account
Partner takes active part in the business but he ❑ Share in the loss of
is not known to the public as a partner the partnership’s
Dormant -does not take active part in the operation (may be
Partner management and is not known to the debited to capital
public as a partner. account)

ADVANTAGES DISADVANTAGES
❑ Easier to form and has ❑ Less stable, can be
lesser legal dissolved any time at the
requirements; will of the partners;
❑ Lesser cost to be ❑ Unlimited liability
incurred in the from the point of view of
formation; the partners;
Loans Receivable
❑ Exempted from ❑ Divided authority;
 ❑ Any partner may borrow from the partnership;
❑ Partnership has a loan receivable from the partner or
partners.
❑ Loan Receivable account is presented as an asset in
the statement of financial position.
❑ collectible within one year it will be classified as
current asset.
❑ collectible for a period of more than one year it will
be classified as non current asset;
❑ Other terms for Loan Receivable from partners are
Due from Partners, Advances to Partners, Accounts
Receivable. Receivables may bear interest depending on
the agreement between the borrowing partner and the
partnership.

Loans Payable
❑ Partners may extend credit to the partnership ;
❑ Partner is also a creditor of the partnership;
❑ On the part of the partnership the account is called
Loans Payable or Due to Partners and it is presented in
the statement of financial position as liability

Partnership Formation
May be formed by :
❑ Persons new in the business;
❑ A person who has an existing business and those
persons who will join in the existing business as
partners;
❑ Those persons who have their respective businesses
and would like to combine their businesses into one