Law on Partnership

Prof. Joshua S. Umali, CPA

 Partnership – Definition and Characteristics

A partnership is a contract of two or more persons who bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves. Two or more
persons may also form a partnership for the exercise of a profession (Art. 1767).
Personal Assets
Characteristics:
Consensual – It is perfected by mere consent.
Principal – It does not depend upon any other contract for its validity or existence.
Bilateral or multilateral – It is entered into by two or more persons whose rights and obligations are
reciprocal.
Nominate – It has a special name given to it by law.
Preparatory – It is a means by which other contracts will be entered into as the partnership pursues its
business.
Onerous – The partners contribute money, property, or industry to a common fund.
 Principles Applicable

There must be Affectio Societatis – the desire to formulate an ACTIVE union with people
among whom there exist mutual confidence and trust.
Personal Assets
In connection thereto, the principle of Delectus Personae (Personal Choices), which
pertains to the right to choose who to associate with, is also applicable.
 Purpose of Partnership

A partnership’s purpose can be either:

1. For the intention of dividing the profits among themselves (business partnership or
partnership for profit), or Personal Assets
2. In order to exercise profession (general professional partnership)

Nevertheless, it is required that a partnership must have a LAWFUL object or purpose,

otherwise it may be declared dissolved by judicial decree, and the profits shall be
confiscated in favor of the state.

Creation
Number of Organizers
Existence
Liability of Owners
Transferability of interest
Ability of owners to bind
the firm
Remedies in case of
mismanagement
Nationality
Legal Personality
Right of Succession
Partnership versus Corporation
Partnership
Voluntary agreement of parties
Two or more
No time limit except agreement of parties
May extend to private property
All partners need to consent to the transfer of
interest to another
Generally, partners acting on behalf of the
partnership are agents thereof
A partner can sue another partner who mismanages
A partnership is a national of the country where it
was created, and dependent on a percentage of
ownership.
From the time the contract begins
None. Death, retirement, insolvency, civil
interdiction, or insanity of a partner dissolves the
partnership.
Corporation
Created by the state in the form of a special law or by a
general enabling law (The Revised Corporation Code)
Not more than 15
Perpetual existence
Personal Assets
Liability only up to their capital contributions
Does not need the consent of the other stockholders
Generally, stockholders cannot bind corporations since
its official acts are through a board of directors
A stockholder cannot sue a director who mismanages, it
must be in the name of the corporation, through a
derivative suit.
Generally, under whose laws it was created as to
whether domestic or foreign, and as to nationality, on
the ownership of the outstanding capital stock.
Generally from issuance of certificate of registration
Yes. Such causes do not dissolve a corporation
 Separate Juridical Personality

The partnership has a judicial personality separate and distinct from that of each of the
partners. The partnership can, in general:
Personal Assets
1. Acquire and possess property of all kinds;
2. Incur obligations;
3. Bring civil or criminal actions;
4. Adjudged insolvent even if the individual members be each financial solvent.
 Rules to determine whether a partnership exists

1. There is no partnership:
a. Between persons who are not partners as to each other are not partners as to third
persons; except a partnership by estoppel. Personal Assets
b. Co-ownership or co-possession if itself, whether such co-owners or co-possessors do
or do not share any profits made by the use of the property
c. The sharing of gross returns, whether or not the persons sharing them have a joint or
common right or interest in any property from which the returns are derived.
 Rules to determine whether a partnership exists

2. Presumption: the receipt by a person of a share of the profits of a business is prima

facie evidence that he is a partner in the business.
Personal Assets
Except: no such inference shall be drawn if such profits were received in payment:
a. As a debt by installments or otherwise;
b. As wages of an employee or rent to a landlord;
c. As an annuity to a widow or representative of a deceased partner;
d. As interest on a loan, through the amount of payment vary with the profits of
the business;
e. As the consideration for the sale of a goodwill of a business or other property by
installments or otherwise.
 Rules to determine whether a partnership exists

General rule: A partnership may be constituted in any form,

Except: A contract of partnership is void, whenever immovable property is contributed

Personal Assets
thereto, if an inventory of said property is not made, signed by the parties, and
attached to the public instrument.

Capital is more than P3,000 – the contract of partnership must appear in a public
instrument, which must be recorded in the SEC. This does not in any way affect validity
of the partnership as it is intended only to affect thirs persons.
 Kinds of Partnership

As to object:
1. Universal Partnership
2. Particular Partnership Personal Assets
 Universal Partnership
Universal Partnership of All Profits
As to the contribution Only the USUFRUCT of the properties of the
partners become common property; NAKED
OWNERSHIP is retained by each of the partners.
As to the share in profits All PROFITS acquired by industry or work of the
partners become common property (regardless of
whether or not said profits were obtained
through the usufruct contributed)
Universal Partnership of All Present
Properties
ALL the property actually belonging to the
partners are contributed both ownership
and naked ownership. Personal Assets
Profits that may be acquired from the
present properties shall belong to the
common fund.
Profits from other sources may become
partnership property, but only if there is a
stipulation to such effect.
Properties subsequently acquired by
inheritance, legacy, or donation, cannot be
included in the stipulation, but the fruits
thereof can be included in the stipulation.
 Universal Partnership of All Present Property

Example:
A and B formed a universal partnership of all present property. At the time of the establishment of the partnership, A owned a fleet
of taxies which he had purchased and an agricultural lot which he had inherited. B, on the other hand, owned an apartment which he
had earlier acquired by exchange and share of stock which were donated to him. The partners agreed that property acquired by each
partner after the formation of the partnership shall belong to the partnership. Personal Assets

During the first year of operations of the partnership , the following transactions took place:

Fare revenues of P200,000 were realized from the operations of
the fleet of taxis
Crops amounting to P100,000 were gathered from the agricultural
lot
Rentals of P150,000 were collected from the apartment
Dividends of P50,000 were received from the shares of stock.
Coconuts worth P80,000 were gathered from the coconut
plantation.
A fishpond was received by B by way of donation from a rich
uncle.
Fish valued at P70,000 were harvested from the fishpond.
A coconut plantation were purchased by A from his own funds.
 Universal Partnership of All Profits

Example:
A and B formed a universal partnership of profits. At the time of the establishment of the partnership, A owned a fleet of taxies which
he had purchased and an agricultural lot which he had inherited. B, on the other hand, owned an apartment which he had earlier
acquired by exchange and share of stock which were donated to him. The partners stipulated that fruits of future property shall
belong to the partnership. Personal Assets

During the first year of operations of the partnership , the following transactions took place:

Fare revenues of P200,000 were realized from the operations of
the fleet of taxis
Crops amounting to P100,000 were gathered from the agricultural
lot
Rentals of P150,000 were collected from the apartment
Dividends of P50,000 were received from the shares of stock.
Salary of P200,000 was received by A as professor of UCP
P1,000,000 was won by B in the lotto draw. – belong to B as
these were acquired by chance and lucrative title.
A coconut plantation were purchased by A from his own funds.
A fishpond was received by B by way of donation from a rich
uncle.
Fish valued at P70,000 were harvested from the fishpond.
Coconuts worth P80,000 were gathered from the coconut
plantation.
 Universal Partnership

In case of ambiguity: If the Articles of Universal Partnership does not specify the nature
of the Universal Partnership, it is deemed that what is constituted is only a universal
partnership of all profits. Personal Assets
 Universal Partnership

Persons not allowed to form a universal partnership: those who cannot donate to each
other, namely:
1. Husband and Wife (art. 133) Personal Assets
2. Those guilty of adultery and concubinage (Art. 739)
3. Those guilty of the same criminal offense, if the partnership was entered into in
consideration of the same (Art. 739)
 Particular Partnership

Where the object is/are:

1. Determinate things, their use or fruits;
2. A specific undertaking, or Personal Assets
3. The exercise of a profession or occupation

Question: May a husband and wife form or be partners in a general professional

partnership?

Answer: Yes. Since a General Professional Partnership is only a Particular Partnership for
the exercise of a common profession or occupation.
 Kinds of Partnership

As to liability:

General Partnership where all the partners are general partners whose liability extends
Personal Assets
to their individual properties, after the assets of the partnership have been exhausted.

Limited Partnership where at least one of the partners are liable only up to the extent of
his contribution.
 Kinds of Partnership

As to term:

Partnership with a fixed term or particular undertaking – upon arrival of thePersonal

fixed term
Assets
or fulfillment of a particular undertaking, the partnership is dissolved, and if continued,
it will constitute a partnership at will and the rights and duties of the partners remain
the same, so far as is consistent with a partnership at will.

Partnership at will – when there is no fixed term or particular undertaking.

 Kinds of Partners

As to contribution:

1. Capitalist Partners – contributes capital; money or property. Personal Assets

2. Industrial Partners – furnishes industry or labor.
3. Capitalist-Industrial Partners – furnishes both.
 Kinds of Partners

As to liability:

1. General Partners – Liable up to his personal assets. Personal Assets

2. Limited Partners – Liable only up to his capital contribution only.
 Kinds of Partners

Other kinds of partners:

1. Silent Partner – one who does not participate in the management of the Personal Assets
partnership.
2. Secret Partner – one who is not known to third persons as a partner.
3. Dormant Partner – one who is both a silent and secret partner
4. Ostensible Partner – direct opposite of a dormant partner or one who participates in
the management and is known to third parties as a partner.
5. Managing Partner – one who undertakes the management of the partnership
6. Liquidating Partner – one who undertakes the winding-up of partnership affairs after
its dissolution.
7. Incoming Partner – one who is admitted to the partnership after it has already been
constituted.
 Kinds of Partners

Other kinds of partners:

1. Silent Partner – one who does not participate in the management of the partnership.
Personal Assets
2. Secret Partner – one who is not known to third persons as a partner.
3. Dormant Partner – one who is both a silent and secret partner
4. Ostensible Partner – direct opposite of a dormant partner or one who participates in the
management and is known to third parties as a partner.
5. Managing Partner – one who undertakes the management of the partnership
6. Liquidating Partner – one who undertakes the winding-up of partnership affairs after its
dissolution.
7. Incoming Partner – one who is admitted to the partnership after it has already been
constituted.
8. Nominal Partner – One who is not actually a partner but who may become liable as such to
third person (such as a partner by estoppel).
 Kinds of Partners

Other kinds of partners:

1. Silent Partner – one who does not participate in the management of the partnership.
Personal Assets
2. Secret Partner – one who is not known to third persons as a partner.
3. Dormant Partner – one who is both a silent and secret partner
4. Ostensible Partner – direct opposite of a dormant partner or one who participates in the
management and is known to third parties as a partner.
5. Managing Partner – one who undertakes the management of the partnership
6. Liquidating Partner – one who undertakes the winding-up of partnership affairs after its
dissolution.
7. Incoming Partner – one who is admitted to the partnership after it has already been
constituted.
8. Nominal Partner – One who is not actually a partner but who may become liable as such to
third person (such as a partner by estoppel).
 Partnership Contribution

1. To give his contribution

a. Amount – Unless there is a stipulation to the contrary, the partners shall contribute
equal shares to the capital of the partnership. Personal Assets
b. When – As a rule, the contribution must be provided upon perfection of the
contract, except if the partners stipulate otherwise.
c. Delay – A partner who has undertaken to contribute a sum of money and fails to do
so becomes a debtor for the interest and damages from the time he should have
complied with his obligation. Thus, no demand shall be necessary since the law
specifically provides for the liability in case of delay.
 Partnership Contribution

1. To give his contribution

d. A partner is likewise liable similar to a vendor:
1. He is bound to deliver the fruits thereof from the time they should have been
Personal Assets
delivered, without need of demand (Art. 1786).
2. A partner must exercise due diligence in preserving the thing promised to be
contributed; otherwise, he shall be liable for loss and deterioration.
3. Warrant the thing delivered against eviction.
 Risk of Loss

Risk of Loss:
Loss borne by the partner:
1. Thing contributed is specific and determinate which is NOT fungible and only their use and
Personal Assets
fruits may be for the common benefit; and
2. There is stipulation that he shall bear the loss of the thing brought and appraised in the
inventory.

Loss borne by the partnership:

1. Thing contributed are:
a. Fungible;
b. Cannot be kept without deteriorating; or
c. They were contributed to be sold; and
There was appraisal in the inventory and no stipulation that the partner will bear the loss.
 Additional Contribution in case of Imminent Losses

2. To give additional contribution in case of imminent losses:

In case of an imminent loss of the business of the partnership, partners are required to give
Personal Assets
additional contributions. Who are required:
1. Capitalist partners (unless there is a stipulation to the contrary)
2. Industrial partners if there is a stipulation to that effect.

Consequence of failure: any partner who refuses to contribute an additional share to the
capital to save the venture shall be obliged to sell his interest to the other partners.
 Not to Engage in Another Business

3. Not to engage in another business

Industrial partners – cannot engage in business for himself except when the capitalist
Personal Assets
partners permit him to do so.

Effect of non-compliance:
The capitalist partners may either:
1. Exclude him from the firm or
2. Avail themselves of the benefits which he may have obtained in violation of this provision.
 Not to Engage in Another Business

3. Not to engage in another business

Capitalist partners – the prohibition is limited to business in the same industry as that of the partnership
which may result in competition. Personal Assets

Exceptions:
1. When it is expressly stipulated that the capitalist partner can so engage himself.
2. When the other partners allow him to do so, whether expressly or impliedly.
3. During the period of liquidation and winding up, when the partnership is already non-existent.
4. When the general-capitalist partner becomes a limited partner in a competitive enterprise.

Effect of non-compliance:
1. He shall bring to the partnership all the profits illegally obtained;
2. He is liable, personally, for all the losses;
3. He may be ousted for loss of trust and confidence
Credit to the Firm Payment made by a Common Debtor to the Managing Partner

4. Credit to the firm payment made by a common debtor to the managing partner

1. It will be primarily dependent on the choice of the debtor.

Personal Assets
2. If the debtor does not exercise his right of choice, the creditor can choose to which obligation it
will apply and indicate the same in the receipt.
a. If the managing partner issues partnership receipt, all payments will be applied entirely to
the partnership credit.
b. If the managing partner issues a receipt in his name, the payments will be credited to both
the obligations pro-rata.
3. If the debtor exercise his right of choice because the debt to the managing partner is more
onerous to him, he will be allowed to do so.
Credit to the Firm Payment made by a Common Debtor to the Managing Partner

Example: D owed ABC partnership and A, the managing partner, P7,000 and P3,000, respectively. A
was able to collect P5,000 from D.

Personal Assets
1. If A issued a receipt in the name of the partnership, the whole amount of P5,000 will be applied
to the partnership.
2. If A issued a receipt in his own name, the 5,000 shall be applied as follows:
a. P3,500 (5,000 * 7,000/10,000) to the partnership credit;
b. P1,500 (5,000 *3,000/10,000) to A’s credit.
3. The above, however, will not apply, if the debt to the managing partner is more onerous to the
debtor and the latter chooses to apply the payment to such debt.
 Other Obligations of a Partner: To the Partnership and Other Partners

5. Not to convert partnership funds/property for his own use.

6. To account for and hold as trustee, any unauthorized (or secret) personal profits.
7. Pay for damages caused by his fault.
8. Share with other partners the share of the partnership credit which he has received from Personal
an insolvent firm
Assets
debtor.
9. Share with other partners the share of the partnership credit which he has received from an insolvent firm
debtor.
10. Keep the partnership books in the principal office (except when otherwise agreed) and allow other partners
to have access, inspect, and copy the same.
11. Reimburse the partnership of damages suffered by it through his fault.
a. The liability for damages is not compensable with profits and benefits earned for the partnership;
b. Damages, however, may be decreased by courts if through partner’s extraordinary efforts, the
partnership earned unusual profits.
12. To inform the other partners on all matters affecting the partnership or relative to partnership affairs.
13. To observe the diligence of a good father of a family in all of his dealings.
14. To adhere to the partnership agreement and decisions of appointed managing partner.
 Obligations of a Partner: To Third Persons

1. Every partnership shall operate under a firm name

• Every partnership shall operate under a firm name, which may or may not include the
Personal Assets
name of one or more of the partners.
• Strangers who include their name in the firm are liable as partners because of estoppel
but do not have the rights of partners – this is to protect customers from being misled.
• If a limited partner included his name in the firm name, he shall be liable as general
partner.
 Liability after Exhaustion of Partnership Assets

2. Liability after exhaustion of partnership assets

All general partners, including industrial ones, shall be liable pro rata with all their property
Personal Assets
and after all the partnership assets have been exhausted for the contract which may be
entered into in the name and for the account of the partnership, under its signature and by a
person authorized to act for the partnership. However, any partner may enter into a separate
obligation to perform a partnership contract.

Any stipulation to the contrary shall be void, except as to the partners.

 Liability after Exhaustion of Partnership Assets

Example: A, B, C and D partners of ABCD partnership agreed on equal distribution of profits. As

regards to third parties, however, they exempted C, an industrial partner. Total Assets of the
partnership amounted to P200,000 while the remaining liabilities to X amounts to P800,000. In this
Personal Assets
case:
1. The liabilities can be settled first through the remaining partnership assets of P200,000.
2. The P600,000 shall be borne by all partners: A, B, C and D and they shall share pro-rata, but
since nothing in the problem indicated a different sharing agreement, or capital contributions, it
shall be presumed equal. So each, may be made liable by the creditor for P150,000 each.
3. C may also be made liable by the creditor since as to X (creditor), the stipulation exempting C is
void.
4. C, however, if made to pay 150,000 can seek reimbursement from A, B, and D since the
agreement exempting him is valid as to the other partners.
 Authority to Act for and in Behalf of the Partnership

3. Authority to act for and in behalf of the partnership

The authority of the partner to act in behalf of the partnership may be:
Personal Assets
1. Express – those expressly granted to the partner; or
2. Implied – those which may be implied from the express authority; or
3. Apparent – when he apparently carries on the usual business of the partnership and the
person to whom he is dealing has no knowledge of the fact that he has no such authority.

If the partner is not carrying on the usual business of the partnership, the act will not bind
the partnership unless it is authorized by the other partners.
 Authority to Act for and in Behalf of the Partnership

Consent of ALL partners necessary to:

1. Assign the partnership property in trust for creditors or on the assignee’s promise to pay
the debts of the partnership;
Personal Assets
2. Dispose of the good-will of the business;
3. Do any other act which would make it impossible to carry on the ordinary business of a
partnership;
4. Confess a judgment;
5. Enter into a compromise concerning a partnership claim or liability;
6. Submit a partnership claim or liability to arbitration;
7. Renounce a claim of the partnership.

Except when authorized by the other partners or unless they have abandoned the business.
 Effects of Conveyance of Property

Title is in the Executed in the

Conveyed by name of name of Effect
Any partner Partnership Partnership Title passes to the buyer but the partnership may
Personal Assets
recover. Except:
One or more One or more One or more
1. If in the usual way of business, except when
partners partners partners
the buyer has knowledge of partner/s’ lack
of authority;
2. Real property was transferred to an innocent
buyer.
Any Partner Partnership Partner Passes the equitable interest of the partnership
provided the conveyance was in the usual way of
One or more Partner/ Partner
business.
partners Partnership
All partners All partners All partners Passes all the rights in such property.
 Effects of Conveyance of Property

Title is in the Executed in the

Conveyed by name of name of Effect
Any partner Partnership Partnership Title passes to the buyer but the partnership may
Personal Assets
recover. Except:
One or more One or more One or more
1. If in the usual way of business, except when
partners partners partners
the buyer has knowledge of partner/s’ lack
of authority;
2. Real property was transferred to an innocent
buyer.
Any Partner Partnership Partner Passes the equitable interest of the partnership
provided the conveyance was in the usual way of
One or more Partner/ Partner
business.
partners Partnership
All partners All partners All partners Passes all the rights in such property.
 Solidary Liability For Torts/Quasi-Delicts

Where, by any wrongful act or omission of any partner acting in the ordinary course of
business of the partnership or with the authority of co-partners, loss or injury is caused to
any person, not being a partner in the partnership, or any penalty is incurred, the
Personal Assets
partnership is liable therefor to the same extent as the partner so acting or omitting to act.
 Solidary Liability For Misappropriation

The partnership is bound to make good the loss, in two situations:

1. Pertains to partner as receiver – where one partner acting within the scope of his
apparent authority receives money or property of a third person and misapplies it.
Personal Assets
2. Pertains to partnership as receiver – where the partnership in the course of its business
receives money or property of a third person and the money or property so received is
misapplied by any partner while it is in the custody of the partnership.

In case of both torts and misappropriation, all the partners are solidarily liable as to each
other and the partnership.
 Partner By Estoppel

1. One who represents himself as a partner of an existing partnership with or without

consent of the partnership:
a. When the partnership consented – a partnership by estoppel is created between the
Personal Assets
original members and the deceiver. A partnership liability results.
b. When the partnership did not consent – deceiver becomes a partner by estoppel
where he is liable as a partner but does not acquire the rights thereof. No
partnership liability exists.
2. One who represents himself as a partner of a Non-existent partnership. Liability of
parties is pro-rata, since there is no partnership liability.
 Liability of New (Incoming) Partner

• Debts incurred prior to admission: liable up to his contribution (except if there is

stipulation)
• Debts incurred after admission: liable up to his personal assets.
Personal Assets