University of the Cordilleras

College of Accountancy

RFBT2(Law on Corporations, Partnerships and Cooperatives)

LESSON no. 1

Module 2

PARTNERSHIPS

An agreement whereby two or more persons agree 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.
(Article 1767, New Civil Code)

The purpose of a Partnership must be lawful, the properties of a Partnership with an

unlawful purpose that is dissolved by a court order shall be confiscated in favor of the
Government. (Article 1770, New Civil Code)

Elements and Kinds of Partnerships

Elements
1. There must be a valid contract
2. There must be a contribution of money, property, or industry to a common fund
3. The partnership must be for profit
4. Intention to divide profits among themselves.

In order to determine if there is a partnership between two (2) or more

persons, we must look into two things;
(a) Is there an agreement to contribute money, property, or industry to a common
fund; and
(b) Is there an intention between the parties to divide the profits among themselves.

If these two tests or requirements are met then there is a partnership existing among
them. (Domingo, 2019)

Since a partnership agreement is a contract, it is perfected by the mere

consent of the parties.

Creation of Artificial Person/Separate Juridical Personality

The creation of a partnership brings about the creation of a separate juridical/ legal
entity. Under Art. 1768 of the Civil Code of the Philippines, the partnership has a juridical
personality separate and distinct from that of each partner.
Thus, if two or more persons decide on opening a partnership, it will form another entity
which is the partnership. The legal entity which is the partnership, shall also be
considered a person (legal person) under our laws. It can acquire properties, liabilities,
and it can also have its own rights under the law on partnership. (De Leon, 2010)

Factors in Determining the Existence of a Partnership (Article 1769, New Civil Code)

1. Persons who are not partners as to each other are not partners as to third
persons, except partnership by estoppel;

2. Co-ownership or co-possession does not of itself establish a partnership, whether

such-co-owners or co-possessors do or do not share any profits made by the use
of the property;

3. The sharing of gross returns does not of itself establish a partnership, whether or
not the persons sharing them have a joint or common right or interest in any
property from which the returns are derived;

4. 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, but 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, though 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.

Partnership vs. Corporation (Differences)

1. As to manner of creation
A partnership as a contract is created by mere agreement of the parties. A corporation
is created by compliance with the requirements of law and commences only upon
issuance of the certificate of incorporation. Before the issuance of a certificate of
incorporation, there is yet no corporation. In a partnership, even if there is no certificate,
a partnership still exists. (De Leon, 2010)

2. As to number of organizers
Two or more persons may form a partnership. Under the revised corporation code a
single person may form a corporation. (Section 10, Revised Corporation Code)
3. As to powers
The powers of a partnership are limited to the powers agreed to by the partners while a
corporation has the powers provided by law, by the articles of incorporation, and
including inherent and incidental powers. (De Leon, 2010)

4. As to authority of the persons who compose it

In a partnership, there is mutual agency among the partners, meaning that the partners
may represent the partnership in business transactions and dealings. In a corporation
the stockholders cannot represent the corporation unless there is express authority
granted by the corporation. (Ibid)

5. As to transfer of interest
In a corporation, a stock holder may transfer his shares of stocks to other people without
the need of asking approval from other stockholders. In a partnership, a partners’
interest in the
partnership may not be transferred without the approval or
consent of the partners. (Ibid)

6. As to right of succession
In partnerships, there is no right of succession. Thus, if a partner dies, the partnership is
dissolved. The right of succession is present in a corporation. Meaning, the death of a
stockholder does not affect the existence of a corporation. (Ibid)

Kinds if Partnerships

1. According to Object
a) Universal partnership
Universal partnership of all present property
The partners contribute all the property which actually belongs to them to a common
fund, with the intention of dividing the same among themselves, as well as all the profits
which they may acquire therewith. (Art. 1778, New Civil Code)
Universal partnership of all profits
It comprises all that the partners may acquire by industry or work during the existence of
the partnership. (Art. 1780, New Civil Code)
b.) Particular partnership
The partners contribute particular or specific things, or specific undertakings, or the
exercise of a profession. (Art. 1783, New Civil Code)

2. According to Liability
a) General partnership
In a general partnership, the partners are considered general partners. As a general
partner, in case of liabilities and after the partnership assets have been exhausted, the
personal property of the general partners will be taken to answer for the liabilities. In
short, a general partner is liable even beyond the extent of his contribution. (Domingo,
2019)
b) Limited partnership
It is a partnership where there is at least one general partner and one limited partner. A
limited partner is liable only up to the extent of his contribution. (Ibid)

3. According to Duration
a) Partnership at Will
In a partnership at will, there is no fixed period or term for the partnership. Likewise, there
is also no specific undertaking in which the partnership is based on. The partnership
exists until the partners decide to end it. (Ibid)

b) Partnership with a Fixed term

In a partnership with a fixed term, the partners agree as to the duration for which the
partnership is to exist. (Ibid)

c) Partnership for a particular Undertaking

In a partnership for a particular undertaking, the partnership exists to accomplish a
specific goal or purpose. (Ibid)

4. According to representation to others

a) Ordinary partnership
It is where two or more persons agree and promise to each other to contribute money,
property, or industry with the intention of dividing the profits among themselves. (Ibid)

b) Partnership by Estoppel
It is a partnership formed when a person represents himself to be a partner to a
partnership knowing that he is not really a partner, or when partners in a partnership
represent a person to be a partner when indeed he is not really a partner. (Ibid)

5. According to Legality
a) De Jure Partnership
It is a partnership that complies with all the requirements provided by law. (Ibid)

b) De Facto Partnership
A partnership that does not comply with all the legal requirements for its creation. (Ibid)

KINDS OF PARTNERS
1. Capitalist Partner
A capitalist partner is one who contributes money or property to the partnership.
(Domingo, 2019)

2. Industrial Partner
An industrial partner is one who contributes his industry to the partnership. Industry is the
work or labor exerted by the partner as his contribution to the partnership. (Ibid)

3. Capitalist - Industrial
A capitalist industrial partner contributes money or property and industry or both
money, property and industry to the common fund. (Ibid)
It is important to determine whether a partner is a capitalist partner or an industrial
partner in order to determine the prohibitions and their share in the profits or losses.

Capitalist Partner Industrial Partner

As to Contribution
Money or property or both Contributes labor / industry
Prohibition to engage in other business
General Rule: He cannot engage in General Rule: Cannot engage in any
the same kind of business in which the Business
partnership is engaged
Exception: If the partners allow him to
Exception: If the other partners
authorize/ allow him
Share in the Profits
He shares in the profit according to Shares in the profits according to
the agreement, if there is no agreement, if there is no agreement
agreement then in proportion to his then he shall receive an amount or
contribution share which is just and equitable
under the circumstances
Share in Losses
He shares in the losses according to He shares in the losses according to
the agreement, if there is no the agreement.
agreement then in proportion to his If there is no agreement, an Industrial
contribution partner shall not be liable for losses.
(Domingo, 2019)

Formalities Required

As a rule, a partnership contract does not need to be in writing. Thus, even though the
agreement to form a partnership is only verbal, the partnership contract or agreement
is still valid. However, there are certain instances where the partnership agreement
needs to be in writing and in a public instrument. A public instrument is a document
prepared by a notary public in the presence of the parties. The following are certain
rules when a partnership agreement must be in a public instrument and the
consequences of failure to do so:

1. If immovable property is contributed the partnership agreement must be in a public

instrument and that an inventory of those property contributed must be made.
otherwise the partnership agreement is INVALID.

2. If the partnership capital is more than three thousand (P3000) pesos or more, the
partnership agreement must be in a public instrument and registered with the Securities
and Exchange Commission. However, in this case if the partnership is not in a public
instrument, the partnership is still VALID. (Domingo, 2019)
It is only when a partnership agreement where immovable property is contributed that
the requirement for it to be in a public instrument is necessary, otherwise it will be void.

Management of the Partnership

As a rule, the partner who has been appointed as the managing partner in the articles
of partnership manages the partnership and may execute all acts of administration.
Despite the opposition of his partners, he may continue acting for the partnership unless
the acts were done in bad faith. (Art. 1800, New Civil Code)

A partner may be appointed as the managing partner in two ways:

a. Appointment as managing partner in the Articles of Partnership;

b. Appointment as managing partner in a separate document. (Domingo, 2019)

Rules on the management of the partnership:

I. If there are two or more managers appointed in the articles of partnership:

SCENARIO 1. No specification of their respective duties and without stipulation requiring

unanimity of action.

General Rule: Each may separately execute all acts of administration (unlimited power
to administer). Each of them may enter into business transactions, contracts, and other
acts of administration for the partnership since there is no specification as to their
respective duties. It is presumed that they have the power to do so.

Exception to the Rule: If any of the managers opposes, decision of the majority prevails.
In case of a tie, decision of the controlling interest shall prevail. (Art. 1801, New Civil
Code)

SCENARIO 2. With stipulation that none of the managing partners shall act without the
consent of the others.

General Rule: Unanimous consent of all the managing partners shall be necessary for
the validity of the acts and absence or inability of any managing partner cannot be
alleged.

Exception to the Rule: Where there is an imminent danger of grave or irreparable injury
to the partnership. (Art. 1802, New Civil Code)

II. If only one partner is appointed as a manager.

The partner who has been appointed manager in the articles of partnership may
execute all acts of administration despite the opposition of his partners, unless he should
act in bad faith; and his power is irrevocable without just or lawful cause. The vote of
the partners representing the controlling interest shall be necessary for such revocation
of power.

A power granted after the partnership has been constituted may be revoked at any
time. (Art. 1801, New Civil Code)

III. No agreement as to manner of management

All partners shall be considered agents (managers of the partnership) and whatever
any one of them may do alone shall bind the partnership, without prejudice to the
provisions of Art. 1801 of the NCC. This right is not dependent on the amount or size of
the partner’s capital contribution or services to the business. (Art. 1803, New Civil Code)

Distribution of Profits and Losses

1. Rules as to distribution of profits

a. The partners share in the profits according to their agreement.
b. If there is no agreement:
i. Capitalist partner – in proportion to his contribution
ii. Industrial partner – what is just and equitable under the circumstances (Art. 1797,
New Civil Code)

If the industrial partner has contributed capital other than his services, he shall also
receive a share in the profits in proportion to his capital.

2. Rules as to distribution of losses

a. The partners share in the losses according to their agreement.
b. In the absence of such, according to their agreement as to profits.
c. In the absence of profit agreement, in proportion to his capital contribution. (Ibid)

Dissolution, Winding Up, and Termination

The three final stages of a partnership are Dissolution, Winding Up, and Termination.

Dissolution as defined under the Civil Code is the change in relationship of the partners
caused by any partner ceasing to be associated with the partnership. If any partner
ceases to become part of the partnership, the partnership is not automatically
terminated, it is considered dissolved but will still undergo Winding Up before it is fully
terminated. In dissolution the partnership still exists for the purpose of settling or winding
up the remaining business affairs of a corporation. It designates the point in time when
the partners cease to carry on the business together. The partnership is not considered
terminated, as it continues until all or the winding up of partnership affairs is completed
(Article 1829, New Civil Code).

Winding up is the process of settling the remaining business affairs of a corporation.

After the change of relation between the partners caused by a partner or partners
ceasing to be such, the partnership will undergo winding up. Here, they will settle all
remaining business affairs of the corporation before it is fully terminated. (Domingo,
2019)

Termination is the final point in time in the life of a partnership where all remaining
business transactions or affairs have been wound up and finished. As such, in this point,
the partnership no longer exists. (Ibid)

Types of Dissolution

A. Judicial Dissolution

1. A partner has been declared insane by a court or is shown to be of unsound

mind.
2. A partner becomes incapable of doing his part in the partnership.
3. A partner has been guilty of acts that is prejudicial to the partnership.
4. A partner willfully or persistently commits a breach of the partnership agreement.
5. The business can only be carried on at a loss. (Art. 1831, new Civil Code)

B. Extra Judicial Dissolution

A partnership may be dissolved without court intervention and only by the parties
themselves in the following instances:

1. When the period for the existence of the partnership has already lapsed, or the
particular undertaking has already been accomplished.
2. By the express will of any of the partners if there is no particular term or particular
undertaking.
3. By the express will of all of the partners if there is no particular term or particular
undertaking.
4. 4. By the expulsion of any partner. (Art 1830, New Civil Code)

Effects of Dissolution (Art. 1832, New Civil Code)

General Rule: Any of the partners cannot bind the partnership anymore upon
dissolution. (Domingo, 2019)

They can no longer enter into new business transactions or agreements for the
partnership.

The following are the effects of dissolution:

a) Dissolution terminates the authority of Partners. Each of the partners no longer has
authority to transact for the partnership.
b) Partnership continues for a limited purpose. After the partnership has been dissolved,
the partnership can only exist for the purpose of winding up of business affairs, no more
new transactions.
c) Partnership is not yet terminated. Although dissolved, the partnership is not yet
completely terminated.
d) They are not anymore agents of the partnership. None of the partners may already
bind the partnership in agreements.

Partners cannot evade previous obligations just because of dissolution.

As to new obligations, partners cannot be held liable to obligations entered by the

partnership without their consent.

Exception:
Even though the partners may no longer bind the partnership, they may still have
limited power/ authority in the partnership. The partners power of representation is
confined to 2 transactions:

1. Transactions necessary for winding up.

2. Transactions begun but not finished.

Liabilities of the Partnership After Dissolution

1. There are instances where the partnership is liable to other persons:

a) Acts appropriate for winding up partnership affairs.
b) Acts for completing transactions unfinished business contracted before
dissolution.
c) If a partner transacts after the partnership has been dissolved and the other
party
i. Has already transacted with the partnership before,
ii. Has no knowledge of the dissolution of the partnership.

2. When is the partnership NOT liable

a) When the partnership was dissolved because it was unlawful to carry on the
business, unless the act is necessary for the winding up of partnership affairs.
b) Where the partner became insolvent
c) Where the partner had no authority to wind up partnership affairs;
i. Except by a transaction with a third person who is in good faith. (Art. 1834,
New Civil Code)

Limited Partnership

It is a kind of partnership formed by two or more persons having as members one or

more general partners and one or more limited partners. (Art 1843, NCC)

Characteristics of a Limited Partnership

1. The General Partners (one or more of them) are the ones who manage the
partnership. (Domingo, 2019)
2. The Limited Partners do not participate in the management of the partnership.
However, if the limited partner participates in the management of the
partnership, then he will be liable as a general partner.(Ibid)
 3. The limited partner is NOT liable for partnership obligations beyond their
contribution. General partners shall be liable for the liabilities of the corporation
using their personal assets after the partnership assets have been exhausted.
(Ibid)
4. The name of the limited partner will not appear in the name of the partnership. If
his name appears in the partnership name then he will be liable as a general
partner.

Exception: If the name of the limited partner is the same as that of a general
partner, such surname may of course appear in the partnership name. (Art. 1846,
New Civil Code)

5. A limited partner can only contribute money or property. A partner who

contributes industry (industrial partner) can only be a general partner. (Domingo,
2019)

Rights of a Limited Partner

1. To have partnership books kept at principal place of business;

2. To inspect/copy books at reasonable hours;
3. To have on demand true and full information of all things affecting partnership;
4. To have formal account of partnership affairs whenever circumstances render it
just and reasonable;
5. To ask for dissolution and winding up by decree of court;
6. Right to receive share of profits/other compensation by way of income;
7. Right to the return of contributions provided the partnership assets are in excess
of all its liabilities (Art. 1851, New Civil Code)

References:

New Civil Code of the Philippines (Art 1767 - 1867)

Domingo,A. (2019). Business Laws and Regulations: partnership, Revised

Corporation, Cooperative Law, Laws, Principles, and Jurisprudence (2019 Edition).
Itogon, Benguet: Coaching for Results Publishing.

De Leon, H. (2010), Comments and Cases on Partnership, Agency, and Trusts. Quezon
City, Philippines: Rex Printing Company, Inc.

Disclaimer

The information provided in RFBT 3 in this module is for educational purposes only. All
information found herein is provided in good faith and we make no representation or
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availability, or completeness of thereof. We do not assume ownership of any of the
information provided herein.