contract must be present.
As in other cases of contracts,
PART 1: Introduction to
Partnership Rights and Obligations
What is a Partnership?
 It is a contract whereby two or more persons bind
themselves to contribute money, property, or
industry to a common fund, with the intention of
dividing the profits among themselves (Art. 1767,
New Civil Code NCC).
Characteristics:
1. Bilateral– it is entered into by two or more
persons and the rights and obligations arising
therefrom are always reciprocal
2. Onerous – each of the parties aspires to procure
for himself a benefit through the giving of
something
3. Nominate– it has a special name or designation in
our law
4. Consensual – perfected by mere consent, upon
the express or implied agreement of two or more
persons
5. Commutative– the undertaking of each of the
partners is considered as the equivalent of that of
the others
6. Principal – it does not depend for its existence or
validity upon some other contracts
Essential Elements:
1. There must be a valid contract
2. The parties (two or more persons) must have
legal capacity to enter into the contract
3. There must be a mutual contribution of money,
property, or industry to a common fund
4. The object must be lawful
5. The primary purpose must be to obtain profits
and to divide the same among the parties.(De
Leon, 2010)
Validity
Partnership is a voluntary relation created by agreement
of the parties. It excludes from its concept all other
associations which do not have their origin in a contract,
express or implied. There is no such thing as a partnership
created by law or by operation or implication of law alone
(De Leon, 2010).
Partnership as a contract since partnership is
fundamentally contractual, all the essentials of a valid
in order to make an agreement for a partnership valid,
there must be a valid consideration existing as between
the partners. Each partner surrenders to the partnership
in accordance with the express or implied stipulations of
their mutual agreement (De Leon, 2010).
Legal Capacity of Contracting Parties
Before there can be a valid contract of partnership, it is
essential that the contracting parties have the necessary
legal capacity to enter into the contract. Consequently,
any person who cannot give consent to a contract cannot
be a partner. Persons who are prohibited from giving
each other any donation or advantage cannot enter into a
universal partnership (Art. 1782).
Capacity and Disqualifications
General Rule: Any person capacitated to contract may
enter into a contract of partnership.
Exceptions:
1. Persons who are prohibited from giving each
other any donation or advantage cannot enter
into a universal partnership (Art. 1782).
NOTE: A husband and wife, however, may enter into a
particular partnership or be members thereof. (De Leon,
2010)
2. Persons suffering from civil interdiction
3. Persons who cannot give consent to a contract:
a) Minors
b) Insane persons
c) Deaf-mutes who do not know how to
write
Principle of Delectus Personae
This refers to the rule that is inherent in every
partnership, that no one can become a member of the
partnership association without the consent of all the
partners. Even if a partner will associate another person
in his share in the partnership, the associate shall not be
admitted into the partnership without the consent of all
the partners, even if the partner having an associate
should be a manager (Art. 1804, NCC).
As a rule, it is illegal for two corporations to enter into a
partnership. Nevertheless, a corporation may enter into a
joint venture with another if the nature of the venture is
in line with the business authorized by its charter.
Mutual Contribution
Money
The term is to be understood as referring to currency
which is a legal tender in the Philippines. Checks, drafts,
promissory notes payable to order, and other mercantile
documents are not money but only representatives of
money. There is no contribution of money until they have
been encashed.
Property
The property contributed may be real or personal,
corporeal or incorporeal. Hence, credit such as
promissory note or other evidence of obligation or even
goodwill may be contributed, as they are considered
property.
Industry
The word “industry” has been interpreted to mean the
active cooperation, the work of the party associated,
which may be either personal manual efforts or
intellectual, and for which he receives a share in the
profits (not merely salary) of the business
Lawful Object
The only limitation is that the object must be lawful and
for the common benefit of the members. The limitation
arises not only from the express provisions of the law, but
from the general principles of morality and justice (De
Leon, 2010)
Intention to Divide Profits
Sharing of profits as a presumptive evidence of
partnership.
There are numerous instances of parties who have a
common interest in the parties and losses of an
enterprise but who are not partners. Thus, if the division
of profits is merely used as guide to determine the
compensation due to one of the parties, such is not a
partner.
Agreeing upon a system of sharing losses is not necessary
for the obligation is implied in the partnership relation. If
only the share of each partner in the profits has been
agreed upon, the share of each in the losses shall be in
the same proportion. The definition of partnership under
Article 1767 refers to “profits” only and is silent as to
“losses.” The reason is that the object of partnership is
primarily the sharing of profits, while the distribution of
losses is but a “consequence of the same.”
Be that as it may, the right to share in the profits carries
with it the duty to contribute to the losses, of any
How is a Partnership Formed?
It is created by agreement of the parties (consensual).
There is no such thing as a partnership created by law or
by operation or implication of law alone. (De Leon, 2005)
Commencement of Contract of Partnership A partnership
is a consensual contract; hence, it exists from the
moment of the celebration of the contract by the
partners. A partnership begins from the moment of the
execution of the contract, unless it is otherwise stipulated
(Art 1784).
Agreement is embodied in the Articles of Partnership
While partnership relation may be informally created and
its existence proved by manifestations of the parties, it is
customary to embody the terms of the association in a
written document known as “Articles of Partnership”
stating the name, nature or purpose and location of the
firm, and defining, among others, the powers, rights,
duties, and liabilities of the partners among themselves,
their contributions, the manner by which the profits and
losses are to be shared, and the procedure for dissolving
the partnership (De Leon, 2010 ed.).
Form and Requirements
1. Personal property
a. Less than P3,000 – may be oral
b. P 3,000 or more – must be:
i. In a public instrument; and
ii. Registered with Securities and
Exchange Commission (Art. 1772,
NCC)
NOTE: Even if the partnership is not registered with SEC,
the partnership is still valid and possesses a distinct
personality (Paras, 1969)
2. Real property or real rights – must be:
a. In a public instrument (Art. 1771, NCC)
b. With an inventory of said property
i. Signed by the parties
ii. Attached to the public instrument
(Art. 1773, NCC)
iii. Registered in the Registry of
Property of the province, where
the real property is found to bind
third persons (Paras, p. 412)
 3. Limited partnership– Must be registered as such
with SEC, otherwise, it is not valid as a limited
partnership but may still be considered a general
partnership with juridical personality
Importance of Firm Name
A partnership must have a firm name under which it will
operate. It is necessary to distinguish the partnership
which has a distinct and separate juridical personality
from the individuals composing the partnership and from
other partnerships and entities (De Leon, 2010).
The partners enjoy the utmost freedom in the selection of
the partnership name. As a general rule, they may adopt
any firm name desired. The firm name of a partnership
may be that of an individual partner, the surnames of all
the partners, or the surname of one or more of the
members with the addition of “and Company,” or it may
consist of individual names wholly distinct from the
names of any of the members, or it may be a name purely
fanciful or fictitious. But whatever the firm name may be,
the signature of the firm name is, in law, the signature of
the several partners’ name.
Kinds of Partners
Under the Civil Code
1. Capitalist – Contributes money or property to the
common fund
2. Industrial – Contributes only his industry or
personal service
3. General– One whose liability to 3rd persons
extends to his separate or personal property
4. Limited – One whose liability to 3rd persons is
limited to his capital contribution
5. Managing – Manages the affairs or business of
the partnership; he may be appointed either in
the articles of partnership or after the
constitution of the partnership. He is also known
as general or real partner.
6. Liquidating– Takes charge of the winding up of
partnership affairs upon dissolution
7. Partner by estoppel – Is not really a partner but is
liable as a partner for the protection of innocent
3rd persons; he is also known as the partner by
implication or nominal partner or a quasi-partner.
8. Continuing partner – Continues the business of a
partnership after it has been dissolved by reason
of the admission of a new partner, retirement,
death or expulsion of one of the partners.
9. Surviving partner – Remains after a partnership
has been dissolved by death of any partner.
10. Sub-partner – Is not a member of the
partnership; contracts with a partner with
reference to the latter's share in the partnership
11. Ostensible – Takes active part and known to the
public as partner in the business, whether or not
he has an actual interest in the firm. Thus, he may
be an actual or a nominal partner.
12. Secret – Takes active part in the business but is
not known to be a partner by outside parties
13. Silent – Does not take any active part in the
business although he may be known to be a
partner. If he withdraws from the partnership, he
must give notice to those persons who do
business with the firm to escape liability in the
future
14. Dormant – Does not take active part in the
business and is not known or held out as a
partner; the term is also synonymous with a
“sleeping partner”
15. Original partner - one who is a member of the
partnership from the time of its organization
16. Incoming partner - a person lately, or about to
be, taken into an existing partnership as a
member
17. Retiring partner - one withdrawn from the
partnership; a withdrawing partner
Types of Partnership
1. As to Object
a) Universal partnership Of all present
property (Art. 1778, NCC) Property which
belonged to each of the partners at the
time of the constitution of the
partnership Profits which they may
acquire from all property contributed
 Of all profits( Art. 1780, NCC) –
Comprises all that the partners
may acquire by their industry or
work during the existence of the
partnership
b) Particular partnership – It is one which
has for its object, determinate things,
their use and fruits, or a specific
undertaking or the exercise of a
profession or a vocation. (Art. 1783, NCC)

Illustration of a Universal Partnership
A and B formed a partnership named Camella Company.
A contributed two parcels of lands and a tractor while B
contributed all of his properties plus other farm
instruments. The partnership formed by A and B is a
Universal Partnership of all Present Property.
In the above example, if A only granted the use of
his land an tractor and B also doing the same, this is a
Universal Partnership of Profits. This is because they
retain ownership of their properties while subdividing
what is due them through the partnership gains.
Illustration of a Particular Partnership
A B and C are all Certified Public Accountants. After
gaining sufficient experience, all of them decided to
practice as one by forming their own Accounting and
Auditing Partnership firm.
This is a Particular Partnership since this is for a
specific undertaking and for the practice of their
accountancy profession
2. As to Liability of Partners
a) General partnership – One where all
partners are general partners who are
liable even with respect to their
individual properties, after the assets of
the partnership have been exhausted.
(Paras,p. 411)
b) Limited partnership – One formed by 2 or
more persons having as members one or
more general partners and one or more
limited partners, the latter not being
personally liable for the obligations of the
partnership. (Art. 1843)
Illustration of a General Partnership
Fred and Melissa equally contributed P50,000 to form a
partnership and open a bakery. The store is named F&M
Bakery. By opening a store together, and without no
distinction Fred and Melissa are both general partners in
the business, F&M Bakery who will run the business
together.
Illustration of a Limited Partnership
Fred and Melissa contributed P50,000 to form a baker
partnership. John was risk adverse and wanted only to
contribute P20,000 with the further condition that his
liability is limited to his contribution. Fred and Melissa
agreed and together they formed FMJ Bakery Limited.
We have a Limited Partnership here because:
1. Presence of a general partner and a limited
partner.
2. 2. Firm name included the word “Limited”
3. As to Duration
a. Partnership at will – this arises where
no fixed term has been agreed for the
duration of the partnership or the
partnership has been entered into for
an undefined term. A partnership at
will may be dissolved at any time by a
partner serving notice on the other
partner(s)
b. Partnership with a fixed period – The
term for which the partnership is to
exist is fixed or agreed upon or one
formed for a particular undertaking
Legality of Existence
A. De jure partnership – One which has complied
with all the requirements for its establishment.
B. De facto partnership – One which has failed to
comply with all the legal requirements for its
establishment.
De Jure v. De Facto Partnership
A and B agreed to form a canteen wherein A will
contribute his house and lot while B will contribute
several cooking materials and ingredients.
If the canteen partnership is embodied in a public
instrument, this is already considered a De Jure
Partnership.
If the canteen partnership is only in a private
document, this is still considered a De Facto partnership
since certain formalities of law have not been observed
a) As to Representation to others
a) Ordinary or real partnership – One which
actually exist among the partners and
also as to third person.
b) Ostensible or partnership by estoppel –
When two or more persons attempt to
create a partnership but fail to comply
with the legal personalities essential for
juridical personality, the law considers
 them as partners, and the association is a
partnership insofar as it is favorable to
third persons, by reason of the equitable
principle of estoppel (MacDonald et. al. v.
Nat’l. City Bank of New York, G.R. No.
L7991, May 21, 1956)

 As to Publicity
 Secret partnership – Partnership that is
not known to many but only as to its
partners. b. Notorious or open
partnership – It is known not only to the
partners, but to the public as well. As to
Purpose a. Commercial or trading – One
formed for the transaction of business.
 Professional or non-trading – One
formed for the exercise of a profession

PART 2: Rights and Obligations of
the Partners
RELATIONSHIPS IN A CONTRACT OF PARTNERSHIP
A contract of partnership gives rise to at least four distinct
juridical relations, namely:
1. Relations among the partners themselves
2. Relations of the partners with the partnership
3. Relations of the partnership with third persons
with whom it contracts
4. Relations of the partners with such third persons
(De Leon, 2010).
Remember: Partnership is founded on Mutual Trust and
Confidence
Under the same principle of mutual trust and confidence
among partners, there must be no concealment between
them in all matters affecting the partnership. The
information, to be sure, must be used only for a
partnership purpose (De Leon, 2010).
Accountability of partners to each other as fiduciary.
Every partner must account to the partnership for any
benefit, and hold as trustee for it any profits derived by
him without the consent of the other partners from any
transaction connected with the formation, conduct, or
liquidation of the partnership or from any use by him of
its property (Art. 1807, NCC).
OBLIGATIONS OF PARTNERS AMONG THEMSELVES
1. Contribution of property (Art. 1786, NCC)
2. Contribution of money and money converted to
personal use (Art. 1788, NCC)
3. Prohibition in engaging in business for himself as
to the industrial partner (Art. 1789, NCC)
4. Contribute additional capital (Art. 1791, NCC)
5. Managing partner who collects debt must
properly account for the same (Art. 1792, NCC)
6. Partner who receives share of partnership credit
(Art. 1793, NCC)
7. Damages to partnership (Art. 1794, NCC)
8. Keep the partnership books (Art. 1805, NCC)
9. Render information (Art. 1806, NCC)
10. Accountable as fiduciary (Art. 1807, NCC)
Obligations of Partners with respect to Property
Contribution
The Partners are to:
1. Contribute at the beginning of the partnership, or
at the stipulated time, the money, property or
industry which he may have promised to
contribute
2. Answer for eviction in case the partnership is
deprived of the determinate property
contributed.
3. Answer to the partnership for the fruits of the
property the contribution of which he delayed,
from the date they should have been contributed
up to the time of actual delivery.
4. Preserve said property with the diligence of a
good father of a family, pending delivery to the
partnership.
5. Indemnify the partnership for any damage caused
to it by the retention of the same or by the delay
in its contribution
Property Contribution
When the capital or a part hereof which a partner is
bound to contribute consists of goods, their appraisal
must be made in the manner prescribed in the contract of
partnership, and in the absence of stipulation, it shall be
made by experts chosen by the partners, and according to
current prices, the subsequent changes thereof being for
the account of the partnership. (Art. 1787, NCC)
Partner Failing to Contribute the Property Promised
Effect if a partner fails to contribute the property which
he promised to deliver to the partnership
1. Partner become ipso jure a debtor of the
partnership even in the absence of any demand
(Art. 1786, NCC)
2. Remedy of the other partner is not rescission but
specific performance with damages and interest
from defaulting partner from the time he should
have complied with his obligation.
Contribution of Money
Rules regarding contribution of money to the partnership
1. Contribute on the date fixed the amount the
partner has undertaken to contribute to the
partnership
 2. Reimburse any amount the partner may have
taken from the partnership coffers and converted
to his own use
3. Indemnify the partnership for the damages
caused to it by delay in the contribution or
conversion of any sum for the partner’s personal
benefit
4. Pay the agreed or legal interest, if the partner
fails to pay his contribution on time or in case he
takes any amount from the common fund and
converts it to his own use.
Withdrawal of Money or Property
Money or property contributed by a partner cannot be
withdrawn or disposed of by the contributing partner
without the consent or approval of the partnership or of
the other partners. The reason behind this is because the
money or property contributed by a partner becomes the
property of the partnership (De Leon, 2010).
However, a partner who fails to perform the personal
services which he has stipulated to render to the
partnership for the value of the services is generally not
liable unless there is a special agreement to that effect.
Chargeability
Unless there is a special agreement to that effect, the
partners are not entitled to charge each other, or the
partnership of which they are members, for their services
in the firm business. The doctrine seems to be that every
partner is bound to work to the extent of his ability for
the benefit of the whole, without regard to the services of
his co-partners, however unequal in value or amount, and
to require a partner to account for the value of his
services would be, in effect, allowing compensation to the
other members of the partnership for the services they
rendered.
Prohibition on Industrial Partners
May an industrial partner engage in business for himself
other than that of the partnership? ANSWER : NO
ART. 1789. An industrial partner cannot engage in
business for himself unless the partnership expressly
permits him to do so; and if he should do so without such
permission, 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
3. with a right to damages in either case
Additional Partnership Capital
Unless there is a stipulation to the contrary, the partners
shall contribute equal shares to the capital of the
partnership (Art 1790, NCC). It is not applicable to an
industrial partner unless, besides his services, he has
contributed capital pursuant to an agreement. :
 A capitalist partner is not bound to contribute to
the partnership more than what he agreed to
contribute, except:
 In case of imminent loss of the business
 There is no agreement to the contrary.
He is under obligation to contribute an
additional share to save the venture. If he
refuses to contribute, he shall be obliged
to sell his interest to the other partners
Illustration: Additional Partnership Capital
A and B entered into a partnership and called Clean Laba,
a laundry business. One day there laundry station was hit
by fire which consumed more than 50% of their available
washing machines. In this scenario, B may ask A for
additional capital contribution since:
1. Losses are imminent, with more than half of
their property essential to their business was
destroyed
There is no Agreement to the contrary
Obligation of the Managing Partner as to the
Partnership Credit
Obligations of managing partners who collect his personal
receivable from a person who also owes the partnership
1. Apply sum collected to two (2) credits in
proportion to their amounts
2. If he received it for the account of partnership,
the whole sum shall be applied to partnership
credit
Requisites:
 At least two (2) debts, one where the collecting
partner is creditor and the other, where the
partnership is the creditor
 Both debts are demandable
 Partner who collects is authorized to manage and
actually manages the partnership
Illustration: Application of Partnership Credit
Ryza and JC are partners in Cruz Company, with Ryza as
the Managing Partner. Cholo is indebted to Ryza in the
sum of P10,000. Cholo is also indebted to Cruz Company
in the amount of P20,000. Both sums are due and
demadable. Ryza then collects the amount of P3,000 from
Cholo.
How shall this be applied? - Proportionately: P1,000 to
Ryza , P2,000 to Cruz Company
What if Ryza issues a receipt for her personal credit
only? - Same rule Applies. Proportionately
*If Ryza however issues a receipt in the name of Cruz
Company, then all P3,000 shall be applied to partnership
credit.
Duty of Confidentiality and Safekeeping
The partnership books shall be kept, subject to any
agreement between partners, at the principal place of
business of the partnership (Art. 1805, NCC).
Duty to keep partnership book belongs to managing or
active partner The duty to keep true and correct books
showing the firm’s accounts, such books being at all times
open to inspection of all members of the firm, primarily
rests on the managing or active partner (De Leon, 2010).
Duty of the partners with respect to information affecting
the partnership Partners shall render on demand true and
full information of all things affecting the partnership to
1. Any partner
2. Legal representative of any deceased or any
partner under legal disability (Art. 1806, NCC).
Duty of Partner who receives Partnership Credit in case
of Insolvency
(Art 1793) A partner who has received, in whole or in
part, his share of a partnership, when the other partners
have not collected theirs, shall be obliged, if the debtor
should thereafter become insolvent, to bring to the
partnership capital what he received even though he may
have given receipt for his share only.
Example: A, B and C are partners to X Company. D is
indebted to the company in the amount of P4,500. A was
able to collect P1,500, gave a receipt and considered it as
his share B and C went to D to collect theirs but the latter
is already insolvent. In this case, even though a receipt
was already.
Rule on Damages caused by a Partner
ART. 1794. Every partner is responsible to
the partnership for damages suffered by it through his
fault, and he cannot compensate them with the profits
and benefits which he may have earned for the
partnership by his industry. However, the courts may
equitably lessen this responsibility if through the partner’
s extraordinary efforts in other activities of the
partnership, unusual profits have been realized.
General Rule: DAMAGES cannot be offset by Profits or
Gains made by the Partner
Exception: Extraordinary Profits
What are the rules as to who shall bear the risk of loss of
the thing contributed?
ART. 1795
1. If the thing contributed is specific, determinate,
not fungible, and that only their use and fruits
may be for the common benefit, the risk is borne
by the partner who owns them.
2. If the thing contributed are fungible, or cannot be
kept without deteriorating, or if they were
contributed to be sold, the risk shall be borne by
the partnership.
Responsibilities of a Partnership to Partners
1. Refund the amount disbursed by partner in
behalf of the partnership plus corresponding
interest from the time the expenses are made,
not from the date of demand. (e.g., loans and
advances made by the partner to the partnership
aside from the capital contribution.)
2. Answer the obligations the partner may have
contracted in good faith in the interest of the
partnership business.
3. Answer for risks in consequence of its
management. (Art. 1796, NCC)
Rights of Partners among Themselves
1. Right to reimbursement for amounts advanced to
the partnership and to indemnification for risks
in consequence of management (Art. 1796)
2. Right on the distribution of profits and losses (Art.
1797, NCC).
3. Right to associate another person with him in his
share without the consent of the other partners
(Art. 1804, NCC).
NOTE: Such partnership formed between a member of a
partnership and a third person for a division of the profits
coming to him from the partnership enterprise is NOTE: Loss is different from liability.
termed subpartnership. (De Leon, 2010)

4. Right to free access and to inspect and copy at

any reasonable hour the partnership books (Art.
1805, NCC).
5. Right to formal account as to partnership affairs:
a. If he is wrongfully excluded from the Illustration of Profit and Losses
partnership business or possession of its X, Y and Z formed a partnership whereby by each of them
property by his co-partners contributed P20,000. They agreed that profits shall be
b. If the right exists under the terms of any distributed in following manner:
agreement
c. As provided by Art. 1807 X -40% as managing partner, Y-30% , Z- 30%.
d. Whenever there are circumstances If the partnership earned net profits of P100,000 for the
render it just and reasonable. year 2020, how shall the same be distributed?
6. Right to have the partnership dissolved.
7. Property rights of a partner (Art. 1810, NCC) X shall receive P40,000, Y with P30,000 and Z also with
P30,000.
Rules in Profit and Losses
What if there was no designation in the Partnership
Rules regarding distribution of profits and losses Agreement on how profits/losses shall be distributed?
1. Distribution of profits Then A, B and C shall each receive 1/3 or approximately
a) The partners share in the profits P33,333.33
according to their agreement
b) In the absence of such: Can the designation of Profits/Losses be delegated to
 Capitalist partner – in proportion the third person?
to his contribution
Answer: Yes, partners can agree to entrust to a third
 Industrial partner – what is just
person the designation of the share of each one in the
and equitable under the
profits and losses. The designation may be impugned only
circumstances
when it is manifestly inequitable.
NOTE: If the industrial partner has contributed capital
Remember:
other than his services, he shall also receive a share in the
profits in proportion to his capital. The designation of losses and profits CANNOT be
entrusted to one of the partners
2. Distribution of losses
a) The partners share in the losses according Power of the Managing Partner
to their agreement.
The partner who has been appointed manager in the
b) In the absence of such, according to their
articles of partnership may execute all acts of
agreement as to profits
administration despite the opposition of his partners,
c) In the absence of profit agreement, in
unless he should act in bad faith; and his power is
proportion to his capital contribution
irrevocable without just or lawful cause. The vote of the
IMPORTANT: partners representing the controlling interest shall be
necessary for such revocation of power. A power granted
Rule regarding a stipulation excluding a partner in the
after the partnership has been constituted may be
sharing of profits and losses
revoked at any time. (Art. 1800 NCC).
General Rule: Stipulation is void.
Remember:
Exception: Industrial partner is not liable for losses.
Managing Partner executes all acts of Administration.
However Industrial Partner is not exempted from liability Rule of Majority only stands when the Managing Partner
insofar as third persons are concerned.
oversteps his/her boundaries and committed prejudicial
acts to the Partnership.
What are the rules to be observed when the manner of
management of the partnership has not been agreed
upon?
1. All the partners shall be considered agents and
whatever any one of them may do alone shall
bind the partnership.
2. None of the partners may, without the consent of
the others, make any important alteration in the
immovable property of the partnership, unless he
should be given court's approval.
Property rights of Partners
1. Right in specific partnership property
2. Interest in the partnership (share in the profits
and surplus)
3. Right to participate in the management
May a capitalist partner engage in the business the same
as that of the partnership?
Generally, the answer is NO. Unless there is a stipulation
to the contrary.
A capitalist partner who engages in the same business as
the partnership shall be:
a) compelled to bring to the common funds any
profits accruing to him from his transactions
b) held personally liable to bear all the losses.
Contract of Sub-Partnership
It is done by the act of any partner in associating another
person in his share, with the consent of all other partners.
Remember: Mere assignment of partner’s share to the
profits does not dissolve or extinguish the partnership.
Assignment of Partner’s Rights
1. Rights withheld from the assignee
Such assignment does not grant the assignee the right to:
a) To interfere in the management
a) To require any information or account
b) To inspect partnership book
2. Rights of assignee on partner’s interest:
a) To receive in accordance with his contract the
profits accruing to the assigning partner
b) To avail himself of the usual remedies
provided by law in the event of fraud in the
management
c) To receive the assignor’s interest in case of
dissolution
d) To require an account of partnership affairs,
but only in case the partnership is dissolved,
and such account shall cover the period from
the date only of the last account agreed to by
all the partners.
Are Profits and Surplus the same? No.
a) Profit means the excess of returns over
expenditure in a transaction or series of
transactions; or the net income of the partnership
for a given period of time.
b) Surplus refers to the assets of the partnership
after partnership debts and liabilities are paid
and settled and the rights of the partners
among themselves are adjusted. (see Art. 1839.)
It is the excess of assets over liabilities. If the
liabilities are more than the assets, the difference
represents the extent of the loss.
Profit presupposes that the Partnership is still in
operation.
When shall a partner be entitled to a formal account of
the Partnership Affairs?
1. If he is wrongfully excluded from the partner-ship
business or possession of its property by his co-
partners
2. If the right exists under the terms of
any agreement
3. As provided by Article 1807
4. Whenever other circumstances render it just and
reasonable.
Obligations of Partnership and Partners to Third Person
1. Every partnership shall operate under a firm
name. Persons who include their names in the
partnership name even if they are not members
shall be liable as a partner (Art. 1815, NCC)
All names appearing in the Partnership shall be made
liable to All partnership liability as protection for Third
persons dealing with the Company.
Remember: All partners including industrial one shall be
liable pro rata with all their property and after all the
partnership assets have been exhausted, for the contracts
which may be entered into in the name and for the
account of the partnership.
and 1823). While the liability of the partners is
merely joint in transactions entered into by the
partnership, a third person who transacted with said
partnership may hold the partners solidarity liable for the
whole obligation if the case of the third person falls under
Articles 1822 and 1823.

2. All partners shall be liable for contractual

obligations of the partnership with their property,
after all partnership assets have been exhausted:
a. Pro rata
b. Subsidiary (Art. 1816, NCC)

NOTE: Any stipulation against the liability laid down in

Art. 1816 shall be void except as among the partners.
(Art. 1817, NCC)

3. Partner as an agent of the partnership (Art. 1818,

NCC)
4. Conveyance of real property belonging to the
partnership (Art. 1819, NCC)
5. Admission or representation made by any partner
concerning partnership affairs within the scope of
his authority is evidence against the partnership
(Art. 1820, NCC) – Partnership by estoppel.
6. Notice to partner of any matter relating to
partnership affairs operates as notice to
partnership except in case of fraud:
a. Knowledge of partner acting in the
particular matter acquired while a
partner.
b. Knowledge of the partner acting in the
particular matter then present to
his mind .
c. Knowledge of any other partner who
reasonably could and should
have communicated it to the acting
partner (Art. 1821, NCC)
7. Partners and the partnership are solidarily liable
to 3rd persons for the partner's tort or breach of
trust (Art. 1822-24, NCC)
8. Liability of incoming partner is limited to:
a. His share in the partnership property for
existing obligations
b. His separate property for subsequent
obligations (Art. 1826, NCC)
9. Creditors of partnership are preferred in
partnership property and may attach partner's
share in partnership assets (Art. 1827, NCC)

NOTE: On solidary liability, Art. 1816 should be construed

together with Art. 1824 (in connection with Arts. 1822

PART 3: Dissolution and Winding
up of Partnership
Dissolution - A change in the relation of the
partners caused by any partner ceasing to be associated
in carrying on the business.
It is that point in time when the partners cease to carry
on the business together. It represents the demise of a
partnership. Thus, any time a partner leaves the business,
the partnership is dissolved.
Rationale
There is a change in Partnership Relations
One partner leaving means the original parties to the
Partnership Agreement are no longer complete
Essentially, the terms and their relationship with one
another are no longer the same.
Three Separate stages in Ending the Partnership
1. Dissolution
2. Winding up of Affairs
3. Termination
Dissolution -------- Winding Up ----------- Termination
Causes of Dissolution
1. Without violating the agreement:
a. Termination of the definite term or
specific undertaking
b. Express will of any partner in good faith,
when there is no definite term and no
specified undertaking
c. Express will of all partners (except those
who have assigned their interests or
suffered them to be charged for
their separate debts) either before or
after the termination of any specified
term or particular undertaking.
d. Expulsion of any partner in good faith as a
member.
2. Violating the agreement
3. Unlawfulness of the business
4. Loss
a) Specific thing promised as contribution is lost
or perished before delivery
b) Loss of a specific thing contributed before or
after delivery, if only the use of such
is contributed
NOTE: The partnership shall not be dissolved by the loss
of the thing when it occurs after the partnership has
acquired the ownership thereof.
5. Death of any of the partners
6. Insolvency of any partner or of the partnership
7. Civil interdiction of any partner
8. By decree of court under Art. 1831
a. A partner has been declared insane or of
unsound mind
b. A partner becomes in any other way
incapable of performing his part of the
partnership contract
c. A partner has been guilty of such conduct
as tends to affect prejudicially the
carrying on of the business
d. A partner willfully or persistently commits
a breach of the partnership agreement
e. The business of the partnership can only
be carried on at a loss
f. Other circumstances render a dissolution
equitable
Effects of Dissolution
1. Partnership is not terminated
2. Partnership continues for a limited purpose
3. Transaction of new business is prohibited
NOTE: The dissolution of a partnership must not be
understood in the absolute and strict sense so that at the
termination of the object for which it was created the
partnership is extinguished, pending the winding up of
some incidents and obligations of the partnership, but
in such case, the partnership will be reputed as existing
until the juridical relations arising out of the contract are
dissolved.
Effect of Dissolution on Partner’s Equity
General Rule: The partnership ceases to be a going
concern
Exception: The partner’s power of representation is
confined only to acts incident to winding up or
completing transactions begun but not then finished (Art.
1832, NCC).
Subject to the qualifications set forth in Articles 1833 and
1834 in relation to Article 1832:
1. In so far as the partners themselves are
concerned– The authority of any partner to bind
the partnership by a new contract is immediately
terminated when the dissolution is not by the
act, insolvency, or death of a partner.
2. When the dissolution is by the act, insolvency, or
death, the termination of authority depends
upon whether or not the partner had knowledge
or notice of dissolution (Art. 1833, NCC).
Question: After the dissolution of partnership, can a
partner still bind the partnership?
Answer: A partner continues to bind partnership even
after dissolution in the following cases:
1. Transactions to wind up partnership affairs or to
complete transactions unfinished at dissolution.
2. Transactions which would bind partnership if
dissolution had not taken place, provided the
other party/oblige:
a. Had extended credit to partnership prior
to dissolution; and had no
knowledge/notice of dissolution
b. Did not extend credit to partnership
AND had no knowledge/notice of dissolution/fact of
dissolution not advertised in a newspaper of general
circulation in the place where partnership is regularly
carried on.
Exception:
Partner cannot bind the partnership anymore
after dissolution where dissolution is due to
unlawfulness to carry on business.
Question: Does the dissolution of a partnership
discharge existing liability of a partner?
A. General Rule: Dissolution does not discharge the
existing liability of a partner.
Exception: Said liability is discharged when there is
an agreement between:
1. Partner himself
2. Person/s continuing the business; and
3. Partnership creditors
Winding up Partnership Affairs
Winding Up Process
It is during this time after dissolution that
partnership business or affairs are being settled (De
Leon, 2005).
Ways of winding up - The winding up of the dissolved
partnership may be done either:
1. Judicially, under the control and direction of
the proper court upon cause shown by any
partner, his legal representative, or his assignee;
or
2. Extrajudicially, by the partners
themselves without intervention of the court (De
Leon, 2010).
Persons Authorized to Wind Up
1. Partners designated by the agreement
2. In the absence of such, all partners who have not
wrongfully dissolved the partnership
3. Legal representative of last surviving partner who
is not insolvent.
Settlement of Account Between Partners
1. Assets of the partnership include:
a. Partnership property (including goodwill)
b. Contributions of the partners
2. Order of application of the assets:
a. First, those owing to partnership
creditors
b. Second, those owing to partners other
than for capital and profits such as loans
given by the partners or advances
for business expenses
c. Third, those owing for the return of the
capital contributed by the partners
d. Fourth, the share of the profits, if any,
due to each partner
Doctrine of Marshalling of Assets
1. The doctrine of marshalling of assets provides
that: Partnership creditors have preference in
partnership assets
2. Separate or individual creditors have preference
in separate or individual properties
3. Anything left from either goes to the other.
NOTE: The doctrine of marshalling of assets involves the 4. The remaining P30,000 shall be treated as profit
ranking of assets in a certain order toward the payment and shall be distributed on the ratio of
of outstanding debts. (De Leon, 2010) Unless otherwise contribution 3:2:1, P15,000 to A, P10,000 to B
agreed, the rights of each partner are as follows: and P5,000 to C.

1. To have the partnership property applied to Some Illustration with a Limited Partners
discharge the liabilities of partnership; and
A, B and C are partners in ABC Bakery. A contributed
2. To have the surplus, if any, applied, to pay in cash
P15,000, B gave P 10,000 and C gave P5,000 to the
the net amount owing to the respective partners.
common fund. They were able to entice investor X to
As to Limited Partners contribute P30,000 as a Limited Partner Upon dissolution,
the assets amounted to P300,000. Partnership owes D the
Subject to any statement in the certificate or to
amount of P70,000, E –P50,0000 and A who supplied
subsequent agreement, limited partners share in the
flour for P20,000.
partnership assets in respect to their claims for capital,
and in respect to their claims for profits or for How shall now the accounts be settled?
compensation by way of income on their contribution
1. Pay first the Partnership Creditors D and E, who
respectively, in proportion to the respective amounts of
has a total credit of P120,000.
such claims.
2. Pay A as a Individual Creditor for the amount
How Partnership Credits Paid? of P20,000
3. Afterwards, return the capital invested by the
1. Those to creditors, in the order of priority as
Limited Partner X in the amount of P30,000.
provided by law, except those to limited partners
4. The remaining P30,000 shall be treated as return
on account of their contributions, and to general
to the capital contribution made by all general
partners
partners, P15,000 to A, P10,000 to B and P5,000
2. Those to limited partners in respect to their share
to C.
of the profits and other compensation by way of
income on their contributions Rights of Liquidating Partner
3. Those to limited partners in respect to the capital
1. Make new contracts
of their contributions
2. Raise money to pay partnership debts
4. Those to general partners other than for capital
3. Incur obligations to complete existing contracts or
and profits
preserve partnership assets
5. Those to general partners in respect to profits
4. Incur expenses necessary in the conduct of
6. Those to general partners in respect to capital
litigation (De Leon, 2010).
Illustration:
Order of payment in winding up
A, B and C are partners in ABC Bakery. A contributed
1. Those owing to creditors other than partners
P15,000, B gave P 10,000 and C gave P5,000 to the
2. Those owing to partners other than for capital or
common fund. Upon dissolution, the assets amounted to
profits
P200,000. Partnership owes D the amount of P70,000, E –
3. Those owing to partners in respect of capital
P50,0000 and A who supplied flour for P20,000.
4. Those owing to partners in respect to profits (Art.
How shall the accounts be settled? 1839 (2), NCC)

1. Pay first the Partnership Creditors D and E, who Rights of Partners in Dissolution
has a total credit of P120,000.
The rights of a partner vary depending upon whether he
2. Pay A as an Individual Creditor for the amount
is the innocent or guilty partner.
of P20,000
3. Afterwards, return the capital invested by the 1. Rights of partner who has not caused the
Partners, P15,000 to A, P10,000 to B and P5,000 dissolution wrongfully (innocent partner):
to C.
 a. To have partnership property applied for
the payment of its liabilities and to
receive in cash his share of the surplus
b. To be indemnified for the damages
caused by the partner guilty of wrongful
dissolution
c. To continue the business in the same
name during the agreed term of the
partnership, by themselves or jointly with
others
d. To possess partnership property should
they decide to continue the business
As to Guilty Partners
2. Rights of partner who has wrongfully caused
the dissolution:
a. If the business is not continued by the
other partners, to have the partnership
property applied to discharge its liabilities
and to receive in cash his share of the
surplus less damages caused by his
wrongful dissolution
b. If the business is continued:
i. To have the value of his interest
in the partnership at the time of
the dissolution, less any damage
caused by the dissolution to his
co-partners, ascertained and paid
in cash, or secured by bond
approved by the court; and
ii. To be released from all existing
and future liabilities of the
partnership
Partner Lien
 It is the right of every partner to have the
partnership property applied, to discharge
partnership liabilities and surplus assets, if any,
distributed in cash to the respective partners,
after deducting what may be due to the
partnership from them as partners
Effects when the Business of a Dissolved Partnership is
continued
1. Creditors of old partnership are also creditors of
the new partnership who continues the business
of the old one without liquidation of the
partnership affairs.
Example:
A, B, C are partners to ABC Laundry. The partners then
decided to directly sell the Laundry Shop to D with the
latter promising to pay all debts and liabilities of ABC
Laundry.
2. Creditors have an equitable lien on the
consideration paid to the retiring/deceased
partner on the purchaser when
retiring/deceased partner sold his interest
without final settlement with creditors.
Example:
A, B and C are partners in ABC Bakery. C then decided to
sell his share before all partners decided to dissolve the
Company.
Here, the share sold by C shall constitute a lien to the
Partnership Creditors should they not be fully paid of
their debts.
3. Rights of retiring/estate of deceased partner:
a. To have the value of his interest
ascertained as of the date of dissolution;
and
b. To receive as ordinary creditor the value
of his share in the dissolved partnership
with interest or profits attributable to use
of his right, at his option.
Note: Material to this is the valuation of his share at the
date of death/retirement by the deceased partner.
Right to Demand Accounting
Persons that are required to render an account
1. Winding up partner
2. Surviving partner; and
3. Person or partnership continuing the business
The right to demand on accounting of the value of
his interest accrues to any partner or his
legal representative after dissolution in the absence of
an agreement to the contrary.
Prescription begins to run only upon the dissolution of
the partnership, when the final accounting is done.