PARTNERSHIP

- two or more persons bind themselves to contribute money, property, or industry to a common
fund, with the intention of dividing the profit amongst the partners.
- may also form a partnership for the exercise of a profession. (civ. Code of the phil., art. 1767)
- no contribution, no partner wawa man
Characteristics of a partnership:
Mutual contribution
- Cannot be a partnership without contribution of assets/industry to a common fund
Division of profit/ losses
- Partners must share the profits/losses of the partnership
Co-ownership of contributed assets
- All assets contributed to the partnership are owned by all the partners [has a separate
and distinct juridical personality]
Mutual agency
- If agreed upon by all the partners, any partner can enter a contract in the name of the
partnership [esp. If walang managing partner]
Limited life
- Partnership can be dissolved by the admission of a new partner, death, insolvency,
withdrawal of a partner, or the expiration of their contract terms
Unlimited liability
- All partners (except limited), including the industrial partner are personally liable for the
partnership’s liabilities. Creditors may go after each partner's personal assets. [in short,
simot sarap]

CLASSIFICATION OF A PARTNERSHIP
According to:
Object
- all present property/ contributions become part of the partnership fund
Profit
- all the partners profits during the regular course of business of the partnership belongs to the
partnership
Liability
- general partners are liable to the extent of their own properties while limited partners are liable
only to the extent of their personal contribution. [required: at least one general partner in a
partnership]
Duration
- fixed term or a particular purpose, partnership at will or no term is specified and no particular
purpose
Purpose
- commercial or trading- for the transaction of business
- professional- formed for the practice of a profession

Legality of existence
- de jure- complied will all the legal requirements
- de facto- failed to comply with all the legal requirements

KINDS OF PARTNERS:
General
- liable to the extent of his separate property once the partnership cannot pay for their debts.
Limited
- only to the extent of their contribution
Capitalist
- contributes money or property
Industrial
- contributes skill/knowledge
Managing
- manager of the partnership
Liquidating
- assigned to settle the affairs of the partnership upon dissolution
Dormant (yung nilalagay sa entrance ng pinto)
- no active part, not known
Silent
- no active part, may be known as partner
Secret
-baka may asset
- takes active part, not known
Estoppel
- nakikipapel, epal, di kasali sa partnership

Articles of partnership
- may be orally or in writing:
name, nature, and purpose of partnership,
info abt the partners,
date and duration of partnership,
capital contribution of all partners,
profit loss agreement,
salaries allowed to partners
The note payable is included since it was assumed by the partnership

Labusa balhag

land 1,350,000 cash 1,790,000

inventory 510,000 capital 1,790,000

cash 280,000

n/p (350,000)

capital 1,790,000

foja lupian

cash 50,000 property 80,000

capital 50,000 mortgage -35,000

capital 45,000

retada

equipment 55,000

capital 55,000
 padernal pating

cash 100,000 cash 160,000

equipment 50,000 capital 160,000

capital 150,000

liggayu

cash 50,000

equipment 120,000

capital 170,000

gogola supposed shares

cash 1,260,000 paglinawan 900,000 (900k/40%)

computer 360,000 gogola 1,350,000 (2.250m*60%)

n/p -120,000 captial 2,250,000

capital 1,500,000

gogola,capital 1,500,000

supposed capital 1,350,000

withdrawal 150,000
DISTRIBUTION OF PROFIT OR LOSSES:
Profit:
1. Partners’ agreement
2. If no agreement, it is as follows:
a. Original capital investment
Profit x capital investment/total capital [p(ci/tc]
b. Beginning of the year capital
Profit x capital investment at beg. of the year/total capital
c. End of the year capital
Profit x capital at end of the year/total capital
d. Average Capital
Like dis:

*industrial partners shall receive their share before the capitalist partners
Loss:
1. Partners’ agreement
2. Profit sharing ratio
3. Capital contribution
*purely industrial partner shall not be liable for any losses.
Other considerations(allowances):
1. Interest on capital(must be given regardless of profit/loss)
2. Salaries(in absence of agreement, salaries must be distributed regardless of p/l)
3. Bonus(not considered in the computation of profit; not always given)
a. Divided in the ratio of original capital investment

Diaz 330,000 shares:

Manalo 110,000 diaz 315,000 (420k*330k/440k)

total 440,000 manalo 105,500 (420k*110k/440k)

total 420,500

b. Interest of 8% on original investments, p/l: 2:3

diaz manalo total

interest 26,400 8,800 35,200

(330k*8%) (110k*8%)

balance 420k-35,200 384,800

share 153,920 230,880

(384,800*2/5) (384,800*3/5)

total 180,320 239,680 420,000

c. salary of 50k and 70k respectively, p/l: equal

diaz manalo total

salary 50,000 70,000 120,000

balance 300,000

share 150,000 150,000

total 200,000 220,000 420,000

DISSOLUTION OF PARTNERSHIP
- change in the relation of the partners
- partnership is not terminated, continues until the affairs of the partnership is completed
Winding up- settling the affairs after dissolution | Termination- end of the partnership
- any change in the membership will result to the dissolution

Causes of Dissolution:
1. Admission of a new partner
2. Withdrawal or retirement
3. Death of a partner
4. Incorporation of partnership

ADMISSION OF A NEW PARTNER:

- a new partner can only be admitted with the consent of all the partners.(delectus personae)
- a person admitted to an existing partnership is liable for all past and future liabilities incurred.
(liability may be limited to his contribution unless agreed upon)
A person may become a partner in an existing partnership by either:
- Purchase of interest from the partners
- Investment of assets to the partnership

Purchase of interest from the partners

- purchasing an interest directly from the partners
- a debit to the capital account of the selling partner and a credit to the buyer
Case 1: payment to partners is equal to interest bought
A and B have 400k and 200k capital respectively, C paid 150k for 1/4 of each of the partners
capital.
400,000(¼)= 100k
200,000(¼)= 50k

Case 2: payment is less than interest purchased

Same capital, C paid 160k for 1/3 of each of the partners capital
400k(⅓)= 133,333
200k(⅓)= 66,667

Case 3: payment is more than purchased

C paid 200k for 30% of A and B’s capital
400k(30%)= 120k
200k(30%)= 60k
Investment of assets to the partnership
- investing cash or other assets to the partnership, not given to the individual partners
- will increase total assets and equity
Total contributed capital
- sum of the capital balances of all partners, along with the recent partner
Total agreed capital
- total capital of the partnership after capital credits are given to each partner.
Capital credit- equity of a partner in the new partnership. [Total agreed capital x interest]
Bonus method- total agreed capital=total contributed capital
- capital credits may be =,>, < than a partners contribution
Case 1: Total agreed capital is stated
A and B have capital of 400k and 200k respectively, p/l: 3:1, C invested 250k for 1/4 interest,
total agreed capital: 850k
contributed bonus agreed
A 400,000 28,125 428,125
B 200,000 9,375 209,375
total 600,000 37,500 637,500

C(new partner) 250,000 -37,500 212,500

total 850,000 0 850,000
computation: distribution of bonus:
C, agreed capital= Bonus:
850k(1/4)= 212,500 250k-212,500= 37,500 A: 37,500(3/4)= 28,125 B: 37,500(1/4)= 9,375

Case 2: total agreed capital is not stated

A&B have the same capital, C invested 400k, with a bonus of 100k, no stated agreed capital
contributed bonus agreed
A 400,000 75,000 475,000
B 200,000 25,000 225,000
total 600,000 100,000 700,000

C(new partner) 400,000 -100,000 300,000

total 1,000,000* 1,000,000
distribution of bonus:

A: 100k(3/4)= 75k B: 100k(1/4)= 25k

*under bonus method, total agreed capital is equal to total contributed capital of all partners
Case 2.1: Total agreed capital not stated, bonus to new partner
A&B have capital of 140k and 56k respectively, C invested 100k for 35% of capital
contributed bonus agreed
A 140,000 (2,700) 142,700
B 56,000 (900) 56,900
total 196,000 (3,600) 192,400
C(new partner) 100,000 3,600 103,600
total 296,000 296,000
Computation:
bonus: distribution of bonus
296k(35%)=103,600 A:3,600(75%)=2,700
103,600-100k=3,600 B:3,600(25%)=900

Summary:
Bonus
capital of new partner - payment for interest in Agreed
contributed partnership contributed capital + bonus
Deduction to old partners if bonus is given
A to new partner
B
total
C(new partner) Deduct if bonus to old, add if to new total agreed capital x interest
total (agreed capital)

WITHDRAWAL OR RETIREMENT OF A PARTNER:

-withdrawal of a partner dissolves the partnership, the retiring/ withdrawing partner may sell
their equity to:
1. One or more of the remaining partners
2. To an outsider
3. To the partnership
Illustration:
A is retiring in midyear from the partnership of ABC. They have capital balances of 540k, 430k,
210k respectively before revaluation. Their inventory was revalued at 380k(loss of 60k) and
land, 1,(increase of 460k). p/l is 1:2:1
distribution of loss of 60k:
A: 60k(¼)=15k B:60k(2/4)=30k C:60k(¼)=15k
distribution of gain of 460k:
A: 460k(¼)=115k B: 460k(2/4)=230k C: 460k(¼)=115k
Land 460,000
A, capital 115,000
B, capital 230,000
C, capital 115,000

Capital after revaluation:

A, capital 640,000
B, capital 630,000
C, capital 310,000

Case 1: withdrawal at more than book value

Partner C demanded a 400k settlement, A and B agreed.
400,000 - 310,000= 90k
Computation:
A: 90,000(⅓)= 30k
B: 90,000(⅔)= 60k

Case 2: withdrawal at less than book value

Partner C is willing to accept a 280k settlement
310,000 - 280,000= 30k
Computation:
A: 30,000(⅓)= 10k
B: 30,000(⅔)= 20k

LIQUIDATION OF PARTNERSHIP:
- the partnership winds up their affairs and sells all their non-cash assets(realization), settles all
their liability, and distributes the remaining cash to the partners.

RULES IN SETTLING ACCOUNTS:

- The rules are subject to revision of the partners either by their original partnership agreement
or dissolution agreement.
Assets of the partnership
1. Partnership property
2. Additional contributions if the partnership fund isn't sufficient to settle liabilities
Order of preference:
1. Outside creditors
2. Inside creditors
Right to offset
- legal right of a partner to use his loan balance in the partnership to reduce or payoff his capital
deficiency resulting from losses in the partnership.
Insufficient Partnership Assets
- when capital is insufficient to pay off debts, they should make additional contributions to the
partnership. Any partner who has contributed in excess has the right to collect from the other
partners.
Distribution of a partners personal asset:
1. Separate creditor
2. Partnership creditor
3. Debts to partners

METHOD OF LIQUIDATION:
LUMP-SUM
- All non-cash assets are realized and all liabilities are paid before cash is distributed to the
partners
Procedures may be as followed:
1. Realization
2. Payment of liabilities
3. Elimination of capital deficiencies
a. Right to offset
b. Solvent partner, make additional investment
c. Insolvent partner, other partners should absorb the deficiency
4. Payment to Partner
a. Loan account
b. Capital account

Statement of Liquidation

cash non-cash liabilities B, loan C, loan A, capital B, Capital C, capital

p/l

balances before liquidation

sale of non-cash

distribution of gain/loss

balances
payment of liabilities(according to
importance

right to offset(if applicable)

additional investments(if applicable

balances

payment to partners
INSTALLMENT METHOD
- When cash is available, paid immediately to the creditors, excess of the cash may be distributed
to the partners using either cash priority program or safe payments method. This will continue
until all non-cash assets have been realized and all excess has be distributed to all partners and
creditors. (still requires statement of liquidation)
Procedures are as follows:
1. Realization and distribution of gain/loss based on p/l ratio
2. Payment of liquidation expenses and adjustments of liabilities based on p/l ratio
3. Payment to creditors
4. Distribution of available cash to partners
Schedule of Safe Payments
- assumes possible losses due to inability to dispose of all non-cash assets(nca)
Schedule of Safe payments
cash bal. before distribution A B C
loan balance
total
*restricted interest[p/l ratio]
total
restricted interest[p/l ratio]
*Free interest
distribution to partners

Cash Priority Program

-prepared at the start of the liquidation process.
Cash Priority Program Priority payments
A B C payment, A payment, B payment, C
capital balances
add: loan balances
total
divide by p/l
loss absorption balances
priority 1
priority 2
priority 3 [and so on until
no more cash is available]
*loss absorption balances- maximum loss that partners can absorb w/out deduction to their
capital
*biggest capital or loss absorption should be prioritized
Example problems:
Case 1: Lump-sum with gain on realization
p/l: equally; non-cash sold for 2.650m
arenas
cash non-cash liabilities capital dulay capital laurente capital
balances before
liquidation 50,000 2,350,000 400,000 900,000 500,000 600,000
sale of non-cash 2,650,000 -2,350,000
distribution of gain/loss 300,000 100,000 100,000 100,000
balances 2,700,000 400,000 1,000,000 600,000 700,000
payment of
liabilities(according to
importance -400,000 -400,000
balances 2,300,000 1,000,000 600,000 700,000
payment to partners -2,300,000 -1,000,000 -600,000 -700,000

Case 2: Lump-sum with right to offset and add. investments and absorption
Partners have personal assets of 20k, 60k, 25k respectively
lump-sum Statement of Liquidation
Bantilles,
cash non-cash a/p loan Aparece Bantilles Lerin
p/l 20% 40% 40%
balances before liquidation 25,000 475,000 240,000 30,000 120,000 50,000 60,000
sale of non-cash 260,000 -475,000
distribution of gain/loss -215,000 -43,000 -86,000 -86,000
balances 285,000 77,000 -36,000 -26,000
payment of liabilities(according
to importance -240,000
balances 45,000 0 0 0 77,000 -36,000 -26,000
right to offset -30,000 30,000
balances 45,000 0 0 -30,000 77,000 -6,000 -26,000
additional investment: bantilles
and lerin 31,000 6,000 25,000
balances 76,000 0 0 -30,000 77,000 0 -1,000
loss absorption by aparece -1,000 -1,000 1,000
balance 0 0 -30,000 76,000 0 0
payments to partners -76,000 -76,000
Case 3: Installment using schedule of safe payment

Statement of Liquidation
Limin Parducho Calingasan
cash non-cash liabilities limin, loan (5/10) (3/10) (2/10)
balances before liquidation 400,000 2,100,000 600,000 80,000 400,000 720,000 700,000
sale of non-cash and
distribution of gain/loss 900,000 -1,200,000 -150,000 -90,000 -60,000
balances 1,300,000 900,000 600,000 80,000 250,000 630,000 640,000
payment of
liabilities(according to
importance -600,000
balance 700,000 900,000 600,000 80,000 250,000 630,000 640,000
payment of liquidation
expense -20,000 -10,000 -6,000 -4,000
balances 680,000 900,000 600,000 80,000 240,000 624,000 636,000
payment to partners -680,000 - - 276,000 404,000

schedule of safe payments

limin(5/10) parducho(3/10) calingasan(2/10)
balance before distribution 240,000 624,000 636,000
add: loan balances 80,000
total 320,000 624,000 636,000
restricted interest: 900k -450,000 -270,000 -180,000
balances -130,000 354,000 456,000
restricted interest-possible loss of partner
deficiency 130,000 -78,000 -52,000
free interest 0 276,000 404,000
Case 4: Installment using cash priority program

Cash Priority Program Priority payments

Bernardino Lee Ong payment, payment payment,
(40%) (40%) (20%) bernardino , lee ong total
capital balances 150,000 350,000 200,000
add: loan balances 100,000 100,000 150,000
total 250,000 450,000 350,000
divide by p/l 40% 40% 20%
loss absorption balances 625,000 1,125,000 1,750,000
priority 1 -625,000 125,000 125,000
total 625,000 1,125,000 1,125,000
priority 2 -500,000 -500,000 200,000 100,000 300,000
total 625,000 625,000 625,000 200,000 225,000 425,000

PROS AND CONS OF PARTNERSHIP:

Vs. proprietorship
- greater financial capability
- combines special skills and experience
- more freedom and flexibility in decision making
Vs. Corporation
- easier and less expensive to form
- personal and informal
Disadvantages
- easily dissolved, unstable
- mutual agency and unlimited liability
- less effective in raising a large amount of capital compared to corporation