BUSINESS LAWS AND

REGULATIONS – PARTNERSHIPS
Third Trimester, Schoolyear 2021 - 2022

Atty. Manuel R. del Rosario

LIMITED PARTNERSHIPS

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 PRINCIPLES OF LIMITED PARTNERSHIPS

A limited partnership is one formed where there are one or more general
partners and one or more limited partners. It has two classes of partners
– general partners and limited partners. The limited partners are not
bound by the obligations of the partnership. (1843)

The general partners manage the business and are personally liable to
creditors.

The limited partners contribute to the partnership capital and share in

the profits BUT are not personally liable for partnership obligations
beyond their capital contributions. Limited partners have limited liability.
A limited partner is more like an investor or a stockholder who gives
cash or property but not services. (1845)

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 PRINCIPLES OF LIMITED PARTNERSHIPS

A limited partner cannot be impleaded in any action against the

partnership.

The name of the limited partner cannot appear in the Firm Name. (1846)

A limited partner may engage in a business which is the same kind of

business in which the partnership is engaged.

EXAMPLE: Atty. Reyes invested P2M in the partnership of Atty. Beltran

and Atty. Jandoc and became a limited partner. Atty. Reyes can continue
to practice law on his own. There is no conflict of interest since he is only
a limited partner to Atty. Beltran and Atty. Jandoc.

The withdrawal, death, insanity, insolvency of a limited partner

DOES NOT dissolve the partnership.

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 PRINCIPLES OF LIMITED PARTNERSHIPS

A limited partnership must follow the rules in Article 1844 in order to be

legally constituted:

1. Articles of Limited Partnership must be signed and notarized (public

document) and
2. Such document must be registered with the Securities and Exchange
Commission.

WHY? Give notice to the public dealing with the partnership that some
partners are not liable for partnership obligations.

EXAMPLE: Atty. Beltran and Atty. Jandoc have been bragging that
Atty. Reyes has joined their law office as a partner. They failed to
mention that Atty. Reyes is only a limited partner. Those who wish
to transact business with the law office can check with the SEC to
find out the exact nature of the participation of Atty. Reyes in the
law office.
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 PRINCIPLES OF LIMITED PARTNERSHIPS

If a limited partner takes part or becomes involved in the general

affairs of the partnership, he becomes liable as a general partner.
(1848)

EXAMPLE: Atty. Reyes invested P2M in the partnership of Atty.

Beltran and Atty. Jandoc and became a limited partner. One day the
law office handled a big case involving P3B. Because it was an
important case that was very complicated, Atty. Reyes participated
in the deliberations and in fact even appeared in court as counsel
for the law office. The law office was subsequently sued in court by
a private detective agency for P50M for work they did on the
case. Atty. Reyes will be liable for this P50M obligation with his
personal property even if he invested only P2M because he
acted like a general partner.
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 RIGHTS OF A GENERAL PARTNER
IN A LIMITED PARTNERSHIPS
A general partner in a limited partnership has the same rights of a general
partner in an ordinary partnership. (1850)

However, a general partner needs to get the written consent of ALL the
limited partners in the following instances:
- Any act in contravention (in violation) of their agreement;
- Any act which will make it impossible to carry on the partnership business
- Confess judgment (admit liability) in a court case;
- Possess SPP or assign their rights;
- Admit a new general partner;
- Admit a new limited partner;
- Continue the partnership business after the death, retirement,
insanity, insolvency or civil interdiction of a general partner.

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 RIGHTS OF A LIMITED PARTNER

A limited partner has the same rights as a general partner to:

- Have the partnership books kept at the principal place of business;
- Have true and full information on all things affecting the partnership;
- Have a formal account of partnership affairs;
- Have a court order the partnership’s dissolution and winding up;
- Have the right to receive a share in the profits also losses;
- Have the right to return of the money he contributed.

- A limited partner cannot exercise even acts of administration. Limited

partners cannot bind the partnership. They are like silent partners

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 STATUS OF A LIMITED PARTNER WHEN THERE IS
FAILURE TO CREATE A LIMITED PARTNERSHIP
If a person contributes money or property to a partnership with the
intention of becoming a limited partner but there is error in the way the
partnership was setup, for example he is named a general partner or he is
not designated as a limited partner, he is NOT LIABLE as a general partner
provided:
- he promptly renounces his interest in the profits of the business or
other compensation (1852) and
- he did not participate in the management of the business.
(1848)

EXAMPLE: Atty. Reyes invested P2M in the partnership of Atty. Beltran

and Atty. Jandoc with the intention of becoming a limited partner.
However, there was a mistake in the paper submitted to the SEC.
If Atty. Reyes does not promptly renounce his interest in any
profit or income from the business, he may be held liable.
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 A PERSON CAN BE A GENERAL PARTNER AND A
LIMITED PARTNER AT THE SAME TIME

A person can be a general partner and a limited partner at the

same time in the same partnership provided this is clearly stated in
the partnership certificate. (1853)

DUH? This rarely happens.

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 LOANS GRANTED BY A LIMITED PARTNER

A limited partner can loan money or transact business with the

partnership. He can also share pro-rata in SPP together with other
creditors. However, a limited partner cannot:

- receive any SPP as collateral or security for the loan;

- receive any payment, conveyance or release from liability
if this will be a fraud on other creditors. (1854)

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 PREFERRED LIMITED PARTNERS

When there are several limited partners, it may be agreed that one or
more of them shall have a priority over other limited partners as to the
return of their contributions, as to compensation or as to any other matter.
(1856)

EXAMPLE. Dr. Jose and Dr. Carlos invested P1M each to become limited
partners in the Flawless Beauty Parlor, a partnership owned by spouses
Oliver and Jenny. In the certificate of partnership, it was expressly stated
that any profits or income to be given to the limited partners will be
shared 2:1. This means that if there is a profit of P300,000 to be divided,
Dr. Jose will get P200,000 while Dr. Carlos will get P100,000 despite
their equal contributions.

The provisions in the Articles of Limited Partnership will prevail.

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 INCOME PAID TO A LIMITED PARTNER

A limited partner can be paid a share of the profits or any

compensation income provided that the partnership assets are
greater than the partnership liabilities. (1856).

This is because third party creditors are preferred over the limited
partners.

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 RETURN OF CONTRIBUTION TO
A LIMITED PARTNER

A limited partner shall not receive any part of his contribution until:

- all liabilities of the partnership, excluding liabilities to general

partners, have been paid or there remains sufficient property to
pay them;
- the consent of all members of the partnership is obtained and
- the certificate of limited partnership is cancelled or amended by
SEC. (1857)

All three conditions must concur before a limited partner gets back his
contribution.

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 WHEN CAN A LIMITED PARTNER DEMAND THE
RETURN OF HIS CONTRIBUTIONS?

A limited partner can demand the return of his contribution:

1. Upon the dissolution of the partnership;

2. When the date specified in the SEC certificate has arrived;
3. After he has given six months notice in writing to all other
partners, if no time is stated in the SEC certificate. (1857)

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 WHEN CAN A LIMITED PARTNER DEMAND THE
DISSOLUTION OF THE PARTNERSHIP?

A limited partner can petition the court to demand the dissolution of

the partnership when:

1. His demand for the return of his contribution is denied;

2. The other liabilities of the partnership have not been paid;
3. The partnership property is insufficient to pay the liabilities of
the partnership

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 LIABILITIES OF A LIMITED PARTNER

A limited partner is liable to the partnership:

1. For the difference in his actual contribution from the

contribution stated in the SEC certificate;
2. For any unpaid contribution which he agreed to make in the
future.

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 LIABILITY OF A LIMITED PARTNER
AS A TRUSTEE OF THE PARTNERSHIP

A limited partner is considered a trustee of the partnership:

1. Specific property he promised to contribute but which was not actually

contributed or delivered;
2. Money or property wrongfully paid to him on account of his contribution.

EXAMPLE: Architect Joel is a limited partner and he promised to contribute 10

desktop computers to the partnership. He purchased the 10 computers but failed
to deliver them to the partnership. He is considered a trustee of the partnership
and he should take care of the computers since they are already owned by the
partnership.

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 LIABILITY OF A LIMITED PARTNER
CAN BE WAIVED OR COMPROMISED

The liability of a limited partner may be waived or compromised provided:

1. The waiver or compromise is consented to by all the partners; and

2. The waiver or compromise does not prejudice third party creditors
who extended credit or whose claims arose before the waiver or
compromise. (1858)

EXAMPLE: Architect Joel promised to contribute P1M as his share in the

partnership capital by August 1, 2021. He was able to give only P200k but
the other general partners waived the balance in a meeting held on
September 15, 2021. However, BDO extended a loan of P1M to the
partnership on August 15, 2021 or before the waiver. Architect Joel
is still liable to BDO AS IF his contribution was P1M. Why? The
waiver or compromise should not prejudice creditors.
.
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 A LIMITED PARTNER’S INTEREST
IS ASSIGNABLE (1859)

A limited partner may assign his interest in the partnership.

The person to whom the interest was assigned can be accepted as

a substituted limited partner, if all the other partners consent
thereto and the SEC partnership certificate is amended.

The substituted limited partner has the right to receive a share in

the profits or ask for a return of contribution, but he DOES NOT
have the right to ask for any information or to inspect the books.
WHY? Delectus personae.

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 WHEN A LIMITED PARTNER DIES

When a limited partner dies the executor or administrator of his

estate shall have the rights of a limited partner for the purpose of
settling the estate. The estate of the deceased limited partner shall
be liable for all the liabilities of the limited partner. (1861)

EXAMPLE: Architect Joel contributed P1M as his share in the

partnership capital. For 2020 his share of the partnership profits
amounted to P250,000 but he was given P350,000 by mistake. On
July 15, 2021 Architect Joel died. His estate is still liable to the
partnership for the overpayment of P100,000.

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 RIGHTS OF CREDITORS OF
A DEAD LIMITED PARTNER

Upon the death of a limited partner, any creditor can go to court

and ask for a charging order against the interest of the limited
partner for the payment of any unsatisfied claim.

However, the interest cannot be paid using partnership property but

the separate property of any general partner. (1862)

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 HOW TO DISTRIBUTE LIMITED PARTNERSHIP
ASSETS IN CASE OF DISSOLUTION

The liabilities of the partnership shall be settled in the following order:

1. Preferred creditors, including the credits of limited partners if they are

also creditors;
2. Share in profits of limited partners as well as any compensation due to
them;
3. Return of the capital invested by the limited partners;
4. Amounts due to general partners other than for capital and profits;
5. Amounts due to general partners for profit; and
6. Return of capital invested by the general partners.

Limited Partners are preferred in the distribution

of profits and property.

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 AMENDMENT OF THE CERTIFICATE OF
LIMITED PARTNERSHIP (11)

The certificate of limited partnership may be amended:

1. When there is a change in the name of the partnership;

2. When there is a change in the amount or character of the contribution
of a limited partner;
3. When a person is substituted as a limited partner;
4. When an additional limited partner is amended;
5. When a partner is admitted as a general partner;
6. When a general partner retires, dies, becomes insolvent or insane or
is sentenced to civil interdiction but the business is continued.

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 AMENDMENT OF THE CERTIFICATE OF
LIMITED PARTNERSHIP (11)

The certificate of limited partnership may be amended:

7. When there is a change in the character of the business;

8. When there is a false or onerous statement in the original certificate;
9. When there is a change in the time period stated in the certificate for
the dissolution of the partnership;
10. When there is no time specified in the certificate for the dissolution of
the partnership or the return of contributions and a time period needs
to be specified;
11. The members decide to make a change in the certificate that will
accurately represent their agreement.

If the Certificate of Limited Partnership is amended, this has to be

submitted and registered with the SEC.

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 CAN A LIMITED PARTNER PARTICIPATE IN
LITIGATION INVOLVING THE PARTNERSHIP?
GENERAL RULE: A limited partner is not a proper party in proceedings by or
against the partnership. He cannot participate.

EXCEPTION: A limited partner can participate if the subject matter of the

proceedings is to enforce the right of the limited partner against the partnership or
liability of the limited partner.

EXAMPLE 1: Dr. Ruiz is a limited partner in ABC partnership. He can sue the
partnership if he wants to collect his share of the profits for a given year that the
partnership refused to pay to him.

EXAMPLE 2: Dr. Ruiz is a limited partner in ABC partnership. He

was given authority to purchase a Toyota Innova for the partnership.
However, when the seller asked ABC for payment it refused to pay saying
that Dr. Ruiz had no authority to bind the partnership. The seller can sue
ABC and include Dr. Ruiz even if he is only a limited partner since he
acted as an agent of the partnership.

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 LIMITED PARTNERSHIP EXAMPLE

Ortigas and Company Limited Partnership. More popularly known as

Ortigas Land. Constructs residential and commercial establishments.

Ortigas Center, Greenhills Shopping Center, Tiendesitas, Capitol Commons

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THANK YOU!

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