Partnership

By the contract of partnership, two or more persons bind themselves to contribute money, property or
industry to a common fund, with the intention of dividing the profit among themselves.

Two or more persons may also form a partnership for the exercise of a profession.

Partnership by its definition is a contract, as such it still follows the general elements of contracts like:
Consent
Parties
Cause
Object
Other definitions:

1) A partnership is an ASSOCIATION of two or more persons to carry on as co-owners of a business for profit
2) A partnership is an ENTITY, distinct and apart from the members composing it, and, for the purpose of which it
was created, it is a person having its own assets and liabilities and any benefit or liability attaching to a member of
the partnership, results from the partnership relations
3) A partnership is a JOINT UNDERTAKING to share in the profit and losses

Characteristics of partnership

1) CONSENSUAL-because it is perfected by mere consent, that is, upon the express or implied agreement of two or
more persons
2) NOMINATE-because it has a special name of designation in our law
3) BILATERAL-because it is entered into by two or more persons and the rights and obligations arising therefrom
are always reciprocal
4) ONEROUS-because each of the parties aspires to procure for himself a benefit through the giving of something
5) COMMUTATIVE-because the undertaking of each of the partners is considered as the equivalent of that of the
others
6) PRINCIPAL-because it does not depend for its existence or validity upon some other contract
7) PREPARATORY-because it is entered into as a means to an end-to engage in business or specific venture for the
realization of profits with the view of dividing them among the contracting parties

Elements of a partnership

1) There must be a valid contract

2) The parties 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

Short discussion regarding the elements:

1) Valid contract

Partnership relation is fundamentally contractual, it is a voluntary relation created by agreement of the parties. A
contract begins when there is a meeting of the minds of the parties

2) There must be a legal capacity to enter into a contract

Before there can be a valid contract of partnership, it is essential that the contracting parties have the necessary
legal capacity to enter into a contract.
As a general rule, any person may be a partner who is capable of entering into contractual relations

Following cannot give consent to a contract of partnership:

a) Emancipated minor
b) Insane or demented person
c) Deaf-mutes who do not know how to read and write
d) Persons who are suffering from civil interdiction
e) Incompetents who are under guardianship

Minors are emancipated when they are given legal capacity by the state to transact and act as an adult.

3) There must be a mutual contribution of money, property or industry to a common fund

a) money- is the term understood as referring to currency which is legal tender in the Philippines. The following
are not money until encashed:
i. checks
ii. drafts
iii. promissory notes payable to order
iv. other mercantile documents
b) property- any kind of property may be contributed whether it be:
i. real
ii. personal
iii. corporeal
iv. incorporeal

so that credit such as promissory note or other evidence of obligation or even goodwill may be contributed to the
partnership as they are considered property
c) industry-it has been interpreted to mean the active cooperation, the work of the party associated, which may
be either:
i. personal
ii. manual efforts
iii. or intellectual and for which he receives a share in the profits( not salary) of the business

4) the object must be lawful-the object is lawful when it is not against:

a) law
b) morals
c) good customs
d) public order
e) public policy

Examples of unlawful partnerships:

a) partnerships formed to create illegal monopolies or combinations in restraint of trade
b) partnerships for illegal gambling
c) partnership to furnish apartment houses for prostitution or white slavery

disposition of the partnership proceeds if partnership is unlawful

a) the proceeds and instruments or tools shall be confiscated and forfeited in favor of the government
b) property which were the object of unlawful commerce shall be destroyed
c) the capital contributions of the partners are returned, only the profits are confiscated by the state
5) purpose is to obtain profit- the idea of obtaining pecuniary profit or gain directly as a result of business to be
carried on is the very reason for the existence of the partnership

Note:
Our law allows the formation of a partnership for the exercise of a profession although the exercise of a
profession is not a business undertaking nor an enterprise for profit.

Profession has been defined as a group of men pursuing alearned art as a common calling in the spirit of
public service.

Partnership distinguished from a corporation:

PARTNERSHIP CORPORATION

1) created by voluntary agreement 1)created by law either special charter or of the

parties general law

2) may exist for a definite period 2)may exist for not more than fifty(50) years of time
subject to extension

3) managed by all the partners 3)managed by the board of directors or

except if they appoint a trustees elected by the stockholders
managing partner or members

4) a general partners liability extends 4)a stockholders liability does not extend
beyond his capital contribution; beyond his interest(investment) in the
it extends to his separate property corporation

5) a partner may bind his copartner for 5)stockholders, not being agents of the
acts within the scope of the business corporation, cannot bind the corporation except when authorized by
the corporation code in case of close family corporations

6) death of a general partner may dissolve 6) death of a stockholder doesnot

dissolve the business corporation

Classification of partnership

1) to object
a. universal partnership
i. of all present property
ii. of profits
b. particular partnership
2) as to liability
a. general partnership-all partners are liable to the extent of their separate property
b. limited partnership- composed of at least one general and at least one limited partner. The liability of the
limited partner is only to the extent of his contribution
3) as to duration
a. at will- term of existence is unlimited even after the expiration of a definite term or after accomplishment of its
purpose, of if no period is fixed
b. fixed term- there is a specific period of term for existence and expiration thereof dissolve the partnership
4) as to manner of creation
a. orally
b. written in a public or private instrument
Kinds of partners

1) according to liability
a. general-whose liability extends to his separate property
b. limited-whose liability extends only to his contribution to the partnership

2) nature of contribution to the partnership

a. capitalist partner- one who contributes money or property
b. industrial-one who contributes industry or personal services

3) knowledge by the public

a. ostensible partner- one who is known to the public as a partner in the business
b. secret partner- one whose connection with the business is unknown to the public

4) as to connection with the partnership

a. real partner- one who is actually connected with the business of the partnership
b. nominal partner- one who is a partner by name and is actually not a partner. Sometimes he is referred to as
partner by estoppel

5) as to extent of participation in the business

a. universal partner one whose participation refers to the whole or entire business
b. particular partner- one whose relation to the business is specified or limited to a part of it

6) as to his power in partnership management

a. silent partner- one who has no control of or relation to the management of the business
b. dormant partner- one whose connection with the partnership business is concealed and who does not take any
act or part of it

7) as to the time of admission

a. original partner- partner at the time of the execution of the contract of partnership
b. newly admitted partner- partner after the formation of the partnership

8) as to the nature of management work

a. managing partner- one who is appointed by the partners as manager of the partnership business
b. liquidation partner- on who takes care of closing up the affairs of the partnership after dissolution

Universal partnership

Classification of Universal Partnership

1) universal partnership of all present property
2) universal partnership of all the profits

Universal partnership of all present property

A universal partnership of all present property is one in which the partners contribute all the property which
actually belongs to them to a common fund including all profit acquired from such property.

The common funds of a universal partnership property:

1) all present property of each partner
2) all the profits that may be derived from such properties
3) if stipulated, the fruits of properties acquired by a partner by inheritance, legacy or donation
Coverage of universal partnership of profits
1) all properties acquired by each partner from his work or industry
2) usufruct of movable or immovable property belonging to each partner at the time of the perfection of the
contract of partnership

The profits referred to in the universal partnership of profits includes:

2) salaries
3) wages
4) professional fees
5) earnings in business or trade or in arts
but such excludes:
1) donation
2) property acquired through succession
3) or the findings of hidden treasure

Persons prohibited to enter into a universal partnership

1) spouses during the marriage
2) those who are guilty of adultery or concubinage at the time of the donation
3) those made between persons found guilty to the same criminal offense in consideration thereof
4) those made between a public officer or his wife or some other person by reason of the formers office

note:

a universal partnership that is attempted to be formed by persons who are prohibited by law to form such is
void and will not acquire juridical personality

Firm name

A partnership as a juridical person may have a firm name which may or may not include the name of one or
more of the partners

A person who include their name in the firm is liable as a partner but have no rights as a partner

A person who misrepresents himself as a partner that third persons are misled is liable as a partner even if he
did not include his name in the firm name

Take notice that although partnership may use any firm name they may chose under Partnership laws, however
spread in other laws, specially intellectual property laws prohibits the use of names which are identical or
deceptively or confusingly similar to that of any existing artificial juridical being, which includes partnerships and
corporations or to any other name already protected by law or is patently deceptive, confusing or contrary to
other existing laws.

Formalities required in a partnership:

General rule:

The contract of partnership may be executed either orally or in writing and it may be executed either
expressly or impliedly

Exception:

(A) if the capital of the partnership is P3,000 or more composed of MONEY or PROPERTY,
It must:
1) appear in a public instrument
2) and it must be recorded on the Securities and Exchange Commission

note:

the formality stated above is only DIRECTORY, hence even if it does not comply with the stated requirements
such partnership still acquire a juridical personality separate and distinct from that of each of the partners.

(B) if immovable property or real rights are contributed regardless of value if must:
1)appear in a public instrument
2)together with an inventory of the immovables or real rights contributed
3)signed by the parties and attached to the public instrument

Note:

The formality stated above is mandatory, none compliance would render the contract void

Presumption:

As a rule, the receipt of a person of a share in the profits of the business raises the disputable presumption
that the recipient is a partner

This presumption however does not hold ground when the receipt of the profits is for the reason of:
1) payment of debt or otherwise
2) payment of wages of an employee or rent to landlord
3) payment as an annuity to a widow or representative of a deceased partner
4) payment as interest on a loan, though the amount of payment vary with the profit of the business

Rules to single facts:

Persons who are not partners as to each other are not partners as to third person, however, when a person:
i. Represents himself
ii. Or consents to another representing him to anyone as a partner,

He is liable to any such persons to whom such representation has been made, who has, on the faith of such
representation, given credit to the actual or apparent partnership

Co-ownership and co-possession itself does not establish a partnership

Mere sharing of gross returns, does not of itself establish a partnership

Rules in Division of Profits and Losses

1. The losses and profits shall be distributed inconformity with the agreement.
2. 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.
3. In the absence of stipulation, the share of each partner in the profits and losses shall be in proportion to what
he may have contributed,
4. industrial partner shall not be liable for the losses. As for the profits, the industrial partner shall receive such
share as may be just and equitable under the circumstances.
5. If besides his services he has contributed capital, he shall also receive a share in the profits in proportion to his
capital
Partners may agree to in trust to a third person the designation of the share of each one in the profits and losses,
such designation may be impugned only when it is manifestly inequitable.
No partner who has begun to execute the decision of the third person, or who has not impugned the same within a
period of three(3)months from the time he had knowledge thereof, complain of such decision.
The designation of losses and profits cannot be entrusted to one of the partners.
A stipulation which excludes one or more partners from any share in the profits or losses is void.

Rules regarding contributions and misappropriation of partners:

Duties of partner contributing a specific thing

1) the duty to contribute what he promised to contribute

2) the duty to deliver the fruits of what should have been delivered
3) the duty to warrant the thing delivered

rules as to the fruits of the thing to be delivered:

1) if property, the fruits arising from the time it should have been delivered, must be given to the partnership
without the need for a demand
2) of money, the interest and damages from the time he should have complied with his obligation must be given
to the partnership, also without need of a demand

obligation of a partner who is obliged to contribute money to the capital

1) to deliver the money on the date of perfection of contract or on a date fixed

2) incase of default, to pay interest from the time he should have given his contribution, plus damages

if a partner misappropriated the money of the partnership his liabilities are:

1) to return the amount appropriated

2) to pay interest from the time of the appropriation
3) to pay damages

Rules as to partners engaging business for themselves:

1) industrial partners cannot engage in business for himself unless expressly permitted by the other partners, in
case of violation by the industrial partner:
a. If there is profit or benefit, the same shall be given to the partnership plus damages OR
b. expulsion from the partnership plus damages

2) the capitalist partner may engage in business for their own account except when it is of the kind of business
which the partnership is engage in. a violation by the capitalist partner would result:
a. the capitalist partner should bring to the common fund any profits accruing to him from his transaction
b. personally bear all the losses

Rules in case of imminent loss:

Incase of imminent loss partners are called upon to give additional contribution to save the venture except:
a) if a partner is insolvent
b) exempted by stipulation
c) an industrial partner
if a partner refuses, he is obliged to sell his interest to the other partners

Not all losses in which are imminent requires the partners to contribute additional investments. For partners to
have a mandatory contribution, such losses must be so grave as to affect the partnership operations and the
additional input must be necessary to save the partnership venture.

Rules with regards to payment to a managing partner

When a managing partner receives money from a person who owes the partnership and the managing
partner:
1) If the receipt is in the name of the managing partner, the amount received as payment must be applied to both
obligation in proportion to the credits except:
a. if the debt of the partnership is not yet due
b. if the debt of the managing partner is more onerous in the exercise of debtors right

2) if the receipt is in the name of the partnership, then the payment must be applied to the partnership credit

This rule applies only to managing partners or to all general partners when no partner is appointed as managers as
this would mean that all partners manages the partnership.

So that when a partner, who is not a managing partner, and in a partnership wherein there is an appointed or
elected managing partner receives money from a person who owes the partnership and the partner money, that
partner may apply the whole amount to his own credit.

Risk of losses of things in possession by the partnership:

Risk of loss shall be borne by the partnership when

1) the things contributed are to be sold
2) are consumable or cannot be kept without deteriorating
3) contributed under appraisal in the inventory

Risk of loss shall be borne by the partner when the things contributed are non-consumable and only there use
andfruits are for the benefit of the partnership

Management of the partnership

The management of the partnership maybe vested through appointment of a manager or through silence. In
the latter case, it is vested to all of the partners.

Modes of appointment of a manager

1) appointment in the articles of partnership

a. his power is irrevocable without:
i. just cause
ii. lawful cause
b. to remove him for just cause, the controlling partners should vote to oust him
c. to remove him without cause or for an unjust cause, there must be a unanimous vote including himself
d. the extent of his powers would depend on
i. whether he acts in good faith- he may do all acts of administration despite the opposition
of his co-partners
ii. whether he acts in bad faith- he may be ousted from the firm by the vote of the
controlling interest
2) appointment in another instrument aside from the articles of partnership
- his power is revocable at any time with or without just cause

note:

unless restricted, a manager of a partnership is considered a general agent and he can therefore exercise
powers necessary to accomplish the objective of the partnership

his powers are limited however to powers of administration and not of ownership

Rules when there is more than one managing partner or when there is absence of an appointment of a manager:

1) unless there is stipulation to the contrary, solidary management would apply, in such case:
a. each may separately execute all acts of administration
b. If any of the managers oppose, the majority managers will prevail
c. if there is a tie, it will be decided by the controlling interest

2) if there is a stipulation of joint management,

a. the consent of all of the managers is necessary to execute an act
b. if any oppose, the act will not be executed, unless there is an imminent danger of:
i. grave
ii. irreparable injury to the partnership
c. absence or incapacity of any partner- unanimity is still require unless
i. grave
ii. irreparable injury to the partnership

In Joint Management, all managers must concur to have a partnership act. By stating all managers, this however
refers only to managers who have the same scope of work or jurisdiction. So that even if it is expressly stated in
the Partnership Articles that unanimity is required to all managers, managers of different spheres should require
unanimity only within their own authority.

e.g.

There are two purchasing managers and two sales managers in a partnership. When it is expressly required that all
managers must consent to a valid partnership act, in the all purchasing matters, the two purchasing managers
must concur without the need of the consent of the two sales managers.

note:

no important alteration in the immovable property of the partnership can be made without the concurrence
of all the partners

Rights of a partner

1) The right to associate another in his share in the partnership

2) Demand a formal accounting of partnership affairs when:
a. Wrongfully excluded from partnership business
b. Wrongfully excluded from possession of its property
c. If such exists under the terms
d. If a partner has derived profits from any transaction connected with the formation, conduct or liquidation of
the partnership or from any use by him of its property
e. When just and reasonable
3) Property rights of a partner
a. Rights in specific partnership property
b. Interest and surplus in the partnership
c. To participate in management

Partners right in the partnership property is:

- not assignable
- not attachable
- not subject to legal support
note:

even if a partners property right over specific partnership property is not assignable, attachable and not
subject to legal support, the creditor could ask for a charging order

however the interest of the partner charged may be redeemed or bought:

- with the property of one or more partners
- with partnership property, with the consent of all the partners whose interest are not so charged

Partners right in specific partnership property includes the partners right to use the specific partnership property.
However such right to use is limited only to usage in line with partnership affairs. Partners right to partnership
property does not extend to utilization of partnership property for personal use.

3) Right of conveyance or assignment of interest in the partnership

Note:

Partners interest in the partnership is his share in the profits and surplus

Effects of conveyance or assignment:

a. partnership is not dissolved
b. assignor is still considered the partner with right to demand accounting
c. the conveyee or assignee could not interfere in the management or administration
d. the conveyee or assignee could not demand:
i. information
ii. accounting
iii. inspection of partnership books

Rights of conveyee or assignee

a. right to the profits of the assignor
b. to avail of usual remedies in case of fraud of management
c. after dissolution- to demand accounting covering the period only form the date of the last accounting which
had been agreed by all the partners

assignment of partnership interest is only basically the assignment to receive the share of the partner in the profit
and surplus

Obligation of partners

1) Obligation to give information; who can demand information:

a. Any partner
b. Legal representative of a dead partner
c. Legal representative of any partner under legal disability

2) obligation to render account in instances when:

any benefit is derived by him without the consent of the other partners from any transaction connected with the:
i. formation
ii. conduct
iii. liquidation of the partnership
iv. from any use by him of its property