LAW ON PARTNERSHIP

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

Characteristics
1. Principal
2. Nominate
3. Bilateral
4. Onerous-
5. Consensual
6. Commutative
7. Preparatory

Essential Features
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
6. There must be at least one general partner.

Rules in determining the existence of a partnership:

1. Persons who are not partners as to each other are not partners as to third persons.
2. Co-ownership or co-possession dies not of itself establish a partnership, whether such co-owners or co-
possessors do or do not share any profits made by the use of the property.
3. The sharing of gross returns does not of itself establish a partnership, whether or not the persons
sharing them have a joint or common right or interest in any property for which the returns are divided.
4. The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner
in the business, but no such inference shall be drawn if such profits were received in payment:
a. As a debt by installments or otherwise;
b. As wages of an employee or rent to a landlord;
c. As an annuity to a widow or representative of a deceased partners;
d. As interest on a loan, though the amount of payment vary with the profits of the business;
e. As the consideration for the sale of a goodwill of a business or other property by installments.

Formation of a partnership
General rule: A partnership may be constituted in any form.
Exceptions:
1. In case of personal property:
i. If capital is less than P3,000, no special form is required for its validity or existence.
ii. If capital is P3,000 or more, in money or personal property, the same shall appear in a public
instrument and must be recorded in the office of the SEC.
2. In case of real property, it must appear in a public instrument and an inventory of said real property
should be made, signed by the parties, and attached to the public instrument, and the same must be
recorded in the office of the SEC, otherwise, the contract of partnership is void.

Classifications of partnership
1. As to the extent of its subject matter
a. Universal partnership
i. Universal partnership of all present property
ii. Universal partnership of all profits
*The following persons are prohibited from entering into a universal partnership:
 Husband and wife
 Those guilty of adultery or concubinage
 Those guilty of the same criminal offense, if the partnership was entered in consideration of the
same.
b. Particular partnership
2. As to liability of the partners
a. General partnership
b. Limited partnership
3. As to its duration
a. Partnership at will
b. Partnership with a fixed term
4. As to the legality of its existence
a. De jure partnership
b. De factor partnership
5. As to representation to others
a. Ordinary or real partnership
b. Ostensible partnership or partnership by estoppel
6. As to publicity
a. Secret partnership

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 b. Open or notorious partnership
7. As to purpose
a. Commercial or trading partnership
b. Professional or non-trading partnership

Kinds of partners
1. As to liability
a. General partner
b. Limited partner
2. As to contribution
a. Capitalist partner
b. Industrialist partner
c. Capitalist
3. Other classification
a. Managing partner
b. Liquidating partner
c. Partner by estoppel or nominal partner or partner by implication
d. Subpartner
e. Ostensible partner
f. Secret partner
g. Silent partner
h. Dormant partner
i. Incoming partner
j. Retiring partner

Relations created by a contract of partnership:

1. Relations among the partners themselves
2. Relations of the partners with the partnership
3. Relations of the partnership with third persons
4. Relations of the partners with third persons

Management of the Partnership Affairs

Two modes of appointing a manager:

1. Appointment as manager in the articles of partnership
a. The power of the manager is irrevocable without just and 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 unanimity (including his own
vote).
d. He may execute all acts of administration despite the opposition of his partners, unless he should act
in bad faith.
2. Appointment as manager made in an instrument other than the articles of partnership or made orally
a. The appointment can be revoked any time for any cause whatsoever.

Rules when two or more managers are appointed:

1. When the appointment is without specification of their respective duties and without stipulation that one
of them shall not act without the consent of the other, each one may execute all act of administration,
except if any such partner should oppose:
a. Decision of the majority of the managing partner shall prevail.
b. In case of a tie, decision of all the partners having the controlling interest.
2. With stipulation requiring unanimity of action, unanimous consent of all the managing partners shall be
necessary for the validity of the acts and absence or disability of any managing partner cannot be
alleged, except when there is an imminent danger of grave or irreparable injury to the partnership.

Distribution of profits and losses

1. Profits
i. Agreement
ii. In the absence of any agreement, the industrial partner shall first receive a just and equitable share
of the profits and thereafter, each capitalist partner shall share in the profits in proportion to his
capital contribution.
2. Losses
i. Agreement
ii. In the absence of any agreement, the industrial partner will not share in the losses and each
capitalist partner shall share in the losses in the same proportion as the share in the profits and in
the absence thereof, in proportion to his capital contribution.

Obligations of the partners among themselves

1. Obligations with respect to contribution of property
Three important duties of every partner:
i. The duty to contribute what had been promised;
ii. The duty to deliver the fruits of what should have been delivered; and
iii. The duty to warrant.
2. Obligations with respect to contribution of money and money converted to personal use

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 3. Obligation not to engage in another business for himself
a. Industrial partner cannot engage in business for himself, unless the partnership expressly permits
him to do so.
b. Capitalist partner cannot engage for their own account in any operation which is of the kind of
business in which the partnership is engaged, unless there is a stipulation to the contrary.
Remedies:
i. Industrial partner- the capitalist partners may either exclude him from the firm with damages or
avail themselves of the benefits which he may have obtained therefrom plus damages.
ii. Capitalist partner- the capitalist shall bring to the common funds any profits accruing to him from
his transactions, and shall personally bear all the losses.
4. Obligation to contribute additional capital
5. Obligation of the managing partner who collects debt
6. Obligation of partner who receives share in partnership credit
7. Obligation of partner for damages to partnership
8. Duty to render information
9. Obligation to account for any benefit and hold as trustee unauthorized personal profits

Responsibilities of the partnership to the partners:

1. To refund amounts disbursed on behalf of firm plus interest from the time expenses where made;
2. To answer to each partner for obligations, he may have entered into in good faith in the interest of the
partnership; and
3. To answer for risks in consequence of its management.

Rights of a partner in a partnership:

1. Property rights of a partner (principal rights)
a. his rights in specific partnership property
b. his interest in the partnership
c. his right to participate in the management
2. Right to reimbursement for amounts advanced to the partnership and to indemnification for risks in
consequences of management
3. Right to associate with another person in his share
4. Right of access and inspection of partnership books
5. Right to true and full information of all things affecting the partnership
6. Right to a formal account of partnership affairs under certain circumstances
7. Right to have partnership dissolved under certain conditions.

Obligations of Partnership/Partners to third persons:

1. Solidary liability of the partnership for the wrongful act of the partner/s
2. Those who, not being members of the partnership, include their names in the firm name, shall be
subject to the liability of a partner.
3. All partners, including industrial ones, shall be liable pro rata with all their property and after all the
partnership assets have been exhausted, for the contract which may be entered into in the name and for
the account of the partnership (liability for contractual obligations). Any stipulation to the contrary shall
be void, except as among the partners.
4. Liability of partnership to third persons for acts of partners
5. Effect of conveyance of real property of partnership
6. Effect of admission of a partner
7. Effect of notice or knowledge of a partner
a. notice to any partner of any matter relating to partnership affairs operates as notice to the
partnership
b. knowledge of the partner acting in the particular matter acquired while a partner is knowledge to the
partnership
c. knowledge of the partner acting in the particular matter then present to his mind is knowledge to the
partnership
d. knowledge of any other partner who reasonably could or should have communicated it to the acting
partner is knowledge to the partnership
8. A person admitted as a partner into an existing partnership is liable for all the obligations of the
partnership arising before his admission as though he had been a partner when such obligations were
incurred, unless there is a stipulation to the contrary.
9. Liabilities of partners by estoppel
*Liabilities of partners by estoppel:
a. When partnership liability results-if all actual partners consented to the representation, it is
considered a partnership liability. This is a case of partnership by estoppel.
b. Liability is pro rata-when there is no existing partnership and all or some of those represented as
partners consented to the representation, or none or only some of the partners of an existing
partnership consented to the representation, the liability of all those who made and consented to
the representation is joint or pro rata.

Dissolution and Winding Up

Dissolution-is the change in the relation of the partners caused by any partner ceasing to be associated in the
carrying on of the business.

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Winding up-is the process of settling the business partnership affairs after dissolution.

Termination-is that point in time when all partnership affairs are completely wound up and finally settled. It
signifies the end of the partnership life.

Kinds of Dissolution
1. Extrajudicial dissolution
a. without violation of the agreement between the partners
i. by the termination of the definite term or particular undertaking specified in the agreement.
ii. by the express will of any partner, who must act in good faith, when no definite term or
particular undertaking is specified.
iii. by express will of all the partners who have not 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.
iv. by the expulsion of any partner form the business bona fide in accordance with such a power
conferred by the agreement between the partners.
b. in contravention of the agreement between the partners, where the circumstances do not permit a
dissolution under any other provision of this article, by the express will of any partner at any time.
c. by any event which makes it unlawful for the business of the partnership to be carried on or for the
members to carry it on in partnership.
d. when a specific thing which a partner had promised to contribute to the partnership, perishes before
the delivery.
e. by the death of any partner
f. by the insolvency of any partner or of the partnership
g. by the civil interdiction of any partner
2. Judicial dissolution
a. a partner has been declared insane or is shown to be 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, or otherwise so
conducts himself in matters relating to the partnership business that it is not reasonably practicable
to carry on the business in partnership with him
e. the business of the partnership can only be carried on at a loss
f. other circumstances render dissolution equitable
g. on the application of the purchaser of a partner's interest:
i. after the termination of the specified term or particular undertaking; or
ii. at any time if the partnership was a partnership at will when the interest was assigned or when
the charging order was issued.

*The general rule is dissolution terminates all authority of any partner to act for the partnership, except:
1. acts necessary to wind up partnership affairs
2. acts necessary to complete transactions begun but unfinished.
*When dissolution is by act, insolvency or death of partner, authority of partners to act for the partnership is
not deemed terminated, except:
1. the cause of dissolution is the act of a partner and the acting partner had knowledge of such dissolution.
2. the cause of dissolution is the death or insolvency of a partner and the acting partner had knowledge or
notice of such dissolution.

Manner of winding up
1. Extrajudicial-by the partners themselves without the intervention of the court.
2. Judicial-under the control and direction of the court upon proper cause shown by any partner, his legal
representative or his assignee.

Persons authorized to wind up

1. Partners designated by the agreement;
2. In the absence of such agreement, all partners who have not wrongfully dissolved the partnership; or
3. Legal representative of las surviving partner not insolvent.

The liabilities of the partnership shall rank in order of payment, as follows:

a. those owing to creditors other than partners
b. those owing to partners other than for capital and profits
c. those owing to partners in respect of capital
d. those owing to partners in respect of profits

Limited Partnership
-is one formed by two or more persons having as members one or more general partners and one or more
limited partners.
-it must be in writing and registered with the SEC for its validity.
-must contain the word limited or Ltd.

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Characteristics:
1. A limited partnership is formed by compliance with the statutory requirements
2. One or more general partners control the business and are personally liable to creditors
3. One or more limited partners contribute money or property, but not services, to the capital and share
in the profits but do not participate in the management of the business and are not personally liable for
partnership obligations beyond their capital contributions
4. The limited partners may ask for the return of their capital contributions under the conditions prescribed
by law.
5. The partnership debts are paid out of the common fund and the individual properties of the general
partners.

*The surname of a limited partner shall not appear in the partnership name, otherwise he will be liable as a
general partner, unless:
1. it is also the surname of a general partner, or
2. prior to the time when the limited partner became such, the business had been carried on under a name
in which his surname appeared.
*Additional limited partners may be admitted upon filing an amendment to the original certificate of limited
partnership.

Rights of a limited partner:

1. to require that the partnership books be kept at the principal place of business of the partnership;
2. to inspect and copy at a reasonable hour partnership books or any of them;
3. to demand true and full information of all things affecting the partnership;
4. to demand a formal account of partnership affairs whenever circumstances render it just and
reasonable;
5. to ask for dissolution and winding up by decree of court;
6. to receive a share of the profits or other compensation by way of income; and
7. to receive the return of his contribution provided the partnership assets are in excess of all its liabilities

Substituted limited partner

-a limited partner's interest is assignable. A substituted limited partner is a person admitted to all the rights of a
limited partner who has died or has assigned his interest in a partnership.

Causes of dissolution of a limited partnership:

1. retirement, insolvency, death, insanity, or civil interdiction of a general partner;
2. when all the limited partners ceased to be such;
3. expiration of the term or period of existence of the partnership;
4. by agreement of all partners before the lapse of the period of existence;
5. misconduct of a general partner or fraud committed by a general partner against the limited partner/s;
or
6. when the limited partner demanded the return of his contribution but same was unjustifiably denied.

Effect of retirement, death, civil interdiction, insanity, or insolvency of a partner

1. General partner- partnership is dissolved.
2. Limited partner- partnership is not dissolved except if there is no more limited partner

Order of payment of liabilities

1. those to creditors, including limited partners
2. those to limited partners by way of their share of the profits and other compensation by way of income
on their contributions
3. those to limited partners in respect to the capital of their contributions
4. those to general partners other than for capital and profits
5. those to general partners in respect to profits
6. those to general partners in respect to capital

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