Business Law and Regulation

Partnership Part 1
I. General Provisions
PARTNERSHIP
A. What is 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 person may also form a partnership for the exercise
a profession.1

B. What are the Characteristics of a Partnership?

1. Consensual, bilateral or multilateral, nominate, principal, onerous and preparatory
contract.
Consensual - perfected by mere consent.
Bilateral or multilateral - it is entered into by two or more persons and the
rights and obligations arising there from are reciprocal.
Nominate - it has a special name or designation in our law.
Principal - its life does not depend on the existence of another contract.
Onerous - each of the parties aspire to procure for himself a benefit through
the giving of something. Partners are required to contribute something in order
to be considered a legitimate member of the partnership.
Preparatory - It is entered into as a means to an end. To engage in a business.

2. There must be common contribution of money, property, or industry to a common

fund.
In partnership it is necessary that there is an agreement to contribute money,
property or industry to a common fund; and, the intention to divide the profits among
the contracting parties.

3. The object must be a lawful one.

A partnership must have a lawful object or purpose, and must be established for the
common benefit or interest of the partners.
Partnerships with unlawful objects (e.g partnerships engaged in illicit activities like
drug trafficking) are usually shunned upon by society.
When an unlawful partnership is dissolved by a judicial decree, the profits shall be
confiscated in favor of the State, without prejudice to the provisions of the Penal
Code governing the confiscation of the instruments and effects of a crime.2

4. There must be intention of dividing the profits among the partners.

Chief end of a partnership is for the partners to earn something from what they have
contributed.

5. Mutual Confidence
Mutual Confidence between partners means that they both trusted each other,
knowing fully well that what they gave will be (e.g cash, property, industry) will be
used for the purpose the partnership was established.

6. A juridical personality - distinct from the separate personality of each of the

members or partners.
Partnership is considered a juridical being under the law. A juridical being means that
it has several rights and obligations that it must comply under the law, similar to us
natural persons (human beings).

C. What are the rules to determine the existence of partnership?

1. Persons who are not partners as to each other are not partners as to third
persons.
2. Co‐ownership/co‐possession does not of itself establish a partnership.
3. Sharing of gross returns does not of itself establish a partnership.
4. Receipt of a person of a share in the profits is prima facie evidence that he is a
partner, but not when received as payment for:
• Debt as installment
• Wages
• Annuity
• Interest in a loan
• Consideration for the sale of a goodwill3
D. What are the classifications/kinds of partnership?
1. According to manner of creation:
a) orally constituted -by mere agreement
b) constituted in a private instrument -written agreement
c) constituted in a public instrument
d) registered in the office of the Securities and Exchange Commission (SEC)
As a general rule, a partnership may be constituted in any form, except where
immovable property or real rights are contributed thereto, in which case a public
instrument shall be necessary.4
Every contract of partnership having a capital of three thousand pesos (P3,000.00) or
more, in money or property, shall appear in a public instrument, which must be
recorded in the Office of the Securities and Exchange Commission. Failure to comply
with the requirements of registration shall not affect the liability of the partnership
and the members thereof to third persons.5
2. According to object:
a) Universal
i. with all present property
In this kind of universal partnership, all properties contributed by the
partners becomes the common property of the Partnership
ii. with all profits6
The individual properties here continue to be owned by the partners,
but the usufruct thereof passes to the firm.
Usufruct means the right to use and enjoy the fruits of a thing.

What are the disqualifications in Universal partnership?

Persons who are prohibited from giving each other any donation or advantage cannot
enter into universal partnership.7
Examples of people prohibited:8
1. Husband and Wife
2. Those guilty of adultery or concubinage
 3. Those guilty of the same criminal offense, if the partnership was entered
into in consideration of the same
b) Particular
Here the object is determinate things, their use or fruits; specific undertaking,
or the exercise of a profession or occupation.9

3. According to liability:
a) Limited partnership - that where at least one partner is a general partner,
and the rest are limited partner.
(Note - A general partner is liable beyond his contribution; a limited partner is
liable only to the extent of his contribution.)

b) General partnership - that where all the partners are general partners.

4. According to legality
a) lawful or legal
b) Illegal or unlawful

5. According to duration:
a) for a specific period or till the purpose is accomplished
The term for which the partnership is to exist is fixed or agreed upon or one
formed for a particular undertaking.
b) Partnership at will
1. Here, no period, express or implied, is given and so, its duration
depends on the will of partners.
2. If the period has expired, but the partnership has been continued,
without liquidation, by partners who habitually acted as such during the
term.10

4. According to representation to others:

1. Ordinary partnership
 2. Ostensible or Partnership by estoppel
Estoppel - a bar or impediment (obstruction) which precludes a person from asserting
a fact or a right, or prevents one from denying a fact.

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.

A partner in estoppel is one who, by words or conduct does any of the following:
Directly represents himself to anyone as a partner in an existing partnership or
in a non- existing partnership.
Indirectly represents himself by consenting to another representing him as a
partner in an existing partnership or in a non-existing partnership

E. Classification of Partners

1. As to the Contribution
Capitalist partner - contributes money or property
Industrial partner - contributes only his industry or personal service
2. As to the Liability
General Partner – liability to third persons extends to his separate property
Limited Partner – liability to third persons is limited to his capital contribution
3. As to Management
Managing Partner – manages the business or affairs of the partnership.
Silent Partner – does not take any active part in the business although he may
be known to be a partner.
Liquidating partner – takes charge of the winding up of the partnership affairs
upon dissolution.
4. Miscellaneous:
 Ostensible Partner – one who takes active part and known to the public as a
partner and known to the public as a partner in the business, whether or not he
has actual interest in the firm.
Secret Partner – takes active part in the business but is not known to be a
partner by outside parties not held out as a partner by the other partners.
Trust Relations trust Partner – does not take active part in the business and is
not known or held out as partner.

1. Art. 1767, RA 386 Civil Code of the Philippines

2. Art. 1770, Ibid.

3. Art. 1769, Ibid.

4. Art. 1771, Ibid.

5. Art. 1772, Ibid.

6. Art. 1777, Ibid.

7. Art. 1782, Ibid.

8. Art. 133, 739, Ibid.

9. Art. 1783, Ibid.

10. Ibid, Art. 1785

II. Obligations of the Partners Among Themselves

OBLIGATIONS OF THE PARTNERS AMONG THEMSELVES

A. What are the obligations of the partners among themselves?

1. To give his contribution1
In partnership, a partner is considered a debtor of partnership wherein he is bound to
deliver to the partnership what he has promised to contribute. A partner being the
debtor of the partnership can be legally held liable if he fails to deliver what he has
promised. He also has the duty to warrant the property he contributed in case of
eviction.
Note: In Partnership, there is no need of demand because failure to deliver
automatically makes the obligation due and demandable.
2. Not to convert firm money or property for his own use 2
This only means that a partner violates the agreed purpose if he use the partnership’s
money/property for other purposes other than agreed upon.
In case the partner converted or used the money or property of the partnership, the
partner shall be obliged to reimburse the same. The partner shall also indemnify the
partnership for the damages caused to it by delay in the contribution or conversion of
any sum for the partner’s personal benefits.

3. Not to engage in unfair competition with his own firm

A capitalist partner cannot engage in any business which the partnership is engaged
into unless the partnership and the capitalist partner has an agreement allowing the
latter to do so.3
The Article also states that all the income earned by the capitalist partner will
accrue/remitted to the partnership.

4. To account for and hold as trustee for unauthorized personal profits

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.4
The relationship between partners is grounded on trust and confidence which must
not be abused. However, the trust relations exist only during the life of the
partnership.

5. Pay for damages caused by his fault

Every partner is responsible to the partnership for damages suffered by it through his
own fault. These damages cannot be offset by the profits or 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.5

6. If a managing partner, duty to credit pro rata to the firm payment made by a
debtor who owes him and the firm.
If a partner authorized to manage, collects a demandable sum which was owed to him
in his own name, from a person who owed the partnership another sum also
demandable, the sum thus collected shall be applied to the two credits in proportion
to their amounts, even though he may have given a receipt for his own credit only;
but should he have given it for the account of the partnership credit, the amount shall
be fully applied to the latter.6

7. To share with the others partners the share of the partnership credit, which he
has received from an insolvent firm debtor.
A partner who has received, in whole or in part, his share of a partnership credit,
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. 7

1. Art. 1786, Civil Code of the Philippines

2. Art. 1788, Ibid.

3. Art. 1808, Ibid.

4. Art. 1807, Ibid.

5. Art. 1794, Ibid.

6. Art. 1792, Ibid.

7. Art. 1793, Ibid.

III. Property Rights of a Partner

PROPERTY RIGHTS OF A PARTNER

A. What are the property rights of a partner?

a) Rights in specific partnership property
The general principle, is that there exists a co–ownership among partners subject to
the following rules (e.g., Rights in a car contributed to firm):
Equal right to possession for partnership purposes. In general, a partner has an
equal right with his partners to possess the car but only for partnership
purposes (not for other purposes, except if the others expressly or impliedly
give their consent)
 A partner cannot assign his right in the car (except if all the other partners
assign their rights in the same property)
The partner’s right to the said property is not subject to the attachment or
execution (except on a claim against the partnership)
A partner’s right to the said is not subject to legal support.

b) Interest in the partnership (share in the profits and surplus)

A partner’s right to his share in in the profits and surplus can be assigned, attached
and be subjected to legal support.

I. What are the effects of conveyance of a partner of his interest in the partnership?
If it is conveyance of his whole interest, the partnership may either remain or be
dissolved. However, the assignee does not necessarily become a partner. Hence, he
cannot:
1. Interfere in the management or administration; or
2. Demand information, accounting and inspection of the partnership books.

II. What are the rights of the assignee?

The assignee has the following rights:
1. Receive in accordance with his contract the profits which the assigning partner
would otherwise be entitled.
2. Avail himself of the usual remedies provided by law in event of fraud in
management.
3. Receive assignor’s interest in case of dissolution.
4. Require and 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 parties.

c) Right to participate in the Management

Generally, all partners have the right to participate in managing the business and
affairs of the partnership except when a managing partner has been appointed
expressly (in the articles of partnership) or impliedly.
Another exception to the right to manage the affairs of the partnership is that of a
limited partner.1

I. Does a partner have the right to Associate with another person in his share?
Every partner may associate another person with him in his share, but the associate
shall not be admitted into the partnership without the consent of all the other
partners, even if the partner having an associate should be a manager. 2
Delectus Personarum - For the associate to become a partner, all must consent
(whether the partner having the associate is a manager or not)

II. Can a partner inspect and copy partnership books?

A partner at any reasonable hour shall have access to and may inspect and copy any
of the partnership books. The right is given as to give the partner a chance to see the
transparency of the partnership’s transaction that may reflect in its books located in
the partnership’s principal place of business. However, this can be done during
reasonable hours of the day.

III. Can a partner demand formal Accounting?

The general rule is that formal accounting is allowed only during the dissolution of the
partnership. Nevertheless, the law provides some exceptions:
1. If a partner is wrongfully excluded from the partnership business or possession of
its property by his co-partners.
2. If the right is existing under the terms of any agreement.
3. As provided by Art. 1807 of the Civil Code
Article 1807. 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. (n)
4. Other Circumstances which will render accounting just and reasonable.

1. Art. 1848, Civil Code of the Philippines

2. Art. 1804, Ibid.