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PARTNERSHIP: GENERAL PROVISIONS
Concept of Partnership
“Article 1767. By the contract of partnership two (2) 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 (2) or more persons may also form a partnership for the exercise of a profession (1665a).”
Partnership for the Exercise of a Profession
A profession is a calling in the preparation for or practice of which academic learning is required and which has
for its prime purpose the rendering of public service. It may also refer to the whole body of persons or a group
of persons engaged in calling. Thus, it has been defined as “a group of men pursuing a learned art as a common
calling in the spirit of public service – no less a public service because it may incidentally be a means of
livelihood.
Characteristics of Partnership
The contract of partnership is:
a. Consensual, because it is perfected by mere consent, that is, upon the express or implied agreement
of two (2) or more persons;
b. Nominate, because it has a special name or designation in our law;
c. Bilateral, because it is entered into by two (2) or more persons and the rights and obligations arising
therefrom are always reciprocal;
d. Onerous, because each of the parties aspires to procure himself a benefit through the giving of
something;
e. Commutative, because the undertaking of each of the partner is considered as the equivalent of that of
the others;
f. Principal, because it does not depend for its existence or validity upon some other contract; and
g. Preparatory, because it is entered into as a means to an end, i.e., to engage in business for the
realization of profits with the view of dividing them among the contracting parties.
A partnership contract, in its essence, is a contract of agency.
Essential Requisites of Partnership
1.
2.
3.
4.
5.
6.
There must be a valid contract.
The parties must have legal capacity to enter into the contract.
There must be contribution of money, property, or industry to a common fund.
The object or purpose must be lawful.
The primary purpose must be to obtain profits to divide the same among the parties.
There must be at least one (1) general partner.
Articles of Partnership
There is no required form but the contract is subject to the provisions of Article 1771 and 1773 and the Statute
of Frauds. However, it is customary to embody the terms of the agreement in a document known as “Articles of
Partnership” stating the name, nature or purpose and location of the firm, and defining among members, the
powers, rights, duties and liabilities of the partners among themselves, their contributions, the manner by which
the profits and losses are to be shared, and the procedure for dissolving the partnership.
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Partnership Existence
“Article 1769. In determining whether a partnership exists, these rules shall apply:
(1) Except as provided by Article 1825, persons who are not partners as to each other are not partners as to
third persons;
(2) Co-ownerships or co-possession does not of itself establish a partnership, whether such co-owners or copossessors 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 from which the returns are derived; and
(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 partner;
d. As interest on a loan, though the amounts of payment vary with the profits of the business; or
e. As the consideration for the sale of a goodwill of a business or other property by installments or
otherwise. (n)”
Rules to Determine the Existence of Partnership
The article above lays down the rules for determining whether or not an association is one of partnership.
(1) Where terms of contract not clear – In general, to establish the existence of a partnership, all of its
essential features or characteristics must be shown as being present. Sometimes, the contract between
the persons engaged in a business enterprise which is supposed to create a partnership is unclear, or they
have never executed a formal contract. In case of doubt, Article 1769 shall apply.
It must be observed that this article seeks to exclude from the category of partnership certain features
enumerated therein, which, by themselves, are not indicative of the existence of a partnership.
(2) Where existence disputed – The existence of a partnership may be disputed or questioned by an affected
party. The issue as to whether a partnership exists or not is a factual matter to be determined based on all
the facts and circumstances presented in evidence of the parties’ intentions to create a partnership.
Partnership Distinguished from Co-ownership
There is co-ownership whenever the ownership of an undivided thing or right belongs to the different persons.
The following are the distinctions between a partnership and a co-ownership:
Creation
Juridical personality
Purpose
Duration
Disposal of
interests
Power to act with
third persons
Effect of death
Partnership
Always created by a contract, either
express or implied
Has a juridical personality separate and
distinct from that of each partner
Realization of profits
No limitation upon the duration is set by
law
A partner may not dispose of his
individual interest in the partnership so
as to make the assignee a partner
unless agreed upon by all of the
partners
A partner may bind the partnership,
Death or incapacity of a partner results
in the dissolve of the partnership
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Co-ownership
Generally created by law but may exist even
without a contract
Has no juridical personality
Common enjoyment of a thing or right
An agreement to keep the thing undivided
for more than 10 years is not allowed
A co-owner can dispose of his share
without the consent of others
A co-owner cannot represent the coownership; hence, a judgement secured
against only one of the co-owners will not
bind the other co-owners.
Death or incapacity of a co-owner does not
necessarily dissolve the co-ownership
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Classifications of Partnership
“Article 1776. As to its object, a partnership is either universal or particular.
As regards the liability of the partners, a partnership may be general or limited.”
Classifications:
(1) As to its subject matter – A partnership may be:
a. Universal partnership or one which refers to all the present property or to all profits
i. Universal partnership of all present property (Article 1778)
- One wherein the partners contribute all the property which actually belongs to them
to a common fund, with the intention of dividing the same among themselves, as
well as all the profits which they may acquire therewith.
The following becomes the common property of all partners:
1. Property which belonged to each of them at the time of the constitution of the
partnership; and
2. Profits which they may acquire from the property contributed.
Rule on after acquired properties
As a rule, aside from the contributed properties, only the profits of the contributed
common property are included. Thus, should a partner subsequently acquire a
property as remuneration for his work, such property and its fruits are not to be
enjoyed by the universal partnership of all present property.
Profits from other sources may become common, only if there is stipulation to such
effect.
Properties subsequently acquired by inheritance, legacy or donation, cannot be
included in the stipulation but fruits thereof can be included in the stipulation.
ii. Universal partnership of profits (Article 1780)
- One which comprises all that the partners may acquire by their industry or work
during the existence of the partnership.
Partners retain their ownership over their present and future property. What passes
to the partnership are the profits and the use of the same.
Note:
Articles of universal partnership, entered into without specification of its nature, only
constitute a universal partnership of profits (Article 1781). A universal partnership of
profits imposes less obligation on the partners since they preserve the ownership of their
separate property.
b. Particular partnership (Article 1783)
i. Determinate things
ii. Their use or fruits
iii. A specific undertaking
iv. The exercise of profession or occupation
(2) As to the liability of the partners – it may be:
a. General partnership where all partners are unlimitedly liable;
b. Limited partnership where there are one or more general partners who are unlimitedly liable,
and one or more limited partners, who are liable for partnership debts only to the extent of their
stipulated contributions under the articles of partnership.
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(3) As to its duration:
a. Partnership at will one that does not fix its term. The birth and life of a partnership at will are
predicated on the mutual desire and consent of the partners. Verily, any one of the partners
may, at his sole pleasure, dictate a dissolution of the partnership at will. He must, however, act
in good faith, not that the attendance of bad faith can prevent the dissolution of the partnership4
but that it can result in a liability for damages; (Ortega v. CA GR No. 109248, July 3, 1995)
b. Partnership with a fixed period;
c.
For a particular undertaking, automatically dissolved upon the achievement of the particular
undertaking stipulated in the contract of partnership.
(4) As to the legality of its existence – It may be:
a. De jure partnership or one which has complied with all the legal requirements for its
establishment;
b. De facto partnership or one with a colorable title or one which has failed to comply with all the
legal requirements for its establishment.
(5) As to representation to others:
a. Ordinary or real partnership or one which actually exists among the partners and also as to
third persons;
b. Ostensible partnership or partnership by estoppel or one which in reality is not a partnership,
but is considered a partnership only in relation to those who, by their conduct or admission, are
precluded to deny or disprove its existence.
(6) As to publicity:
a. Secret partnership or one wherein the existence of certain persons as partners is not avowed
or made known to the public by any of the partners;
b. Open or notorious partnership or one whose existence is avowed or made known to the public
by the members of the firm.
(7) As to purpose:
a. Commercial or trading partnership or one formed for the transaction of business;
b. Professional or non-trading partnership or one formed for the exercise of a profession.
Kinds of Partners
Partners are classified according to their interests in the business or their obligations to the partnership or their
liabilities to third persons.
(1) As to the nature of contribution:
a. Capitalist partner or one who contributes money or property to the common fund.
b. Industrial partner or one who contributes only his industry or personal service.
(2) As to liability:
a. General partner or one whose liability to third persons extends to his separate property.
b. Limited partner or one whose liability to third persons is limited to his capital contribution.
(3) As to management:
a. Managing partner or one who manages the affairs or business of the partnership; he may be
appointed either in the articles of partnership or after the constitution of the partnership. He is
also known as a general or real partner.
b. Silent partner or one who does not take an active part in the business although he may be
known to be a partner.
c. Liquidating partner or one who takes charge of the winding up of partnership affairs upon
dissolution.
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(4) As to exposure to public perception:
a. Ostensible partner or one who takes active part and known to the public as a partner in the
business, whether or not he has an actual interest in the firm. If he is not actually a partner, he
is subject to liability by the doctrine of estoppel.
b. Secret partner or one who takes active part in the business but is not known to be a partner by
outside parties nor held out as a partner by the other partners, although he participates in the
profits and losses of the partnership.
c. Dormant partner or one who does not take active part in the business and is not known or held
out as partner. He would be both a silent and a secret partner. The term is used as synonymous
with “sleeping partner.” He may retire from the partnership without giving notice and cannot be
held liable for the obligations of the firm subsequent to his withdrawal. His only interest in joining
the partnership would be the sharing of the profits earned.
(5) As to membership:
a. Real partner one who is really a contributing member of an existing legal partnership.
b. Partner by estoppel or one who is not really a partner, not being a party to a partnership
agreement, but is liable as a partner for the protection of innocent third persons. He is one who
is represented as being, in fact, a partner, but who is not so as between the partners
themselves. He is also known as partner by implication or nominal partner. The term “quasipartner” is sometimes used. He is liable for the debts of the firm to those who in good faith
believed him to be a partner.
(6) As to value of contribution:
a. Majority partner or one whose contribution represents the majority or controlling interest.
b. Nominal partner or one whose contribution represents only a minority interest.
(7) As to nature of membership:
a. Original partner or one who is a member of the partnership from the time of its organization.
b. Incoming partner or a person lately, or about to be, taken into a partnership as a member.
c. Continuing partner or one who continues the business of a partnership after it has been
dissolved by reason of the admission of a new partner, or the retirement, death, or expulsion of
one or more partners.
d. Retiring partner or one withdrawn from the partnership, a withdrawing partner.
(8)
As to state of survivorship:
a. Surviving partners or one who remains after a partnership has been dissolved by the death of
any partner.
b. Deceased partner or one who died while being a member of the partnership.
c.
Commencement of a Partnership
“Article 1784. A partnership begins from the moment of the execution of the contract, unless it is otherwise
stipulated.”
A partnership is a consensual contract (Article 1767); hence, it exists from the moment of the celebration of the
contract by the partners. What is necessary is that the essential requisites of a contract of partnership are
present even when the partners have not yet actually given their contributions, or even though its conditions or
details, such as the participation of the partners in the profits and losses and the nature of the partnership have
not yet been fixed, as they pertain to the accidental and not to the essential parts of the contract.
Executory Agreement of Partnership
The above rule on the commencement of partnership is not absolute.
(1) Future partnership – The partners may stipulate some other date for the commencement of the
partnership. Persons who have entered into a contract to become partners at some future time or on
the happening or fulfillment of some condition or future contingency do not become partners until or
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unless the agreed time has arrived or the condition has happened. Hence, there can be a future
partnership which at the moment has no juridical existence yet.
(2) Agreement to create partnership – A distinction must be made between a partnership actually
consummated and an agreement to enter into a contract of partnership at a future time. So long as the
agreement remains executory, no partnership can be said to exist.
Continuation of Partnership beyond Fixed Term
A partnership with a fixed term is one in which the term of its existence has been agreed upon expressly or
impliedly. The expiration of the term this fixed or the accomplishment of the particular undertaking specified will
cause the automatic dissolution of the partnership.
Rights and duties of partners in a partnership at will
The partnership may be extended or renewed by the partners by express agreement, written or oral, or impliedly,
by the mere continuation of the business after the termination of such term or particular undertaking without any
settlement or liquidation. In such case, the rights and duties of the partners remain the same as they were at
such termination by only insofar as it is consistent with a partnership at will.
Dissolution/termination of the partnership
In other words, with such continuation, the partnership of a fixed term or particular undertaking is dissolved and
a new one, a partnership at will, is created the continued existence of which will depend upon the will of the
partners. Unless otherwise provided by the partners, a partnership is “at will,” meaning that a partner may
terminate the partnership relationship is a personal one, and thus, the law will not force anyone to continue as
a partner or to become a partner.
REFERENCE:
De Leon, H.S. & De Leon Jr., H.M. (2014). Comments and cases on partnership, agency, and trusts (9th Ed.).
Manila: REX Book Store.
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