CHA PTE R I
NAT URE AND FOR MAT ION OF A PARTNERSHIP
This chapter deals with the study of d.ffi
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classes of partnership and partners the
characteristics of a partnership and the accoun~i ere;i
0
~ Partnership formation. It also incl~des
the comparison of partn ershi p with other fonn 0 usine
ss organizations.
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LEARNING OBJECTIVES:
The student is expected to:
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I. Define partnership.
.
.
2. Differentiate partn ershi p from sole proprietorshi corporation and cooperative.
3. En~ erat e th~ characteristics of a partnership. P,
. . 4. Iden~fy the d!fferent kinds of partnership
• 5. Identify the diffe rent classes of partners.
·
ntage s and disadvantages of a partnersh.tp versus corporation and
6. Enum erate• the adva
h.
soIe prop neto rs 1p.
ership be registered.
7. ldent~fy the required government agencies where the partn
nting procedures compared to
8. Identify th~ areas_ wher e in there are differences in accou
sole prop netor sh1p and corporation.
.
9. Identify the diffe rent cases of forming a partnership.
p.
l 0. Reco rd trans actio ns concerning the formation of a partnershi
Definition of a Partnership •
more persons bind themselves
A Partnership is defin ed as a contract whereby two or
fund with the intention of dividing the
to contribute mon ey, prop erty or industry to a common
p Law). Two or more persons may
profits amo ng them selve s (Article 1767 of the Partnershi
. (1665a). The partnership is
also form a partn ershi p for the exercise of a profession
ers and creditors during creation,
governed by a partn ersh ip law. The rights of the partn
p are stipulated therein. The owners
operations, disso lutio n, and liquidation of the partnershi
of the partn ershi p are calle d partners.
Organizing a Partnership
into a c?ntract eith~r orally
A partnership is formed by two or more persons entering
tion and
rn the formation, opera
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or in writing. A writt en agre emen t which will gove
Ofthe
• Th. 15
.
Is one
.
.
rship
artne
Co-P
of
les
Artic
the
as
ed
term
is
p
ershi
dissolution of the partn
IS
ment
ion). This wntten agree
requirements by the SEC (Securities and Exchange Commiss
1
required when:
ership.
l. Immovable or real right s are contributed into the partn
ey or property)
2· The capital of the partn ershi p is three thousand pesos or more (mon
1
. I features of partnership
.
.
. ust be a valid contract
Essentia
ract
the cont
l. There m. must have legal capacity to ente r into
property, or industry to a common
ey,
2. The partiest be a mutual contribution of mon
.
. There mus
3
fund. ct must be lawful
.
e obje
prof its and to divide the same
in
Th
obta
to
be
t
mus
ose
purp
ary
rpose or prim
4.
.
5. The pu
among the parties.
. tents of the Articles of Co-Partnership:
ness
Thel ~am e, nature, purpose an~ lo~ati_on of the busi
or limited Partners
es of the partners tnd1cattng whether they are general
Nam
_
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2
addresses of the partners
n and th
, incase of property contribution, indicate the descriptio
cash
of
unt
Amo
_
3
each partner and e
value of said property to be originally contributed by
any
additional contributions that may be made by the partners
4. Term of existence or duration of the partnership
5. Duties and powers of each partner
partners
6. Manner of dividing the profits and losses among the
personal use.
7. Conditions covering the withdrawals by partners for
' capitals shall be allowed or not.
8. Provisions regarding salaries, interest on partners
th of the accounting period, the
9. Manner of keeping the books of accounts, the_ leng
starting date and the end
10. Provision pertinent to disso~ution and liquidation
11. Other special provisions and stipulations.
ents before it can operate
The partnership must comply first with all the legal requirem
in regi'stering a partnership with
lq,,ally. The following are the steps and the requirements
encies:
corres ndin
Certificate Issued
Requirements for Registration
Government
SEC Certificate
• Submit at least 3 possible business name
Securities and
for verification and approval
Exchange
Commission (SEC) • After the release of the approved business
name fill up the required SEC registration
name and submit together with the
Articles of Co-Partners~ip and pay
corres ondin fees.
Registration of
Department of
SEC Certificate
•
Business Name ears
5
stry
Indu
and
e
Trad
Articles of Co- Partnership
•
renew eve
DTI
SSS Certificate of
Social Secwity
• Filled SSS Application Form
Membe1:5hiP °7~t-S·
System (SSS)
memo circular
I 993 of DILG)
2
City or
Municipal Hall
•
•
•
•
•
•
•
•
Bureau of Internal •
•
Revenue (BIR)
•
•
Filled application form from
City/Municipal Office
Bar~gay clearance, community tax
certificate/corporate tax.
Zoning compliance
Fire Certificate - from fire department
Secure clearance and computation of
taxes, fees and charges -Treasurer's
Office
~eat Property Tax OR certification as to
o Real Property, if none-Assessor's
Office
Sub~it application together with all
requirements for verification, sequence
num~er and approval of payment .:..
:enn it and Licensing Division
ay taxes, fees and charges - Treasurer's
Office
Tax Identification Number.
SEC Certificate
Articles of Co-Partnership
Books of Accounts
Mayor's Business
Permit (renewal
annually - on or
before Jan 20)
BIR Certificate of
Registration
be
(to paid annually)
• Authority to print
documents such
as OR, SI and
•
others.
ations
Partnership Versus Other Forms of Business Organiz
ip and its purpose.
Business organizations are classified as to ·ownersh
As to ownership:
organization. It is fonned
Sole Proprietorship - is the simplest fonn of business
r.
and owned by only one person who is called a proprieto
or more persons bind themselves to
2. Partnership - is a contract whereby two
fund with the intention of
contribute money, property or industry to a common
of the New Civil Code of the
djviding the profits among themselves (Article 1767
partners.
Philippines). The owners of the partnership are called
ation of law, having the right of
3• Corporation - is an artificial being created by oper
expressly authorized by law or
succession and the powers, attributes, and properties
e of the Philippines). It is
incident to its existence (Section 2 of Corporation Cod
ons called lncorporators. The
formed by at least five but not more than fifteen pers
ers or shareholders while for
owners of the stock corporations are called stockhold
bers
the non stock corporations the owners are called mem
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legal form of business organization• It operates s· ·1
4. Cooperative - is another
•
corporation. It has its own set of board of directors and offi • mu to a
corporation where the votes of the stockholders are dependent icerhs. Unhke a
on t e number 0f
•
sharehold•ings, each member of a cooperati•ve 1s only entitled to one VOte.
As to purpose:
II.
1:.. . Service organizations - are those business firms which are engaged in d .
enng
• •services. The income is derived from use of skills, talents, expertise and
Of engagement for services rendered. E~ample: repairs and maintenance : s
laundry shops, beauty parlors, law offices, .accounting and auditing finns, docto!:
clinics, schools, photography and many more.
2. Trading or merchandising - are those business firms which are engaged in the
buying and selling of goods in the same form. They buy goods and sell them as is
without changing the fonn. Example: Variety store, department stores,
supermarkets, hai:dware, appliance companies, and many more.
3. Manufacturing firms~ are those companie s engaged in buying raw materials and
making them into new items called finished goods. They are changing the fonn of
what they procure (raw materials) and with. the application of labor and factory
O:..'!
overhe~ they produce a.different kind of product. The production process involves
raw materials, labor and factory overhead.
Example: Furniture f~ctory - from lumb~r to furniture (tables, chairs, cabinets)
Shoe/bag factory - from leather to shoes or bags
Fabrics factory - froin thread to fabrics or cloth
RTW factory- from fabrics to dresses, pants and others
4. Agriculture - agriculture companies are concerned with the planting of crops or
raising animals, and selling of their products either in raw or finished form at a
- · .• ,. profit.
Characteristics of a Partners hip
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1. Mutual Agency. In a sole proprietorship there is only one owner and oftentim
O
as a manager. In the partnership, there are two or more partners and each Ofthe
may act as an agent of the partnership for the operation of its business. ~he act the
partners as long as it is within the scope of the business of the partnership makes
Partnership liable to the third parties.
.
Of a partneJ'ship
2 If
his
t
.
partner
a
be
can
age
legal
of
person
Any
on.
A,6·sociati
ol11ntar,
r
•
H~ is willing to be associated in the partnership. No one can be forced agains
will to become a partner in a partnership.
3 • Based on Contract. In the fonnation of a partnership, it is required that t~o or;:
It is
persons agree to bind themselves to become partners of a p~nersbip .
·n
.
tbem.
btorls
that
contract
a
agreement whether oral or in writing becomes
15 1
pr~f~rre? !hat the contract must be in writing to be enforceabl e. If the contract
wnting it 1s called Articles of Co-Partne rship.
4
. . ·re because it m
Limited Life. A. partners
ay be dissolved at a n
hi
p has a hm1t~~ of th
y .~ ~
4. by the wi\\ of the pa
e law. The life of th
rtners or by op~ratlf th
dependent upon the liv
artners The busines e partne1:hip ts
es and the will o _e
s may conbnue to
operate but it
p em~
nt
will be under a new pa
rtnership agre
•
Unlimited Liability.
The partnershi.p has un1· • d 1· b.1lity It
S. partners but there
m
imite ta
must be, at least, one
•. . . ay• have limited
ge
neral partner. The h
ers
extends beyond their
ab
ih
ty
o
f
in
tb
te
e
re
p
st
ar
in
tn
the partnership. <?ur
including industrial
law ~tates tbat all J
partner sha\\ be \iab
'~ e : i
le pro-rata with al
th e pa rt ne rs hi p' s as
l their property an_
sets ha ve be en exha
a er
usted.· T he cr ed it or
after th e pe rs on al
s o f the partnershi
assets of th e partne
p
can run
rs (ex ce pt limited
o f the partnership
partners) if after all
ha ve be en exhauste
the
d and th er e are stil
l claims fo r settlemen assets
t.
6. Mutual Particip
ation in Profits. Toe
partners bi nd them
property or indust
selves to contribute
ry to a common fu
money,
nd w it h th e in te nt
am on g themselves
io n o
. E ac h partner
f dividing th e prof
ha s th e right to
its
partnership. The
sh
ar
e
profits will be divi
in the profits o f
de
d
th
in accordance w it h
e
in th e articles o f
the agreement stip
co-partnership. In
ul
th
at
e
ed
divided in accordan
absence o f th e ag
re em en t, pr of it s
ce w it h partners' ca
w il l b e
pital contribution.
7. Separate L eg al
Entity. A partners
hip ha s a legal entit
o f every partner
y separate and di st
or owner (Article
in ct from th at
1768 o f the Partne
organization, partne
rship Law). L ik
rship operates unde
e ot he r
r its
its ow n na m e and ca
n enter into contract business name. It ca n ac qu ir e proper
s.
ties in
8. Co-ownership
o f Contributed Ass
ets. All the proper
to th e partnership
ties contributed by
are owned by the pa
th e partners
rtnership by virtue
E ac h partner ha s th
o f it s separate lega
e right or claims ag
l entity.
ainst the properties
• their equities.
owned by th e partne
rship as
9. In co m e Tax,. Pa
rtnership is suited to
the practice or exer
Professi(,nal Partn
cise o f profession.
erships are exempt
General
ed from income ta
partnership is a pa
x. A general prof
rtnership formed by
essional
professionals engagi
or li ne of service.
ng in the same prof
Example: CP As fo
ession
rming an accountin
law office, engine
g firm, lawyers fo
ers rendering engine
rming a
ering services, doct
of professionals form
ors an d many mor
ing a partnership ot
e.
Group
her than services in
is no t considered
as general professi
line w ith their prof
onal
ession
ta x as a corporatio
n. Although the ge partnership. Therefore, they are subj
ect to
neral professional
income ta x the indi
partnership is not
vidual partner mus
subject to
t file their respectiv
share in the distribu
e income tax return
ted partnership inco
on the
m
income. Partners
hips other than ge e and from other sources of their re
spective
neral professional
income ta x as a corp
partnership are su
oration. (Refer to ta
bject to
xes on corporations
)
t' n. The partnership may be created by oral or in written agreement
10. Ease 1Formam,oore individuals. The formation of a partnership is easier than that of
between two or
•
t
d
',, . : . l:' •. a corporation'. It requ~res less~r leg~ re~u1remen s ~om pare to a corporation.
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Partnerships are classified as to:
1. Activity
. - one whtc
• • h the matn
• act1v1ty
• • ts
• buy1ng
• and selling
· of goods
. Trading Partnership
• or manufacturing of goods.
•
.Non Trading Part~ership - one which is organized for a specific purpose or
: project or for rendering services.
2. Liability of partners
.
General Partnership -. is a partnership wh~rein all of the partners are general
• partners. They are all personally liable_ for the debts of the partnership,
Limited Partnership - is a partnership formed by one or more general partners
with one or more limited partners. ,There must be at least one general partner
who ·will assume.- the unlimited liability of the pat1nership. The word
"LIMITED" or "LTD." is attached to the name of the partnership to notify the
• public that it is a limited-partnership. . . ,. ••
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3. Object of the partnership • ;• , ·
- ·.. .·. .
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.
.
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Universal partnership - may refer to all the pres~nt property or to all the profits
in a universal partnership of all present property. the partners ~ontribute their
property into a common fund with ~he intention of dividing the property
and all ·the profits they may acquire among themselves. The property
becomes the common property of all the partners because the ownership
of the property contributed/acquired passes to the partnership.
.
.
.
A universal partnershin of profits cOmprises all that·the partners may acquite
by their in~ustry or work during the· existence of the partnership. The
~ers retain the ownership of the property that they contributed at
of the formation of the partnership. Only the usufruct or the 0
which •hall pass on to the partnership.
,,..,~•.,__ •
.
. thing~ tpeir
..,,,,,,,,,., r'lllt#lnl,lp- one which has for its object detemunate
. n 0r
• o, fnill, or I IJ)Hitlc undertakings or
of a
e x e r c i s e
4,
p r o f e S S l o
~--
I \ I Q h
has no time specitied and
raunated
~m-P.e!Jle11t
f ono or all of the partners or by mutual CIIY .. m a y
.
b e
f
f xistence o
... one which the term or penod O e
5. Representation to Others
Ordinary Partnership - one which is in reality existing among the partners as
well as to the third parties.
Partnership by Estoppel - one which is in reality not a partnership but
considered as a partnership only in. relation to those who by their conduct
or omission are precluded to deny or disapprove its existence.
6. Legality of Existence
De Jure Partnership - one which has complied with all the legal
requirements for its existence.
De Facto Partnership - one which has not complied with all the legal
requirements for its existence.
7. Publicity
Secret Partnership - one wherein the existence of certain partners is not made
known to the public by any of the partners.
•
Open Partnership - one whose existence is made known to the public by the
partners of the firm
Characteristic elements of the contract 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 or designation in our law
3. Bilateral - because it is entered into by two or more persons and the
rights and
obligations arising there from 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 partner is considered as the
equivalent of that of the others.
.
.
. .
6. Principal - because it does not depend for its existence or vahd1ty
upon some other
contract. It can stand alone.
7. Preparatory- because it is entered into as a means to an efndd: ~d~amphle: to engage~.n
business for the realization of profits with the view o 1v1 1ng t em among e
contracting parties.
A partnership contract, in its essence, is a contract of agency, (Art, l8l8)
Partners are classified as to:
1. Liability
.
ed liability. He is liable for the
· General partner - 1s the one who assumes unlimit
.
h•
to the extent of his personal assets.
Lim~;::
~~eu~hose liability for the deb~s ~f ~~r~h ip is only
up t:the extent of his interest in the partnership. His hab1hty is ltm1ted.
:~!:t~:;~:
7
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2• Contribution
Capitalist partner~ 1s the one whose contr1but1ons to the Partnershi
.
P are in the
form of money or property.
Industrial partner - is the one whose contribution to the partnersh· . .
tp is hts labor,
industry, skill, talent or professional services.
h
d
3. Management of the busine~s fidr~
.
Managing partner - 1s es1gnate to manage t e affairs or business Operations
of
.
the partnership.
.
Silent partner - has financial interest in the firm but does not take active
the business although he may be known to the public as a partner.
part in
4. Other classification
Liquidating partner - one who is in charge of the winding up of the partnership
affairs in case of dissolution.
Ostensible partner - takes active part in the partnership and known to the public
as a partner in the partnership whether or not he has an actual interest in the
firm
Nominal partner - is not really a partner having no financial interest in the
partnership nor a party to the agreement of the partnership, but represented
being in fact a partner and make liable as a partner.
Secret partner - has financial interest in the firm and takes active part in the
business but he is not known: to the public as a partner.
Dormant partner - does not take ,active part in the management and is not known
to the public as a partner.
In forming a partnership, there are advantages as well as disadvantages over a corporation
and sole proprietorship.
•
.
.
Advantages:
l. It is easier to form and has lesser legal requirements compared to a corporation.
2 - Lesser cost to be incurred in the formation than the corporation.
3. Exempted.from income tax if it is a general professional partnership.
4• Flexibility of operations.
rsbiP h85
5• It is more reliable from the point of view of the creditor, sine~
partne
unlimited liability compared to a corporation which has limited habdity.
6
. a es of the parlllers
• More capital to be generated than a sole proprietorship_.
7 • More and better business opportunities due to contnbuted Imk g
than a sole proprietorship.
wiJI of
•
time at the
. of
1. t less stable because of its limited life. It can be dissolve any
1fl1
p0
the
the Partners
artn rship frot11
•
2 U r1 ·
e
.~ .~ited liability of the partners· for the debts of the P
•
view· of the Partner~
Disadvantages
.
I 18
d
3. Every partner has an authority and
may act as an agent of the partnersh
ip (divided
authority).
4. Disagreement might occur wh
en partners have the same level of
authority in the
management of the partnership.
5. Partners may suffer from the con
sequence of the negligence or wrong
partners.
action of other
6. The partner can 't easily sell his inte
rest or withdraw from the partnership.
Consent
from all the remaining partners is nee
ded.
Accounting for a Partnership
Accounting for a partnership is basically
the same with that of a sole proprietorship
Business transactions are recorded
.
in the same manner and the same req
uire
d
books of
accounts are maintained such as cas
h receipts journal, cash payments journa
l,
sale
s
journal,
purchases journal, general and subsid
iary ledgers. The difference in accoun
ting procedures
exists only in the areas of formation,
profit distribution, dissolution and liqu
idation.
Capital and Drawing Accounts
In a sole proprietorship, there is only one
owner. Therefore; there is only one cap
account and also one drawing accoun
ital
t maintained by the company. In a partne
rsh
ip, there are
two or more partners. The capital
and drawing accounts are as many as
the number of
partners. The capital and drawing acc
ounts are specified respectively with the
partners.
To illustrate:
,L
J
ove, oy and Happy are partners of Happy Lovely Joy Company. They share in the
. 1 dd • b l
profits and 1osses equal ly. The following are their. capita
an raw1ng a ances:
Partners
Capital
100,000
250,000
150,000
Love
Joy
Happy
Drawin2
5,000
20,000
10,000
. accounts should be presented in
The capital and drawing
the general ledger as
·
follows:
AP TAL
100,000
LOVE DRAWING
5,000
JOY CAPITAL
JOY DRAWING
L VE
250,000
20,000