CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
Law on Partnership
Atty. Dante dela Cruz/Atty. Kenneth Lloyd dela Cruz
General Provisions
1. Define Partnership
Contract of Partnership is a contract of two or more persons who bind
themselves to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves.
It may also be formed by two or more persons for the exercise of a
profession.
2. Characteristics of a contract of partnership
1) Bilateral or Multilateral – It is entered into by two or more persons
whose rights and obligations are reciprocal.
2) Consensual – It is generally perfected by mere consent.
3) Nominate – It has a special name given to it by law.
4) Onerous – The partners contribute money, property, or industry to a
common fund for the purpose of receiving profits.
5) Principal – It does not depend upon any other contract for its validity
or existence.
6) Preparatory – It is a means by which other contracts will be entered
into as the partnership pursues its business.
3. Essential requisites of partnership
1) There must be a valid partnership contract.
2) The parties must have legal capacity to enter into contract.
3) There must be a mutual contribution of money, property, or industry
to a common fund.
4) It must have a lawful object or purpose.
5) The partnership must be established for the common benefit or interest
of the partners which is to obtain profits and to divide the profits among
the partners.
4. Form of contract of partnership
1) As a rule, it may be in any form because it is perfected by mere consent.
2) If the contributed capital is at least P3,000, the contract of partnership
must be notarized and registered for SEC to prejudice and affect third
persons but not for validity of the contract. Noncompliance with this
formality will not affect the liability of the partners to third persons.
3) If immovable or real property is contributed, the contract of partnership
must be notarized and inventory of the said real property must be
attached to the contract of partnership for the contract to be valid. It
must also be registered to SEC to affect and bind third persons.
5. Cases that do not establish a partnership:
1) Persons who are not partners to each other.
Atty. Kenneth Lloyd dela Cruz
9817- Page 1
2) Co-ownership or co-possession, whether such co-owners or copossessors do or do not share any profits made by the use of the
property.
3) Sharing of gross returns, whether or not the persons sharing them have
a joint or common right or interest in any property from which the
returns are derived.
Generally, receipt by a person of share of the profits of a business is a
prima facie evidence that he is a partner. However, these are
exceptional instances when the receipt by a person of a share of the
profits of a business shall not be considered a prima facie evidence that
he is a partner in a business:
a. As a debt by installment or otherwise
b. As wages of an employee
c. As rent to a landlord.
d. As an annuity to a widow or representative of a deceased partner.
e. As interest on a loan, though the amounts of payment vary with the
profits of the business.
f. As the consideration for the sale of a goodwill of a business or other
property by installment or otherwise.
6. Kinds of Universal Partnership
Universal partnership of all present property is a partnership wherein all
the partners contribute all the property which belonged to them to the
common fund, with the intention of dividing the same among themselves,
as well as the profits which they acquire therewith.
Universal partnership of profits is a partnership whereby the common
fund comprises all that the partners may acquire by their work or industry
during the existence of the partnership.
7. Persons who cannot enter a universal partnership but can enter a
particular partnership:
1) Husband and wife
2) Persons who were guilty of adultery or concubinage at the time of
formation
3) Persons who were guilty of the same criminal offense
4) Public officer or his wife, descendants or ascendants and another
person by reason of the public officer’s position
8. In case Universal Partnership is entered into without specification of the
type of Universal Partnership, it shall be presumed to be a Universal
Partnership of Profits.
9. Particular
Partnership is a partnership which has for its object
determinate things, their use or fruits, or a specified undertaking, or the
exercise of a profession. Example is General Professional Partnership.
10. Kinds of partnership
1) General partnership is a partnership where all the partners are liable
to the extent of their separate property after the partnership assets have
been exhausted.
2) Limited partnership is a partnership where there is at least one general
partner and at least one limited partner who is liable to the extent of
his investment in the partnership.
Atty. Kenneth Lloyd dela Cruz
9817- Page 2
3) Partnership by estoppel or nominal partnership is a partnership which
is not partnership but is considered as one with respect to those who,
by reason of their conduct or admission, are precluded from denying
its existence.
4) Partnership by prescription is a partnership which is established by the
lapsing of time.
5) De jure partnership is a partnership that exists both in fact and in law.
6) De facto partnership is a partnership that exists in fact but not in law.
7) Partnership with a fixed term is one for which a period for its duration
is fixed by the partners.
8) Partnership for a particular undertaking is one which is organized for
a certain undertaking which, when attained, will cause the termination
of the partnership.
9) Partnership at will is one where no period is fixed by the parties for its
duration.
Obligations of the Partners
1.
Commencement of Juridical Personality of a Partnership
a. From the date stipulated or agreed by the partners
b. From the moment of the execution of the contract of partnership
2.
Rules on Division of partnership profits
a. It should be divided based on profit agreement.
b. In the absence of profit agreement
The industrial partner shall first receive a just and equitable share in
the profits before distribution to capitalist partners. (Old Civil Code:
Share of the least capitalist partner)
The remaining profits after distribution to industrial partners of his just
and reasonable share in profits shall be distributed to the capitalist
partners based on the following by order of priority: 1) Capital
contribution ratio 2) Equally.
In case of capitalist-industrial partner, he shall receive a just and
equitable share in the profit for being an industrial partner and then
he shall also share in the remaining profits as a capitalist partner based
on capital contribution ratio.
3.
Rules on Division of partnership losses
a. It should be divided based on loss agreement.
b. In the absence of loss agreement
The industrial partner shall be exempted from sharing in losses.
The losses shall be distributed to the capitalist partners based on the
following by order of priority: 1) Profit agreement of capitalist partners
2) Capital contribution ratio 3) Equally.
In case of capitalist-industrial partner, for being an industrial partner,
he shall not share in losses but for being capitalist partner he shall
share in the losses based on profit ratio.
Atty. Kenneth Lloyd dela Cruz
9817- Page 3
4.
Stipulation exempting a partner from share in partnership profit or
partnership loss
a. Stipulation excluding any partner from share in partnership profit is
void.
b. Stipulation excluding a capitalist partner from share in partnership
loss is void.
c. Stipulation excluding an industrial partner from share in partnership
loss is valid.
5.
Designation of profits or losses by a third person as agreed by the partners
a. If entrusted by the partners to a third person, it is binding upon the
partners and may be impugned only when it is manifestly inequitable.
b. If the designation by a third person is manifestly inequitable, it can no
longer be impugned by a partner who has begun to execute it.
c. If the designation by a third person is manifestly inequitable, it can no
longer be impugned by any partner if three months had already lapsed
from the time he obtained knowledge thereof.
Prescriptive period to file an action to impugn or question the
manifestly inequitable sharing of partnership profits or losses
designated by a third person - Within 3 months from the knowledge of
such designation but it must be before the said partner executes it.
6.
Rules on Management
Partnership management when a partner has been appointed manager in
the articles of partnership.
The managing partner may execute all acts of administration despite the
opposition of his partners unless he acts in bad faith.
With just or lawful cause, the revocation of the power of the managing
partner can be made by the vote of the partners representing the
controlling interest.
Without just or lawful cause, the revocation of the power of the managing
partner can be made only with the consent of all the partners including
the managing partner.
Partnership management when a partner has been appointed manager
after the partnership has been constituted or has been appointed in a
separate document other than articles of partnership.
The managing partner may execute all acts of administration.
In case of opposition to the decision of the managing partner on acts of
administration, the partners representing the controlling interest may
resort to voting for his removal as manager.
He may be removed with or without just cause by the vote of the partners
representing the controlling interest.
Two or more partners have been appointed as managers.
When there is a specification of their respective duties, each managing
partner shall perform only the duties specified in his appointment.
Atty. Kenneth Lloyd dela Cruz
9817- Page 4
When there is no specification of their respective duties and there is no
stipulation that one shall not act without the consent of the others, each
one may separately execute all acts of administration.
When there is no specification of their respective duties and there is no
stipulation that one shall not act without the consent of the others, the
decision of the majority of the managing partners shall prevail in case of
opposition.
When there is no specification of their respective duties and there is no
stipulation that one shall not act without the consent of the others, the
decision of partner owning the controlling interest shall prevail in case of
tie in voting.
When there is a stipulation that none of the managing partners shall act
without the consent of the others, the unanimous vote of all managing
partners shall be necessary for the validity of the acts. However, if there is
imminent danger to the partnership involving an act of administration, the
absence of any of the managing partners may be alleged by the present
partners to justify the approval of act of administration despite the absence
of one of the managing partners.
Manner of management has not been agreed upon.
All the partners shall be considered agents of the partnership or all of them
are managers.
Whatever any of the partners may do alone shall bind the partnership.
In case of opposition of the other partners, the decision of the majority
shall prevail and the decision of the partners owning the controlling
interest shall prevail in case of tie.
7.
Acts of the partner that bind the partnership.
a. Any act of a partner for the purpose of the partnership business.
b. Any act of a partner including the execution in the partnership name
of any instrument, for apparently carrying on in the usual way the
business of the partnership of which he is a member.
c. Any act of a partner which is not apparently for the carrying on of
business of the partnership in the usual way but authorized by the
other partners.
Acts that are not considered for apparently carrying on in the usual way
of business of the partnership and may not be performed by a partner
unless he is authorized by all the other
partners or these are acts which require unanimous vote of the partners
because they are considered act of strict ownership or dominion
a. Assignment of partnership property in trust for creditors or on the
assignee’s promise to pay the debts of the partnership.
b. Disposition of the goodwill of the business.
c. Acts which would make it impossible to carry on the ordinary business
of the partnership.
d. Confession of judgment.
e. Entering into a compromise concerning a partnership’s claim or
liability.
f. Submission of a partnership claim or liability to arbitration.
g. Renunciation of a claim of the partnership.
Atty. Kenneth Lloyd dela Cruz
9817- Page 5
8.
Industrial Partner vs. Capitalist Partner
Right of industrial partner to engage in another business,
An industrial partner cannot engage in any business for himself unless
the partnership expressly permits him to do so.
Alternative remedies of the capitalist partner if the industrial partner
engages in business for himself without the express permission of the
partnership.
a. Exclude the industrial partner from the partnership with a right to
damages; or
b. Avail themselves of the benefits obtained from the business he engaged
in with a right to damages.
Right of capitalist partner to engage in another business.
The capitalist partner can engage in a business of different kind even
without stipulation allowing him to do so and in a business of the same
kind if there is a stipulation allowing him to do so.
Remedies available to injured partners when a capitalist partner engages
in the same kind of business without stipulation allowing him to engage
in that business.
a. To ask the guilty capitalist partner to bring to the common fund any
profits accruing to him from the said transaction; and
b. To ask the guilty capitalist partner to bear all the losses from the said
transaction.
9.
Liabilities
Liability of a general partner, whether capitalist or industrial, for the
partnership debts
They shall be liable pro rata and subsidiarily with all their separate
property and after all the partnership assets have been exhausted.
Liabilities of newly admitted partner for partnership debts
He 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, except that this liability shall be satisfied only out of partnership
property, unless there is a stipulation to the contrary. (Limited Partner for
Partnership Obligation arising before his admission)
He is liable pro-rata and subsidiarily for all obligations incurred after his
admission as a partner. (General Partners for Partnership Obligation
arising after his admission)
Cases wherein the partnership shall be solidarily liable with all the
partners and wherein all partners are liable solidarily with the partnership
for everything chargeable to the partnership
a. For loss or injury caused to a third person or any penalty is incurred
by reason of the wrongful act or omission of any partner acting in the
ordinary course of business of the partnership or with the authority of
his co-partners.
b. Where one partner acting within the scope of his apparent authority
receives money or property of a third person and misapplies it.
c. Where the partnership in the course of business receives money or
property of a third person and such money or property is misapplied by
any partner while it is in custody of the partnership.
Atty. Kenneth Lloyd dela Cruz
9817- Page 6
10. Assignment or conveyance of partner’s interest to third person
The associate or assignee does not become a partner of the partnership
without the consent of the other partners.
The partnership is not dissolved by the assignment of the said interest.
The associate or assignee is entitled only to the share of the assigning
partner in the partnership profits and net assets at the date of liquidation.
11. Distinctions between partner’s right to specific partnership property and
partner’s interest in the partnership
A partner cannot assign a partner’s right to specific partnership property,
but he can assign his partner’s interest in the partnership.
A partner’s personal creditor cannot attach a partner’s right to specific
partnership property, but such creditor can attach the partner’s interest
in the partnership.
12. Rules
for application of payment when a person owes separate
demandable debts to the partnership and to the partner authorized to
receive also known as managing partner.
If the partner authorized to receive issues the receipt for the partnership,
payment shall be applied to the partnership credit in its entirety.
If the partner authorized to receive issues his own receipt, payment shall
be applied to the partnership credit and partner’s credit proportionately.
If the debt to the partnership is not yet due, the payment shall be applied
to the partner’s credit in its entirety.
If the debt owed to the partner is more onerous, the selection by the debtor
of the more onerous debt as to the application of payment shall be
followed.
Remember: If the debt is owed to a partner not authorized to receive
payment and he issues his own receipt, the payment shall be applied to
the personal credit or the debt to the partner in its entirety.
13. Preference of credits of partnership creditors and partner’s creditors
a. The partner’s personal creditors have preference over the partner’s
personal assets.
b. The partnership’s creditors have preference over the partnership’s
assets.
c. Partner’s separate creditor shall be paid out of the share of the partner
owing him if there is an excess in the partnership’s assets over
partnership’s liabilities.
d. Partnership creditors shall be paid out first using partnership’s
separate assets.
Atty. Kenneth Lloyd dela Cruz
9817- Page 7
Dissolution and Winding up:
1. Partnership Dissolution vs. Partnership Liquidation vs. Partnership
Termination
Partnership 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.
Partnership Liquidation is the process of settling the disputes or affairs of
the partnership after dissolution or winding up of the partnership
business.
Partnership Termination refers to the point when all the business or affairs
of the partnership are completely wound up.
2. Causes of dissolution of a partnership without violation of the agreement
of the parties: (automatic causes)
1) By the termination of the definite term or particular undertaking
specified in the agreement.
2) By the 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 undertaking.
3) By the expulsion of any partner bona fide or in good faith from the
business in accordance with such power conferred by the agreement of
the parties.
3. Automatic causes of dissolution of general partnership:
1) In contravention of the agreement between the partners, by the express
will of any partner at any time such as withdrawing from the
partnership.
2) When any event makes it unlawful for the business of the partnership
to be carried on or for the members to carry it on in partnership.
3) Loss before delivery of property where the partner contributed only its
use or enjoyment or in case of universal partnership of profits.
4) Loss after delivery of property where the partner contributed only its
use or enjoyment or in case of universal partnership of profits.
5) Loss before delivery of specific thing, which a partner has promised to
contribute to the partnership or in case of universal partnership of all
present property.
6) By the death of any partner.
7) By the insolvency of any partner.
8) By the insolvency of the partnership.
9) By the civil interdiction of any partner.
4. Grounds for court-ordered dissolution of partnership also known as nonautomatic causes of dissolution:
1) A partner has been declared insane in any judicial proceeding or is
shown to be of unsound mind.
2) A partner becomes in any way incapable of performing his part in the
partnership contract.
3) A partner has been guilty of such conduct as tend to affect prejudicially
the carrying on of the business.
4) A partner willfully or persistently commits a breach of the partnership
contracts.
5) The business of the partnership can be carried only at a loss.
Atty. Kenneth Lloyd dela Cruz
9817- Page 8
6) Other circumstances that render dissolution equitable.
Limited Partnership
1. Limited Partnership is a partnership where there is there is at least one
general partner, who is liable up to the extent of his separate assets after
the exhaustion of partnership assets, and there is at least one limited
partner, who is liable only up to the extent his capital contribution.
2. Formality of Limited Partnership - A certificate of limited co-partnership
must be signed under oath by the partners and must be recorded with the
SEC for it to be considered a limited partnership.
Effect if there is no substantial compliance with the registration of
certificate of limited partnership with the SEC. The partnership will be
considered a general partnership as to third persons.
3. Limited Partners
Contribution allowed to a pure limited partner
a. Cash
b. Personal property
c. Real property
As a general rule, the surname of a limited partner shall not appear in the
limited partnership name.
Instances when the limited partner’s name appear in the partnership
name without increasing the liability of such limited partner to a general
partner:
a. If the name of limited partner is also the surname of a general partner.
b. If prior to the time when the limited partner became such, the business
has been carried on under a name in which his surname appeared.
Effect if a limited partner’s name appears in the limited partnership name
contrary to allowed instances provided by law
a. The limited partner is liable pro-rata and subsidiarily to partnership
creditors who extend credit to the partnership without actual
knowledge that he is not a general partner.
Instances when a limited partner is liable pro-rata and subsidiarily like a
general partner to the partnership creditors:
a. If he allows his name to be included in the partnership name contrary
to allowed instances of law.
b. If he takes part in the control or management of the business.
Limited partner's interest is assignable.
4. Liquidation of a Limited Partnership
a. Limited partners are liable to the limited partnership’s liabilities but
only up to the extent of their capital contribution.
b. General partners are liable pro-rata and subsidiarily to limited
partnership’s liabilities up to the extent of their separate assets after
the exhaustion of partnership’s assets.
Atty. Kenneth Lloyd dela Cruz
9817- Page 9