Name: Class number: Date:

Section:
Schedule:

Lesson title: LAW ON Materials:

PARTNERSHIP Lesson Student Activity Sheets, Pen
Objectives
At the end of this module, I should be able to: References:
1. Recognize the right of partners to engage in Soriano, F. R. (2016). Notes in Business Law.
business. Manila: GIC Enterprises & Co., Inc.
2. Explain the rules on sharing of partnership
liabilities to third persons.
3. Apply the rules on sharing of partnership
liabilities in a given situation
4. Describe the requirement to operate under a
firm name.
5. Discuss the rights and obligations of
partners.

A. LESSON PREVIEW/REVIEW
1) Introduction

Hi, future accountant! Welcome to the fourth session of the law on partnership. The immediately
preceding module presented the rules on the division of profits and losses, the designation of share in
the profits and losses by a third person or by a partner, and the rules of management. As a
continuation, this module introduces the following topics: the right of partners to engage in business,
the rules on sharing of partnership liabilities to third persons, the requirement to operate under a firm
name, and the rights and obligations of partners.

2) Activity 1: What I Know Chart, part 1

Try answering the questions below by writing your ideas under the first column What I Know. It’s okay if
you write key words or phrases that you think are related to the questions. After the discussion, answer
the column” What I learned” and discuss your answers breiefly.
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B. MAIN LESSON
1) Activity 2: Content Notes

Right of partners to engage in business

1. Industrial partner
a. General rule and exception. An industrial partner cannot engage in business for himself unless
the partnership expressly permits him to do so. (Art. 1789) This prohibition applies even if the business
is of a kind different from the partnership business.
b. Effect if the industrial partner engages in business for himself without the express permission of
the partnership. The capitalist partners may either:
1) Exclude him from the partnership, with a right to damages, or
2) Avail themselves of the benefits obtained from the business he engaged in, with a right
to damages. (Art. 1789)

2. Capitalist partner
a. Kind of business a capitalist partner may engage in. A capitalist partner may engage in
business for his own account in the following:
1) The business he will engage in is of a kind different from the partnership business.
2) The business he will engage in is of the same kind as the partnership business, but
there is a stipulation allowing him to engage in that business. (See Art. 1808.)
b. Effects if a capitalist partner engages in the same kind of business without a stipulation allowing
him to engage in that business:
1) The capitalist partner shall bring to the common fund any profits accruing to him from his
transaction, and
2) He shall personally bear all the losses. (Art. 1808)

Rules on sharing of partnership liabilities to third persons

1. Nature of liability
a. Pro rata. The liability of the partnership shall be equally divided among the partners. The
sharing should be equal because the liability is imposed on all the partners including an industrial
partner whose proportionate share cannot be determined in the absence of a profit and loss sharing
agreement since he has no capital contribution.
b. Subsidiary. Each partner shall be liable with his separate property after all the assets of the
partnership have been exhausted. (Art. 1816)

2. Partners liable
All general partners whether:
a. capitalist partner, or
b. industrial partner.

3. Status of stipulation exempting a partner from pro rata and subsidiary liability after the
exhaustion of partnership assets
a. Void as to third persons.
b. Valid among the partners. (Art. 1817)

The stipulation, however, will not totally exempt a partner because his contribution will still be subject to
the payment of partnership liabilities. This is to reconcile Art. 1817 with Art. 1799 which declares void
any stipulation excluding a partner from losses, except in the case of an industrial partner.

Accordingly, if there is such stipulation, the liabilities shall be paid as follows:

a. The assets of the partnership shall first be used to pay the liabilities.
b. If the partnership assets are not sufficient, the liability shall be paid equally from the separate
assets of the partners including any industrial partner.
c. Thereafter, the partners not exempted from pro rata and subsidiary liability shall reimburse
according to the partners' profit and loss sharing agreement or in the ratio of their capital contribution,
whichever is applicable, to the following partners the amount paid by them:
1) Industrial partner whom the law exempts from losses.
2) General partners exempted from pro rata and subsidiary liability.

Requirement to operate under firm name

A partnership shall operate under a firm name, which may or may not include the name of one or more
of the partners. Those who, not being members of the partnership, include their names in the firm
name, shall be subject to the liability of a partner. (Art. 1815)

Rights of partners to choose firm name

1. Use of misleading name. May adopt any name it wishes as long as it is not identical or with
deceptive similar to a name which was previously adopted by any other entity, or interfere with the
rights of others, or is contrary to law
2. Use of names of deceased persons. In the choice of a firm name, no false, misleading or assumed
name shall be used. The continued use of the name of a deceased partner is permissible provided
that the firm indicates in all its communications that said partner is deceased.

Note:
Person who, not being partners, include their names in the firm name do not acquire the rights of a
partner ( Art. 1767.) under Article 1815, they shall be subjected to the liability of a partner ( Art 1816).
Insofar as third persons without notice are concerned
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Obligations of partners
1. Contribution of capital. To contribute equally to the capital of the partnership unless there is a
stipulation to the contrary. (Art. 1790)

2. Obligations with respect to contribution of property

a. To deliver to the partnership at the time it was constituted or on the date stipulated the property
he has promised to contribute.
b. To take care of the property before its delivery to the partnership with the diligence of a good
father of a family as a rule. (Art. 1163)
c. To be liable for damages in case of default.
d. To answer for eviction in case the partnership is deprived of the specific or determinate thing he
has contributed to the partnership.
e. To be liable for the fruits of the thing from the time they should have been delivered without the
need of any demand. (Art. 1786)

3. Obligations with respect to contribution of money

a. To deliver to the partnership at the time it was constituted or on the date stipulated the money
he has promised to contribute.
b. To pay interest on the amount he had promised to contribute from the time he should have
complied with his obligation.
c. To pay damages suffered by the partnership by reason of the default. (Art. 1788)

4. Obligations with respect to amount appropriated

a. To reimburse to the partnership the amount that he has taken from the partnership coffers.
b. To pay interest on the amount he had converted for his own use from the time of conversion.
c. To pay the damages suffered by the partnership by reason of the conversion, (Art. 1788)

5. Obligation to contribute additional capital

a. To contribute additional share to the capital in case of an imminent loss of the business of the
partnership, except:
1) If he is an industrial partner, or
2) If there is an agreement to the contrary.
b. To sell his interest to the other partners if he refuses to contribute such additional capital. (Art 1791)

6. Obligation of a partner who has received his share of the partnership credit. To bring to the
partnership capital his share of .a partnership credit which he has received in whole or in part even if he
may have given his receipt only if the following requisites are present:
a. The other partners have not collected their shares, and
b. The debtor becomes insolvent after the partner has received the payment. (Art. 1793)
7. Obligation to pay damages to the partnership. To pay to the partnership for damages suffered by it through his
fault. He cannot compensate them with the profits and 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. (Art. 1794)

8. Obligation to bear risk for property contributed. To bear the risk of specific and determinate things
owned by him which are not fungible, contributed to the partnership so that only their use and fruits may
be for the common benefit. The partnership shall bear the risk for the following contributions of
partners:
a. Fungible things or those that cannot be kept without deteriorating.
b. Things contributed to be sold.
c. Things brought and appraised in the inventory unless there is a stipulation. (Art. 1795)

The purpose of such appraisal, as a rule, is to determine how much shall be credited to the capital
account of the partner bringing the property to the partnership.

9. Obligation to render information. To render on demand true and full information of all things
affecting the partnership to:
a. Any partner, or
b. Legal representative of any deceased partner, or
c. Legal representative of any partner under disability. (Art. 1806)

10. Obligation to account. To account to the partnership for any benefit, and hold as trustee for it
any profits, derived by him without the consent of the partners from any transaction connected with the
formation, conduct, or liquidation of the partnership or from use by him of its property. (Art. 1807)

11. Liability of a newly-admitted partner for obligations of the partnership

a. Obligations existing at the time of his admission. He is liable but only to the extent of his
contribution except if there is an agreement that his liability shall extend to his separate property.
b. Obligations incurred after his admission. He shall be liable like the other partners pro rata with
their separate property after the partnership assets have been exhausted. (See Art. 1826.)
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Rights of partners
1. To associate another person with him in his share. The share referred to is the partner's share of
the profits. The associate shall not be admitted into the partnership without the consent of all the
partners, even if the partner having an associate should be a manager (Art. 1804)

2. To have access to and inspect and copy the partnership books at reasonable hours. The
partnership book shall be kept at the principal place of business of the Partnership, subject to any
agreement between the partners. (Art. 1805)

3. To have a formal account of Partnership affairs (Art. 1809):

a. If he is wrongfully excluded from the partnership business or possession of its property by his
co- partners.
b. If the right exists under the terms of any agreement.
c. With respect to benefits or profits derived by a partner without the consent of the partners from
any transaction connected with the formation, conduct, or liquidation of the partnership or from use by
him of its property. (Art. 1807)
d. Whenever other circumstances render it just and reasonable.

4. Property rights of a partner

a. His rights in specific partnership property (Art. 1810). A partner is co-owner with his partners of
specific partnership property. Such co-ownership has the following incidents (Art. 1811):
1) A partner, except as provided by law and as agreed upon by the partners, has an equal
right with his partners to possess specific partnership property for partnership purposes;
however, he has no right to possess such property for any other purpose without the consent of
his partners.
2) The right is not assignable except in connection with the assignment of rights of all the
partners in the same property.
3) The right is not subject to attachment or execution except on a claim against the
partnership. When a partnership property is attached for partnership debt, the partners, or any
of them, or the representatives of a deceased partner, cannot claim any right under the
homestead or exemption laws.
4) The right is not subject to legal support.
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b. His interest in the partnership (Art. 1810)

1) A partner's interest in the partnership is his share of the profits and surplus. (Art. 1812)
2) He may convey his whole interest in the partnership.
a) The conveyance does not cause the dissolution of the partnership.
b) The assignee does not become partner. Accordingly, he has no right:
(1) To interfere in the management of the business.
(2) To require any information of partnership transactions.
(3) To inspect partnership books.

The assignee's rights shall be limited to the following:

(1) To receive the profits to which the assigning partner would otherwise be
entitled.
(2) To avail himself of the usual remedies in case of fraud in management.
(3) In case the partnership is dissolved, to require an account from the date
only of the last account agreed to by all the partners.
3) A partner's interest in the partnership may be attached for his separate debts, subject to
the preference for partnership creditors. However, the partner may avail himself of the
exemption laws as against his separate creditors after the partnership debts have been paid.
(Art. 1814)

c. His right to participate in management. (Art. 1810)

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2) Activity 3: Skill-building Activities

PROBLEM-SOLVING. Calixto, Hebron, Austria, Roxas and Mendez are partners in the firm CHARM
Sales Company. Calixto is an industrial partner, while the rest are capitalist partners with Hebron
contributing P10,000.00; Austria, P15,000.00; Roxas, P5,000.00; and Mendez, P20,000.00. The
partners stipulated that Hebron shall not be liable for liabilities of the partnership after its assets are
exhausted. After several years of operational losses, CHARM's assets dwindled to P100,000.00, while
its liabilities reached P140,000.00. How shall the liabilities be paid?

Solve the problem by completing the table below.

Check your answers against the Key to Corrections found at the end of this SAS. Write your score on
your paper.

3) Activity 4: What I Know Chart, part 2

It’s time to answer the questions in the What I Know chart in Activity 1. Log in your answers in the third
column.
 Name: Class number: Date:
Section:
Schedule:

4) Activity 5: Check for Understanding

MULTIPLE CHOICE. Select the best answer by writing the letter of your choice before each number.

1. All of the statements is false, EXCEPT?

A. A capitalist partner may engage in business even if the business he will engage in is of the same line as the
partnership business regardless of consent.
B. A capitalist partner may engage in business if the business he will engage in is of a kind different from the
partnership business even without consent from other partners.
C. An industrial partner may engage in business if the business he will engage in is of the same line as the
partnership business even without stipulation
D. An industrial partner may engage in business if the business he will engage in is of a kind
different from the partnership business even without consent from other partners

2. Jill and Jack put up a partnership to engage in the computer repair business. Jill contributed
P200, 000.00, while Jack his services. On the vacant stall on the left side of the computer repair shop,
Jill intends to put up his own eatery business, while on the vacant stall on its right side, Jack plans to
establish a bakery. Who of the two may validly establish his own business without the consent of the
other partner?
A. Jill
B. Jack
C. Both Jack and Jill
D. Neither Jack nor Jill

3. An industrial partner may engage in business for himself ______.

A. When the partnership expressly permits him to do so.
B. When the partnership impliedly permits his to do so.
C. When the industrial partner still has available time to engage in another business.
D. When the industrial partner engages in another business with one of the capitalist partners.

4. A capitalist partner may engage in a business similar to the kind of business in which the
partnership is engaged ________.
A. if he has extra available capital.
B. if he brings with him another capitalist partner.
C. unless there is a stipulation to the contrary.
D. None of the choices

5. All of the following is an obligation of partners, except?

A. To pay to the partnership for damages suffered by it through his fault.
B. To bear the risk of specific and determinate things owned by him which are not fungible,
contributed to the partnership so that only their use and fruits may be for the common benefit.
C. To have access to and inspect and copy the partnership books at reasonable hours.
D. To render on demand true and full information of all things affecting the partnership

6. X and Y verbally agreed to form a contract of partnership 18 months from today, each one to contribute
P15,000. At the arrival of the said date, if one refuses to go ahead with the agreement, can the other enforce
the agreement?
A. Yes, since the agreement is to be enforced after one year from the making thereof, the same should be in
writing to be enforceable.
B. No, because the agreement was merely verbal.
C. Yes, because the prior agreement was voluntarily made
D. Yes, because the contract of partnership is not governed by the Statute of Frauds

7. A, B and C are partners who contributed the following: A- P6,000; B-P4,000 and C-industry. They agreed that
the profits and losses shall be distributed as follows to wit: A-35%; B-25% and C-40%. How shall the loss of
P10,000 be distributed

A. A-P6,000; B-P4,000; C-none

B. A-P3,333; B-P3,333; C-P3,333
C. A-P3,500; B-P2,500; C-P4,000
D. A-P3,000; B-P3,500; C-P3,500

8. The following are the property rights of partners, except:

A. Rights in specific partnership property
B. Interest in the partnership
C. Right to participate in the management
D. Appraisal right

9. I. An industrial partner can engage in business for himself, unless the partnership expressly does not permit
him to do so
II. Every partner is responsible to the partnership for damages suffered by it through fortuitous event
A. Only I is true
B. Only II is true
C. Both are true
D. Both are false

10. Who can demand true and full information?

A. Any partner
B. Legal representative of any deceased partner
C. Legal representative of any partner under legal disability
D. All of the above

*Activity 5: Check for Understanding is a GRADED QUIZ.

 Name: Class number: Date:
Section:
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C. LESSON WRAP-UP
1) Activity 7: Thinking about Learning

Congratulations for finishing this module! Shade the number of the module that you finished.

Did you have challenges learning the concepts in this module? If none, which parts of the module
helped you learn the concepts?

Some question/s I want to ask my teacher about this module is/are:

FAQs
1. Why is an industrial partner prohibited from engaging business for himself?
The partnership is the owner of the services of the industrial partner, which is his contribution to the common fund
of the partnership. (See Art. 1789.)

2. Why is a capitalist partner prohibited from engaging to business of the same kind?
The capitalist partner will be unfairly competing with the partnership business by reason of the information he has
obtained from the partnership business.

*KEY TO CORRECTIONS*

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