PARTNERSHIP

I. General Provisions
Partnership defined
Partnership 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.
Note: Two or more persons may also form a partnership for the exercise of a
profession.
Essential requisites of a Contract of Partnership
1. There must be a valid contract;
2. There must be contribution of money, property, or industry to a common fund;
3. The partnership must be organized for gain or profit; and
4. The partnership should have a lawful object or purpose and must be
established for the common benefit or interest of the partners.
Partnership as Juridical Person
The partnership has a Juridical Personality separate and distinct from that of each
partner.
Consequences of the Partnership being a Juridical Entity. Partnership, in general, can
do the following:
✓ acquire and possess property of all kinds
✓ incur obligations
✓ bring civil and criminal actions
Characteristics of a partnership
1. Bilateral – it is entered into by two or more persons and the rights and
obligations arising therefrom are always reciprocal
2. Onerous – each of the parties aspires to procure for himself a benefit through the
giving of something
3. Nominate – it has a special name or designation in our law
4. Consensual – perfected by mere consent, upon the express or implied agreement
of two or more persons
5. Commutative – the undertaking of each of the partners is considered as the
equivalent of that of the others
6. Principal – it does not depend for its existence or validity upon some other
contracts
7. Preparatory – because it is entered into as a means to an end, i.e. to engage in
business or specific venture for the realization of profits with the view of dividing
them among the contracting parties.
Rules in Determining the Existence of a Partnership (Article 1769)
Rule 1: Persons who are not partners as to each other are not partners as to third persons;
Exception to this rule is Partnership by Estoppel

It is one where persons, by words spoken or written or by conduct, represent

themselves, or consent to another representing them to anyone, as partners in an
existing partnership or with one or more persons not actual partners.
Rule 2: Co-ownership or co-possession does not of itself establish a partnership, whether
such-co- owners or co-possessors do or do not share any profits made by the use of the
property;
Rule 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;
Rule 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 amount of payment vary with the profits of the
business;
(e) As the consideration for the sale of a goodwill of a business or other
property by installments or otherwise.

Commencement of Partnership
General rule: A partnership is a consensual contract; hence, it exists from the
moment of the celebration of the contract by the partners.
A partnership begins from the moment of the execution of the contract, unless it is
otherwise stipulated. Its registration in the Securities and Exchange Commission is not
essential to give it juridical personality.
Form of Partnership
General Rule: There is no form required in a Contract of Partnership.
Exception: If real properties or real rights in immovable properties are
contributed regardless of value. A public instrument is necessary, otherwise, the contract of
partnership is VOID.
Contribution Formal Status of Effect on
requirement contract Juridical
Personality
Capital of less than 3,000 Oral Valid Not affected
Capital of 3,000 or more Public Instrument Valid Not affected
Real property Public Instrument Void Affected

Lawful Object or Purpose

✓ A partnership must have lawful object or purpose, and must be established for the
common benefit or interest of the partners
 ✓ It must be within the commence of man, possible and not contrary to law,
morals, good customs, public order or public policy
✓ If a partnership has several purposes, one of which is unlawful, the
partnership can still validly exist so long as the illegal purpose can be separated
from the legal purposes
✓ There is no need for judicial decree to dissolve an unlawful partnership because it
is VOID ab initio
✓ When an unlawful partnership is dissolved by a judicial decree, the profits
shall be confiscated in favor of the state
Capacity to become a partner
✓ A person capacitated to enter into contractual relations may become a partner
✓ An unemancipated minor cannot become a partner unless his parent or guardian
consents
✓ A married woman, cannot contribute conjugal funds as her contribution to the
partnership unless she is permitted to do so by her husband or unless she is the
administrator of the conjugal partnership, in which the court must give its consent
authority
✓ A partnership being a juridical person by itself can form another partnership
✓ A corporation cannot become a partner on grounds of public policy

Kinds of Partners
A. Capitalist Partner – one who contributes money or property to a common fund
- Unless there is a stipulation to the contrary, a capitalist partner can engage
in other business but not the same as the partnership.
- General rule: a capitalist partner is not bound to contribute more than what
he agreed to contribute.

B. Industrial Partner – one who contributes only his industry or personal service
- An industrial partner cannot engage in other business, rule is absolute.
- Ratio: To prevent conflict between industrial partner and partnership, and
to ensure faithful compliance by said partner with his obligation.

C. General Partner – one whose liability to third persons to third persons

extends to his separate property.
D. Limited Partner – one whose liability to third persons is limited to his capital
contribution, also known as a special partner, does not participate in the
management of the business
E. Managing Partner - one who manages the affairs of the partnership
F. Liquidating Partner – one who takes charge of the winding up of partnership
affairs upon dissolution
G. Partner by Estoppel – one who is not really a partner, but is liable as a
partner for the protection on innocent third persons
H. Continuing Partner – one who continues the partnership after it has been dissolved
I. Surviving Partner – one who remains after a partnership has been dissolved by
reason of the retirement, death or expulsion of the partner
J. Ostensible Partner - one who takes active part and known to the public as a
partner in the business
K. Secret Partner – one who takes active part in the business but not known to be a
partner by the public.
L. Silent Partner – one who does not take any active part in the business although he
may be known to be a partner
 M. Dormant Partner - one who does not take active part in the business and is not
known or held out as a partner.
N. Original Partner – one who is a member of the partnership from the time of its
organization
O. Incoming Partner – about to be taken into a partnership as a member
P. Retiring Partner – one who withdraws from the partnership

Classification of Partnership
As to object
1) Universal Partnership refers to all the present property or to all the profits.
i All present property – partners contribute all their present property to the
partnership with the intention of dividing the profits among themselves.
ii All profits – the partners retain their ownership over their present and
future property, what passes to the partnership are the profits and or
income and the usufruct or use of the same.
Note: There is presumption in favor of universal partnership of
all profits Persons prohibited to enter into a universal partnership
1. Legally married spouses
2. Persons living together as husband and wife without a valid marriage
3. Persons who were guilty of adultery or concubinage at the time of donation
4. Persons found guilty of the same criminal offense, in consideration thereof;
5. Persons and a public officer or his wife, descendants and ascendants by reasons of
his office.
Ratio: Persons who are prohibited from giving each other any donation or
advantage cannot enter into universal partnership.
2) Particular Partnership has for its object determinate things, their use or fruits, or
a specific undertaking, or the exercise of a profession or vocation.
As to Liability
3) General Partnership partners liable pro rata and subsidiarily, sometime
solidarily with their separate property for partnership debts.
4) Limited Partnership has one or more general partners and one or more limited
partners, the limited partner not being personally liable for the obligations of the
partnership.
As to Duration
5) Partnership at Will has no time specified and not formed for a specific
undertaking and may be terminated anytime by mutual agreement or by will of
one partner alone.
6) Partnership with a Fixed Term or for Particular Undertaking has for its term
a fixed period or is formed for a specific undertaking.
As to Legality of its Existence
7) De Jure Partnership or one which has complied with the legal requirements
for its establishment.
8) De Facto partnership or one which has failed to comply with the legal
requirements for its establishment.
As to Representation to Others
9) Ordinary or Real Partnership or one which actually exists among the partners
and also as to third persons.
10) Ostensible or by Estoppel or not a real partnership but is considered one only
for to those who, by their conduct or admission, are precluded to deny or disprove
its existence.
Legal relations created by a contract of partnership
1. Relations among the partners themselves;
2. Relations of the partners with the partnership;
3. Relations of the partnership with third persons with whom it contracts; and
4. Relations of the partners with such third persons.

II. Rights and Obligations of Partners

Obligations of partners among Rights of partners among themselves

themselves
1. To make contributions 1. Right to reimbursement for amounts
2. Not to convert partnership money to advanced to the partnership and to
personal use indemnification for risks in
3. Prohibition in engaging in business for consequence of management
himself 2. Right on the distribution of profits and
4. To contribute additional capital losses
5. Managing partner who collects debt 3. Right to associate another person
6. Partner who receives share of with him in his share without the
partnership credit consent of the other partners
7. To pay damages to partnership 4. Right to free access and to inspect and
8. To keep the partnership books copy at any reasonable hour the
9. To render information partnership books
10. To be accountable as fiduciary 5. Right to formal account as to
partnership affairs
6. Right to have the partnership
dissolved
7. Property rights of a partner

Rules regarding the prohibition to engage in another business

Industrial Partner (Absolute Prohibition)
Cannot engage in business for himself unless the partnership expressly
permits him to do so. Capitalist partners may:
i Exclude him from the firm
ii Avail themselves of the benefits which he may have obtained
iii Damages, in either case

Capitalist Partner (Relative Prohibition)

Cannot engage in business (with same kind of business with the
partnership) for his own account, unless there is a stipulation to the contrary.
Capitalist partner, who violated shall:
i Bring to the common fund any profits accruing to him from said transaction;
and
ii Personally bears all losses (
Rules regarding distribution of profits and losses
A. Distribution of profits
a. The partners share in the profits according to their agreement
b. In the absence of such:
i Capitalist partner – in proportion to his contribution
ii Industrial partner – what is just and equitable under the circumstances
Note: If the industrial partner has contributed capital other than his services, he
shall also receive a share in the profits in proportion to his capital.
B. Distribution of losses
a. The partners share in the losses according to their agreement
b. In the absence of such, according to their agreement as to profits
c. In the absence of profit agreement, in proportion to his capital contribution

General rule: Stipulation excluding a partner in the sharing of profits or loss is VOID.
Exception: In the absence of stipulation to contrary, an industrial partner shall not
be liable for losses. However, he is not exempted from liability insofar as third
persons are concerned.
Property rights of a partner
1. Right in specific partnership property
2. Interest in the partnership (share in the profits and surplus)
3. Right to participate in the management

III. Dissolution and winding up

Dissolution
The dissolution of a partnership is the change in the relation of the partners caused
by any partner ceasing to be associated in the carrying on as distinguished from the
winding up of the business.
Kinds of Dissolution
✓ Judicial Dissolution
✓ Extrajudicial

Causes of Dissolution
1. Without violation of the agreement
a. Termination of the definite term or specific undertaking
b. Express will of any partner in good faith, when there is no definite term and
no specified undertaking
c. Express will of all partners (except those who have assigned their interests
or suffered them to be charged for their separate debts) either before or
after the termination of any specified term or particular undertaking
d. Expulsion of any partner in good faith of a member
2. In contravention of the agreement
3. Unlawful or Illegal Partnership
4. Loss of a specific thing
a. Specific thing promised as contribution is lost or perished before delivery
b. Loss of a specific thing contributed before or after delivery, if only the use
 of such is contributed
5. Death of any partner
6. Insolvency of a partner/partnership
7. Civil Interdiction of any partner/partnership
8. By virtue of a court’s judicial decree*
a. A partner has been declared insane or of unsound mind
b. A partner becomes in any other way incapable of performing his
part of the partnership contract
c. A partner has been guilty of such conduct as tends to affect prejudicially the
carrying on of the business
d. A partner wilfully or persistently commits a breach of the partnership
agreement
e. The business of the partnership can only be carried on at a loss f. Other
circumstances render a dissolution equitable
General rule: Dissolution does not discharge the existing liability of a partner.
Exception: Said liability is discharged when there is an agreement between:
i Partner himself;
ii Person/s continuing the business; and
iii Partnership creditors Liability in case of Dissolution
A. ACTS BINDING ON THE PARNERSHIP
a. Transactions necessary for winding-up
b. Transactions begun but not yet finished as of the time of dissolution
c. New business with innocent third persons-
i Former client with no knowledge or actual notice of dissolution
ii New client who knows of the partnership but has no knowledge or notice of
dissolution and the fact of dissolution not having published

B. ACTS NOT BINDING ON THE PARNERSHIP

a. When dissolution is due to unlawfulness of the business
b. When the acting partner is insolvent
c. When partner is not liquidating partner EXCEPT in the transaction is with-
i Former client with no knowledge or actual notice of lack of authority
ii New client who knows of the partnership but has no knowledge or notice of
the fact of want of authority not having been published.

Winding Up
Winding up is the actual process of settling the business or partnership affairs after
dissolution, involving the collection and distribution of partnership assets, payment of
debts, and determination of the value of each partner’s interest in the partnership.
Manner of winding up
The winding up of the dissolved partnership may be done either:
✓ Judicially, under the control and direction of the proper court upon cause
shown by any partner, his legal representative, or his assignee; or
✓ Extra judicially, by the partners themselves without intervention of the court