MODULE 1

BASIC CONSIDERATION AND FORMATION OF

PARTNERSHIP
(Ballada, 2019)

Introduction

This module discusses the different classification of partnerships, its characteristics

and advantages from other form of business organization.

Learning Outcomes

At the end of this module, students should be able to :

1. Discuss the nature and characteristics of a partnership
2. Enumerate different classifications of a partnership.

3. Enumerate different kinds of partners

4. Distinguish the difference and advantages of a partnership from corporation.
Lesson 1. Characteristics of a Partnership

In a contract of partnership, two or more persons bind themselves to contribute money,

property or industry to a common fund, with the intention of dividing the profit among themselves.
Two or more persons may also form a partnership for the exercise of a profession (Civil Code of
the Philippines, Article 1767).

An association of two or more persons to carry on, as co-owners, a business for profit (Uniform
Partnership Act, Section 6).

The partnership has a juridical personality separate and distinct from that of each of the partners
(Civil Code of the Philippines, Article 1768). Thus, for example, where Fabella and Neis established
a partnership, three persons are involved, namely: the partnership and the partners, Fabella and
Neis.

Partnerships resemble sole proprietorships, except that there are two or more owners of the
business. Each owner is called a partner. Partnerships are often formed to bring together various
talents and knowledge. Partnerships provide a means of obtaining

Characteristics
The important characteristics of a partnership are as follows:

1.Mutual Contribution. There cannot be a partnership without contribution of money, property or

industry (i.e. work or services which may either be personal manual efforts or intellectual) to a
common fund.

2.Division of Profits or Losses. The essence of partnership is that each partner must share in the
profits or losses of the venture.
3. Co-Ownership of Contributed Assets. All assets contributed into the partnership are owned by
the partnership by virtue of its separate and distinct juridical personality. If one partner contributes
an asset to the business, all partners jointly own it in a special sense.

4.Mutual Agency. Any partner can bind the other partners to a contract if he is acting within his
express or implied authority.

5.Limited Life. A partnership has a limited life. It may be dissolved by the admission, death,
insolvency, incapacity, withdrawal of a partner or expiration of the term specified in the partnership
agreement.

6.Unlimited Liability. All partners (except limited partners), including industrial partners, are
personally liable for all debts incurred by the partnership. If the partnership can not settle its
obligations, creditors' claims will be satisfied from the personal assets of the partners without
prejudice to the rights of the separate creditors of the partners.

7.Income Taxes. Partnerships, except general professional partnerships, are subject to tax at the
rate of 25% of taxable income.

8.Partners' Equity Accounts. Accounting for partnerships are much like accounting for sole
proprietorships. The difference lies in the number of partners' equity accounts. Each partner has a
capital account and a withdrawal account that serves similar functions as the related accounts for
sole proprietorships.

Lesson 2. Advantages and Disadvantages of a Partnership

A partnership offers certain advantages over a sole proprietorship and a corporation. It also has a
number of disadvantages. They are as follows:

Advantages versus Proprietorships

1. Brings greater financial capabilities to the business.
2. Combines special skills, expertise and experience of the partners.
3. Offers relative freedom and flexibility of action in decision-making.

Advantages versus Corporations

1. Easier and less expensive to organize.
2. More personal and informal.

Disadvantages
1. Easily dissolved and thus unstable compared to a corporation.
2. Mutual agency and unlimited liability may create personal of obligations to partners.
3. Less effective than a corporation in raising large amount of capital.

Lesson 3. Partnership Distinguished from Corporation

Manner of Creation. A partnership is created by mere agreement of the partners while a

corporation is created by operation of law.

Number of Persons. Two or more persons may form a partnership; in a corporation, at least five
(5) persons, not exceeding fifteen (15).

Commencement of Juridical Personality. In a partnership, juridical personality commences from

the execution of the articles of partnership; in a corporation, from the issuance of certificate of
incorporation by the Securities and Exchange Commission.

Management. In a partnership, every partner is an agent of the partnership if the partners did not
appoint a managing partner; in a corporation, management is vested on the Board of Directors.

Extent of Liability. In a partnership, each of the partners except a limited partner is liable to the
extent of his personal assets; in a corporation, stockholders are liable only to the extent of their
interest or investment in the corporation.
Right of Succession. In a partnership, there is no right of succession; in a corporation, there is
right of succession. A corporation has the capacity of continued existence regardless of the death,
withdrawal, insolvency or incapacity of its directors or shareholders.

Terms of Existence. In a partnership, for any period of time stipulated by the partners; in a
corporation, not to exceed fifty (50) years but subject to extension.

Lesson 4. Classification of Partnerships

1. According to object:
a. Universal partnership of all present property. All contributions become part of the partnership fund.
b. Universal partnership of profits. All that the partners may acquire by their industry or work during
the existence of the partnership and the use of whatever the partners contributed at the time of the
institution of the contract belong to the partnership. If the articles of universal partnership did not specify
its nature, it will considered a universal partnership of profits.
c. Particular partnership. The object of the partnership is determinate—its use or fruit, specific
undertaking, or the exercise of a profession or vocation,

2. According to liability:
a. General. All partners are liable to the extent of their separate
b. Limited. The limited partners are liable only to the extent of their personal contributions. In a limited
partnership, the law states that there shall be at least one general partner.

3. According to duration:
a, Partnership with a fixed term or for a particular undertaking.
b. Partnership at will. One in which no term is specified and is not formed for any particular
undertaking.

4. According to purpose:
a.Commercial or trading partnership. One formed for the transaction of business.
b.Professional or non-trading partnership. One formed for the exercise of profession.
5. According to legality of existence:
a.De jure partnership. One which has complied with all the legal requirements for its establishment.
b.De facto partnership. One which has failed to comply with all the legal requirements for its
establishment.

Lesson 5. Kinds of Partners

1. General partner. One who is liable to the extent of his separate property after all the assets of the
partnership are exhausted.
2. Limited partner. One who is liable only to the extent of his capital contribution. He is not allowed to
contribute industry or services only.
3. Capitalist partner. one who contributes money or property to the common fund of the partnership.
4. Industrial partner. one who contributes his knowledge or personal service to the partnership.
5. Managing partner. One whom the partners has appointed as manager of the partnership.
6. Liquidating partner. one who is designated to wind up or settle the affairs of the partnership after
dissolution
7. Dormant partner. One who does not take active part in the business of the partnership and is not
known as a partner.
8. Silent partner. One who does not take active part in the business of the partnership though may be
known as a partner.
9. Secret partner. One who takes active part in the business but is not known to be a partner by outside
parties.
10. Nominal partner or partner by estoppel. One who is actually not a partner but who represents himself
as one.

Lesson 6. Articles of Partnership

A partnership may be constituted orally or in writing. In the latter case, partnership agreements are
embodied in the Articles of Partnership. The following essential provisions may be contained in the
agreement:
1. The partnership name, nature, purpose and location;
2. The names, citizenship and residences of the partners;
3. The date of formation and the duration of the partnership;
4. The capital contribution of each partner, the procedure for valuing non-cash investments, treatment
of excess contribution (as capital or as loan) and the penalties for a partner's failure to invest and
maintain the agreed capital;
5. The rights and duties of each partner;
6. The accounting period to be adopted, the nature of accounting records, financial statements and
audits by independent public accountants;
7. The method of sharing profit or loss, frequency of income measurement and distribution,
including any provisions for the recognition of differences in contributions;
8. The drawings or salaries to be allowed to partners;
9. The provision for arbitration of disputes, dissolution, and liquidation.

A contract of partnership is void whenever immovable property or real rights are contributed and a
signed inventory of the said property is not made and attached to a public instrument.

SEC REGISTRATION

When the partnership capital is P3,000 or more, in money or property, the public instrument must
be recorded with the Securities and Exchange Commission (SEC). Even if it not registered, the
partnership having a capital of P3,000 or more is still valid and therefore has legal personality.

The SEC shall not register any corporation organized for the practice of public accountancy (The
Philippine Accountancy Act of 2004, Sec. 28).

➢ The purpose of the registration is to set "a condition for the issuance of the licenses engage
in business or trade. In this way, the tax liabilities of big partnerships cannot be evaded,
and the public can also determine more accurately their membership and capital before
dealing with them." (Dean Capistrano, IV Civil Code of the Philippines)

➢ To register a partnership with the SEC, here are the basic steps to follow:

• Have your proposed business name verified in the verification unit of SEC;
 • Submit the following documents:
• Articles of Partnership
• Verification Slip for the Business Name
• Written undertaking to change business name if required
• Tax identification number of each partner and/or that of the partnership
• Registration data sheet for partnership duly accomplished in six copies
• Other documents that may be required

➢ Pay the registration/filing and miscellaneous fees;

➢ Forward documents to the SEC Commissioner for signature.

Assessment Task 8-1

True or False 1

1. All partnerships are subject to tax at the rate of 25% of taxable income.
2. A dormant partner is one who does not take active part in the partnership business though may be
known as a partner.
3. A partner usually retains title to assets contributed to a partnership, so that certain assets may
be identified as belonging to a given partner.
4. In a general partnership, each partner's liability for losses is limited to his investment in the firm.
5. A partnership has a limited life because any change in the relationship of the partners dissolves
the partnership.
6. The essence of partnership is that each partner must share in the profits or losses of the venture.
7. A partnership with a capital of P3,000 or more is valid even if it is unregistered with the Securities and
Exchange Commission.
8. Each partner is personally liable for all debts of the partnership.
9. One advantage of a partnership over a corporate form of organization is the unlimited liability of
partners.
10. A partner by estoppel is one who is actually not a partner but who represents himself as one.
11. In a limited partnership, none of the partners has unlimited liability for the business debts.
12. A silent partner takes active part in the business of the partnership and is not known by
outsiders to be a partner.
13. A limited partnership must have at least one general partner.
14. A partnership may be established for charity.
15. All partnerships have a limited life and assets are co-owned by the partners.
16. A disadvantage of partnerships over corporations is the partners' unlimited liability.
17. A partnership has a juridical personality separate and distinct from that of each of the partners.
18. A partnership must always have two or more owners.
19. One of the partners in a proposed partnership is a multi-millionaire. The stipulati0n in the
articles of partnership that this partner shall be excluded from sharing in the profits of the
partnership is void.
20. Work or services that may either be personal manual efforts or intellectual may be contributed
to a partnership.
21. Ownership is easily transferred in a partnership.
22. A partnership cannot be established for religious purposes.
23. A partnership must always have at least two owners.
24. Not all of the partners in a general partnership are. personally liable for all debts incurred by
the partnership.
25. Bankruptcy of a partner will dissolve the partnership.

Multiple Choice

1.Which of the following partnership characteristics is a disadvantage?

a. Unlimited liability
b. Ease Of dissolution
c. Voluntary association
d. Participation in partnership income
2. All of the following are true for both general and limited partnerships except
a. both are easily dissolved.
b. both must have at least one general partner.
 c. all partners are liable for all debts of the firm.
d. all partners have the right to participate in the profits of the business.
3. A partnership agreement should include
a. each partner's duties.
b. the purpose of the business
c. the method of allocating profits and losses.
d. all of these.
4. Which of the following is not a characteristic of most partnerships?
a. Ease of formation
b. Limited liability
c. Mutual agency
d. Limited life
5. A partnership which comprises all the profits that the partners may acquire by their work or
industry during the existence of the partnership is called
a. de jure partnership
b. universal partnership of profits
c. particular partnership.
d. universal partnership of all present property
6. A partner who is liable for the payment of partnership debts to the extent of his separate
property after the partnership assets are exhausted is called
a. Limited partner,
b. General partner
c. Managing partner.
d. Capitalist partner.
7. The ability of a partner to enter into a contract on behalf of all partners is called
a. mutual agency.
b. voluntary association.
c. unlimited liability.
d. the partnership agreement.
8. Partner’s investments may include which of the following?
a. Cash
b. Non-cash assets
 c. Non-cash assets with liabilities to be assumed
d. All of the above
e. Only a and b
9. A business would be organized as a limited liability partnership to;
a. reduce regulation of the business
b. eliminate double taxation
c. raise additional capital
d. limit the liability of the owner’s to their investment
10. The most appropriate lead to look for relationship among partners is in the
a. accounting records
b. voluntary associations
c. partnership agreement
d. relevant professional journal

Reference

Ballada, W & Ballada, S., (2019), Partnership and Corporation Accounting, Dom Dane Publishers &
Made Easy Books

Prepared by :

ROSALIE D. TIU, CPA, MBA

Accounting Professor