Law on Partnership

Atty. Yen Mendoza

Nature of Partnership

• Within the context of Philippine law, a “partnership” is treated as an

artificial being created by operation of law with legal personality separate
and distinct from the partners thereof.
• Philippine partnerships operate under the concept of unlimited liability
• Unless otherwise agreed upon by the partners
• Each one of them acts as a manager and agent of the partnership
• Each of their acts bind the partnership
Governing Law of Partnership

• Partnerships in the Philippines are governed by and covered under Articles

1767 – 1867 of the Civil Code of the Philippines
• These are the articles that govern all aspects of partnerships: creation,
formation, existence, operation and management to their dissolution and
liquidation, including the obligations of the partners to one another, to the
public or third persons
Definition by Law

• Article 1767: By the 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 profits among themselves
• Two or more persons may also form a partnership for the exercise of a
profession
Essential Features of a Partnership

1. There must be a contract

2. The partners must have legal capacity to enter into a contract
3. There must be a mutual contribution of money, property or industry to a
common fund
4. The purpose must be to obtain pecuniary profits and to share the same
5. The purpose must be lawful, and
6. The articles of co-partnership must not be kept secret
There must be a Contract

• The three essential requisites of a contract must be complied with:

CONSENT, OBJECT AND CAUSE
• As in other cases of contracts, an agreement of partnership to be valid,
there must be a valid consideration existing between partners
• Each partner must surrender to the partnership an interest in his property,
labor, skill, or energy
Fiduciary in nature

• Partnership is a form of voluntary association entered into by the

association
• It is a personal relation in which the element of “delectus personae” exists
• Delectus Personae means it involves trust and confidence between
partners
Cases

• Ortega v. CA : a partnership that does not fix its term is a partnership at will
• The birth and life of a partnership at will is predicated on the mutual desire
and consent of the partners
• The right to choose with whom a person wishes to associate himself is the
very foundation and essence of that partnership
• Its continued existence dependent on the constancy of the mutual
resolve, along with each partners capability to give it
The parties must have legal capacity

• Only those person with legal capacity to give consent may enter into a
contract of partnership
• The following cannot give consent to a contract of partnership:
a. Unemancipated minors
b. Insane or demented persons
c. Deaf mutes who do not know how to read or write
d. Persons who are suffering from civil interdiction
e. Incompetents who are under guardianship
May juridical entities enter into a contract of
partnership?
• Yes in Mervyn v. Bieber, corporations which are expressly authorized by
statute or there is an express grant of such authority in the charter, a
corporation has authority to enter into a contract of partnership
• There is no prohibition against a partnership being a partner in another
partnership
• When two or more partnerships combine with each other creating a
distinct partnership
There must be mutual contribution of money,
property or industry
• Both real and personal property can be contributed
• Money-legal tender of the Philippines not checks, drafts or other
representatives of money
• Property – license to construct and operate a cockpit may be given as a
contribution to a partnership
The purpose must be to obtain profits

• The purpose must be to obtain profits and to divide the same among the
partners and that it is necessary that such profits or benefits shall be
common to all partners
Sharing of profits

• Sharing of profits is a prima facie evidence of partnership because it is an

element of the relationship
The purpose must be lawful

• A partnership cannot be formed for an illegal purpose and where the

thing to be done is illegal, the contract of partnership for the purpose of
doing such is equally illegal
• Article 1770 of the NCC states, : When an unlawful partnership is dissolved
by judicial decree, the profits shall be confiscated in favor of the State”
Effect of unlawful purpose of partnership

• The court will refuse to recognize its existence and will not lend their aid to
assist wither of the parties thereto in an action against the other
• The profits shall be confiscated in favor of the State
• The instruments and effects of the crim, if the purpose is a criminal act,
may be confiscated under the provisions of the RPC
• The contributions of the partners shall not be confiscated
The Articles of Partnership must not be kept
secret
• Art. 1775 provides that: “associations and societies, whose articles are kept
secret among the members, and wherein any one of the members may
contract in his own name with third persons, shall have no juridical
personality, and shall be governed by the provisions relating to co-
ownership
Characteristic Elements of Partnership

• Consensual
• Nominate
• Bilateral
• Onerous
• Commutative
• Principal
• Preparatory
Juridical personality of Partnerships

• Art. 1768: The partnership has a juridical personality separate and distinct
from that of each of the partners, even in cases of failure to comply with
the requirements of Art. 1772
• Question: If A and B decide to form a partnership, how many persons are
involved?
Art 1772

• Every contract of partnership having a capital of three thousand pesos or

more, in money or property, shall appear in a public instrument, which
must be recorded in the Office of the Securities and Exchange
Commission
What is referred to in Art 1772?

• The registration in the SEC is not necessary for the acquisition of juridical
personality
• The contract of partnership is a consensual contract.
• Perfected from the moment of consent
Regulatory control and supervision

• Partnerships like corporations are subject to absolute jurisdiction,

supervision and control of the SEC
Art. 1769. In determining whether a partnership
exists, these rules shall apply:
1) Except as provided by Article 1825, persons who are not partners as to
each other are not partners as to third persons:
2) Co-ownership or co-possession does not itself establish a partnership,
whether such co-owners or co-possessors do not share any profits made
by the use of the property;
3) The sharing of gross returns does not of itself establish a partnership,
whether the persons sharing them have a joint or common right or
interest in any property from which the returns are derived
Art. 1769. In determining whether a partnership exists, these
rules shall apply:
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
 Question

If Juan and Pedro are merely co-owners but Juan represents to Padring tat
he and Pedro are partners, can they be partners as to Padring, a third
person?
ANSWER: The general rule is NO. They cannot be partners as to Padring,
who is a third person if they are not partners as to each other.
The exception: where there is estoppel in Art 1825 of the NCC. So as to
Padring, Juan and Pedro are partners even if they are not real partners.
 Question
Juan and Pedro agree to buy a piece of land under the condition that
each should pay one-half of the price thereof, and that the property should
be divided between them. Is there a partnership in the case?
 Partnership vs. Co-ownership
As a general rule, an agreement between joint- owners of property to carry
common trade or business and to share the profits and losses thereof will
constitute a partnership.
A mere community of interest, such as exists between tenants in common or
joint tenants of real or personal property, does not make such owners
partners or raise a presumption that partnership exists.
 Partnership vs. Co-ownership
• Partnership, once established, has juridical personality, while a co-ownership
has none
• A partnership is created always by contract, while co-ownership may exist by
operation of law
• A co-owner may dispose of his individual interest in the common property as
an incident inherent in ownership, a partner has no such power
• The object of partnership is gain, a co-ownership does not necessarily exist for
profit
• The right of a co-owner descent to his heir; those of a partner (as partner in
partnership) do not, unless expressly stipulated in the contract of partnership
 Case
Juan died leaving heirs, her husband Pedro and her children. After the
partition, the properties were not distributed to Pedro and the other heirs.
Instead Pedro, as administrator, used such properties in business by leasing
or selling them and investing the income derived therefrom and the
proceeds from the sales thereof in real properties and securities. Every year
the heirs returned for income tax purposes their shares in the net income
derived from the properties and investments, and paid the corresponding
income taxes. However, the heirs did not actually receive their shares which
were left in the hands of Perdo, the administrator. The BIR decided that the
heirs had formed an unregistered partnership and therefore subject to the
corporate income tax pursuant to Sec 24 and 28 (b) of the Tax Code
Question 1: Is the BIR correct in contending that the heirs had formed an
unregistered partnership? When did the unregistered partnership begin?

Yes, the BIR is correct in contending that the heirs had formed an unregistered
partnership from the partition of the properties of the deceased Juan was
approved by the court. From the moment the petitioners allowed not only incomes
from their respective shares from the inheritance but even inherited properties
themselves to be used by Pedro as a common fund in undertaking several
transactions or in business, with the intention of deriving profit to be shared by them
proportionally, such act was tantamount to actually contributing such income to a
common fund, and in effect, they thereby formed an unregistered partnership
within the purview of the above mentioned provisions of the Tax Code
Question 2: Are the heirs, as unregistered partnership liable to pay corporate
income tax?

Yes the heirs as constituting an unregistered partnership, are liable to the corporate
income tax. The court differentiated the concept of partnership under the civil
code from that of unregistered partnership and held that, “such unregistered
partnership are considered as ‘corporations’ under Sec 24 and 84 (b) of the NIRC.

For the purpose of tax on corporations, our NIRC, includes these partnerships – with
the exception only for duly registered general co-partnership within the purview of
the term “corporation”
Question 3: May the heirs deduct from the income tax due their
unregistered partnership the income tax they paid on their individual
incomes of which the share in the net profit of their unregistered partnership
is a part?

No, the heirs may not deduct the individual income taxes they paid from the
income tax due their unregistered partnership. The partnership profits distributable
to the partners should be deduced by the amounts of income tax assessed against
the partnership
 Partnership vs. Joint Venture
1. Joint account exists when one person (called a silent partner) contributes
capital to another who is in business (called the ostensible partner) who acts
in his own name
2. A partnership has a firm name, while a joint account has none and it is
conducted in the name of the ostensible partner
3. A partnership has a juridical personality. While a joint account has no
juridical personality, and that action must be brought against the ostensible
partner only;
4. A partnership is a common fund, while a joint account has no common
fund;
5. Liquidation of a partnership may be entrusted to other persons, the
ostensible partner always liquidates the joint account
 Partnership vs. Conjugal Partnership
1. An ordinary partnership is created by the will of the parties whereas a
conjugal partnership arises from the mere celebration of marriage, that is, by
operation of law;
2. In an ordinary partnership, it is the agreement of the parties that determines
its object, duration, etc whereas in a conjugal partnership, it is the law that
regulates such matters.
3. In an ordinary partnership, the profits are distributed in accordance with the
agreement of the parties, and in the absence thereof, in accordance with
the provisions of law, whereas in a conjugal partnership, the profits are
always divided equally between the spouses
4. In an ordinary partnership, all partners are, in the absence of an express
agreement vested with the rights of management, whereas in a conjugal
partnership it is always the husband who manages the same
 Joint Venture, A Form of Partnership

• The legal concept of a joint venture is of common law origin. There is no

precise legal definition, but it has been generally understood to mean an
organization formed for some temporary purpose.
• The main distinction cited by most opinions in common law jurisdictions is
that the partnership contemplates a general business with some degree of
continuity, while the joint venture is formed for the execution of a single
transaction, and thus of a temporary nature.
• A corporation though cannot enter into a partnership contract, may enter
into a venture wit others
Art. 1771 – Art. 1774: Recitation
• The requirement of a public instrument were immovable property or real rights
are contributed is only in order that the contract of partnership may be
effective with respect to third persons, but as far as the partners themselves
are concerned, said contract is valid and effective.
• Art. 1773 complements the provisions of Art. 1771, because the execution of
public instrument would serve no purpose if the inventory of the real property
contributed is omitted. Without the inventory, the contract could not be
registered in the register of property, and such contributions to the partnership
would no way prejudice third persons who, might evidently be defrauded in
their transactions with the partnership, because of their belief in the efficacy of
the guaranty which said property might constitute.
• Take note that where the inventory is not made or signed by the parties and
attached to the public instrument the contract of partnership is void.
Classifications of Partnership
As to the Extent of its Subject Matter
a. UNIVERSAL PARTNERSHIP
i. Universal partnership of all present property; comprises the
following:
- Property which belonged to each of the partners at the
time of the constitution of the partnership
- Profits which they may acquire from all property contributed
ii. Universal partnership of profits; comprises all that the partners may
acquire by their industry or work during the existence of the
partnership
As to the Extent of its Subject Matter
Note: Persons who are prohibited from giving donations or advantage to
each other cannot enter into a universal partnership (Art. 1782)
 FACTS
A, B and C formed a limited partnership to engage in the importation,
marketing and operation of radios, television sets and amusement
machines, their parts and accessories, with B and C as limited partners.
Subsequently, A and B got married and thereafter, C sold his share to A and
B. So, A and B filed a separate income return for the limited partnership and
a consolidated return for them as spouses.
 ISSUE

Whether or not the partnership was dissolved

after the marriage of A and B and the
subsequent sale to them by C of the latter’s
share
 RULING
The firm was not a universal partnership, but a particular one. It follows that
the partnership was one that A and B were forbidden to enter under Art.
1782. Nor could the subsequent marriage of the partners operate to
dissolve it, such marriage not being one of the causes provided for that
purpose by law
Note: Art. 1782 – Persons who are prohibited from giving each other any
donation or advantage cannot enter into a universal partnership.”
b. Particular Partnership – has for its objects:
i. Determinate things
ii. Their use or fruits
iii. Specific undertaking
iv. Exercise of profession or vocation
As To Liability of Partners
a. General Partnership – consists of general partners who are liable pro rata
and subsidiarily and sometimes solidarily with their separate property for
partnership debts.
b. Limited Partnership – one formed by 2 or more persons having as
members one or more general partners and one or more limited
partners, the latter not being personally liable for the obligations of the
partnership
As to Duration
a. Partnership at Will – one in which no time is specified and is not formed
for a particular undertaking or venture which may be terminated
anytime by mutual agreement

b. Partnership with a Fixed Term – the term for which the partnership is to
exist is fixed or agreed upon or one formed for a particular undertaking
As to Legality of Existence
a. De Jure Partnership – one which has complied with all the legal
requirements for its establishment
b. De Facto – one which has failed to comply with all the legal
requirements for its establishment
As to Representation to Others
• Ordinary or Real Partnership – one which actually exits among the partners
and also as to 3rd persons
• Partnership by Estoppel – one which in reality is not a partnership but is
considered a partnership only in relation to those who, by their conduct or
omission, are precluded to deny or disprove its existence
As to Publicity
a. Secret Partnership – one wherein the existence of certain persons as
partners is not avowed or made known to the public by any of the
partners
b. Open or Notorious Partnership – one whose existence is avowed or made
known to the public by the members of the firm.
As to Purpose
a. Commercial or Trading Partnership – on formed for the transaction of
business
b. Professional or Non – Trading Partnership – one formed for the exercise of
a profession