PARTNERSHIP

Definition
It 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. (Art. 1767)

Characteristics
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; and
8. Profit-oriented (Art. 1770)
Essential Requisites of a Valid Partnership Contract
1. There must be a valid contract
2. The parties (two or more persons) must have legal capacity to enter into the contract;
Note: Parties may either be Natural Persons and/or Juridical entities; any person may be
a partner who is capable of entering into a contractual relation.
EXCEPTION:
a. Minors
b. Insane or Demented persons
c. Deaf-mutes who do not know how to write
d. Persons suffering from civil interdictions
e. Incompetents who are under guardianship
f. Article 1782. Persons who are prohibited from giving each other any donation or
advantage cannot enter into universal partnership.
g. Article 87 (FC) every donation or grant of gratuitous advantage, direct or indirect,
between the spouses during the marriage shall be void, except for moderate gifts
which the spouses may give each other on occasion of any family rejoicing. The
prohibition shall also apply to living persons living together as husband and wife
without valid marriage.
h. Article 73 (FC) Either spouse may exercise any legitimate profession, occupation,
business, or activity without the consent of the other. The latter may object only on
valid, serious, or moral grounds
i. Corporations
a. General Rule: A corporation is without capacity or power to enter into a
contract of partnership (33CC)
b. Exception: Joint Venture Partnership with another where the nature of the
venture is in line with the business authorized by its charter.
i. Joint Venture Agreement (JVA) - is an organization formed for some
temporary purpose, executed for a single transaction
ii. JVA is for temporary purpose and Partnership is continuous is NOT
wholly true because there is a Particular Partnership (1723
3. There must be a mutual contribution of money, property, or industry to a common fund;
4. The object must be lawful;
Note: The object is unlawful when it is contrary to law, morals, good customs, public order,
or public policy; no partnership may arise in such case, as the contract is deemed
inexistent and void ab initio.
5. The primary purpose must be to obtain profits and to divide the same among the parties.
Note: An Oral Partnership is valid even though not in writing. However, if
it involves contribution of an immovable property or a real right, an oral
contract of partnership is void. In such a case, the contract of partnership,
to be valid, must be in a public instrument (Art. 1771) and the inventory
of said property signed by the parties must be attached to said public
instrument (Art. 1773).
Formalities needed for the creation of a partnership
As a rule, no special form is required for its validity or existence (Art. 1771). The contract may be made
orally or in writing regardless of the value of contributions. However, if property or real rights have been
contributed to the partnership, the following shall apply:
1. Personal property
a. Less than P3,000 – may be oral
b. P3,000 or more – must be:
i. In a public instrument; and
ii. Registered with the Securities and Exchange Commission (Art. 1772)

Note: Failure to comply with the requirements of the preceding paragraph shall not affect
the liability of the partnership and the members thereof to third persons.

2. Real property or real rights – must be:

a. In a public instrument;
b. With an inventory of said property
i. Signed by the parties;
ii. Attached to the public instrument; and
iii. Registered in the Registry of Property of the province where the real property
is found to bind third persons.
Note: Article 1773. A contract of partnership is void, whenever immovable property is
contributed thereto, if an inventory of said property is not made, signed by the parties, and
attached to the public instrument. (Rationale: to determine the actual value of the
partnership and the respective part of the partners)

3. Limited Partnership – must be registered as such with the SEC, otherwise, it is not valid as a
limited partnership but may still be considered a general partnership with juridical personality.

Note: The failure to register the contract of partnership (general) does not
invalidate the same as among the partners, so long as the contract has
the essential requisites, because the main purpose of registration is to
give notice to third parties, and it can be assumed that the members
themselves knew of the contents of their contract. Non-compliance with
this directory provision of the law will not invalidate the partnership.

Typical Incidents of Partnership

1. The partners share in profits and losses (Arts. 1767, 1797-78);
2. The partnership has a juridical personality separate and distinct from that of each of the partners.
Such juridical personality shall be automatically acquired despite the failure to register in SEC (Art.
1768);
3. Partners have equal rights in the management and conduct of the partnership business (Art.
1803);
4. Every partner is an agent of the partnership, and entitled to bind the other partners by his acts,
for the purpose of its business (Art. 1818). He may also be liable for the entire partnership
obligations;
5. All partners are personally liable for the debts of the partnership with their separate property (Art.
1816, 1822-24) except limited partners are not bound beyond their amount of investment (Art.
1843);
6. A fiduciary relation exists between the partners (Art. 1807);
7. On dissolution, the partnership is not terminated but continues until the winding up of partnership
is completed (Art. 1829).
Kinds of Partners
1. As to the extent of liability
a. Capitalist – contributes either money or property to the common fund; he can also contribute
an intangible like credit, such as promissory note or other evidence of obligation or even a goodwill
b. Industrial – contributes only his industry
2. As to the time of entry
a. Original – one who became a partner at the time of the constitution of partnership
b. Incoming – one who became a partner as a new member of an existing partnership
3. Other kinds
a. Managing – one entrusted with the management of the partnership (Art. 1800 and 1801)
b. Liquidating – one who takes charge of the liquidation and winding up of the partnership affairs
(Art. 1836)
c. Retiring – those who cease to be the part of the partnership
d. Continuing – one who continues the business of a partnership after it has been dissolved by
reason of the admission of a new partner, or the retirement, death or expulsion of one or more
partners
e. Dormant, Silent, Secret – one whose connection to the partnership is concealed and who does
not take any active part in it
f. Partner by Estoppel – although not an actual partner, he has made himself as such by holding
himself out as a partner of allowing himself to be so held out. (Art. 1815)

Classifications of Partnership
1. As to Object
a. Universal partnership
i. Of all present property (Art. 1778)– The partners contribute all the property which
actually belongs to them to a common fund, with the intention of dividing the same among
themselves as well as all profits they may acquire therewith. The following become the common
fund of all the partners:
1. Property which belonged to each of the partners at the time of the constitution of the
partnership
2. Profits which they may acquire from all property contributed.
ii. Of all profits (Art. 1780) – comprises all that the partners may acquire by their industry
or work during the existence of the partnership as well as the usufruct of all movable or immovable
property which each of the partner may possess at the time of the celebration of the contract of
partnership

b. Particular partnership – it is one which has for its object, determinate things, their use and
fruits, or a specific undertaking or the exercise of a profession or a vocation (Art. 1783)
2. As to Liability of Partners
a. General Partnership – One where all partners are general partners who are liable even with
respect to their individual properties, after the assets of the partnership have been exhausted.
b. Limited partnership – One formed by two 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 (Art. 1843)
3. As to Duration
a. Partnership at will – the partnership has an indefinite term and it would be dissolved only when
an act or cause of dissolution happens or arises.
b. Partnership with a fixed period or Partnership for a Particular Undertaking – the partnerships
are automatically dissolved upon the expiration of the stipulated term or the achievement of the
particular undertaking stipulated in the contract of partnership.

Rules to Determine Existence of Partnership (Memorize)

1. Except as provided by Art. 1825 (partnership by estoppel), 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 or do not share ant profits made by the use of the property;
3. The sharing of gross returns does not 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;
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 varies 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 (Art. 1769)

Obligation to contribute
Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the
capital of the partnership (Art. 1790). It is not applicable to an industrial partner unless, besides his
services, he has contributed capital pursuant to an agreement.
Liability of capitalist partner to contribute additional capital
A capitalist partner is not bound to contribute to partnership more than what he agreed to
contribute, unless in case of imminent loss of the business and there is no agreement to the contrary.
Requisites before capitalist partners are compelled to contribute additional capital
1. Imminent loss of the business of the partnership
2. Majority of the capitalist partners are of the opinion that an additional contribution to the
common fund would save the business;
3. Capitalist partner refuses deliberately to contribute (not due to financial capability); and
4. There is no agreement to the contrary.
Obligations of managing partners who collect his personal receivable from a person who also owes the
partnership
1. Apply sum collected to 2 credits in proportion to their amounts;
2. If he received it for the account of partnership, the whole sum shall be applied to partnership
credit.
Application of payment
Note: The debtor is given the right to prefer payment of the credit of the partner if it should be
more onerous to him in accordance with his right to application of payment.
Rules regarding the prohibition to engage in another business
The capitalist partner may engage in a business which is not the same kind of business that the partnership
is engaged in. On the other hand, the industrial partner may not engage in any other business unless their
partnership expressly permits him to do so because as an industrial partner, he has to devote his full-time
to the business of the partnership (Art. 1789)
Duty to keep partnership book belongs to managing or active partner
The duty to keep true and correct books showing the firm’s accounts, such as books being at all times open
to inspection of all members of the firm, primarily rests on the managing or active partner or the particular
partner given record-keeping duties (Art. 1805)
Accountability of partners to each other as fiduciary
Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived
by him without the consent of the other partners from any transaction connected with the formation,
conduct, or liquidation of the partnership or from any use by him of its property (Art. 1807)
Rights of Partners
1. Right to reimbursement for amounts advanced to the partnership and to indemnification for risks
in consequence of management (Art. 1796);
2. Interest in the partnership;
3. Right on the distribution of profits (Art. 1797);
4. Right to participate in management;
5. Right to associate with another person with him in his share without the consent of the other
partners (Art. 1804)
Note: Such partnership formed between a member of a partnership and a third person for
a division of the profits coming to him from the partnership enterprise is termed sub-
partnership.
6. Right to free access and to inspect and copy at any reasonable hour the partnership books (Art.
1805);
7. Right to formal account as to partnership affairs:
a. If he is wrongly excluded from the partnership business or possession of its property by
his co-partners;
b. If the right exist under the terms of any agreement;
c. Duty to account as provided by Art. 1807;
d. Whenever there are circumstance which render it just and reasonable
8. Right to have the partnership dissolved; and
9. Property rights of a partner (Art. 1810)
a. His rights in specific partnership property;
A partner is a co-owner with his partners of specific partnership property. The
incidents of this rule are: (1) A partner, subject to legal provision on partnership
and to any agreement between the partners, has an equal right to possess specific
partnership property, but for partnership purposes only; (2) His right in specific
partnership property is not assignable. Reason: The extent of his beneficial
interest in the property cannot be determined until after liquidation of
partnership affairs. However, the rights of all the partners to the same property
may be assigned by them; (3) His right in said property is not subject to
attachment or execution except on a claim against the partnership and not to the
partner; and (4) The property is not subject to legal support due from a partner.
(Art. 1811.)

b. His interest in the partnership; and

This consists of a partner share in the profits while the partnership is a going
concern and in the surplus after its dissolution. (Art. 1812.)

Note: This interest may be assigned. Such assignment, however, does not make
the assignee or transferee a partner. Reason: No one can become a partner
without the consent of the other partners. The right of the assignee (among
others) is to receive the profits accruing to the assigning partner.

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

Note: This is not assignable except in connection with assignment of rights of all partners
in same property
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
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
Obligations of partners among themselves
1. Contribution of property
2. Contribution of money and money converted to personal use
 3. Prohibition in engaging in business for himself
4. Contribute additional capital
5. Managing partner who collects debt
6. Partner who receives share of partnership credit
7. Damages to partnership
8. Render information
9. Accountable as fiduciary
Obligations of Partnership/ Partners to Third Persons
1. Every partnership shall operate under a firm name (Art. 1815);
2. All partners shall be liable for contractual obligations of the partnership with their property, after
all partnership assets have been exhausted:
a. Pro rata
b. Subsidiary

By way of exception, all partners shall be liable solidarily with the partnership for
everything chargeable to the partnership under Art. 1822 and 1823.

3. Partner as an agent of the partnership (Art. 1818)

4. Conveyance of real property belonging to the partnership (Art. 1819)
5. Admission or representation made by any partner concerning partnership affairs within the scope
of his authority is evidence against the partnership (Art. 1820)
6. Notice to partner of any matter relating to partnership affairs operates as notice to partnership
except in case of fraud (Art 1821)
7. Partners and the partnership are solidarily liable to 3rd persons for the partner’s tort or breach of
trust (Art. 1822-24)
8. Liability of incoming partner is limited to:
a. His share in the partnership property for existing obligations;
b. His separate property for subsequent obligations (Art. 1826)
9. Creditors of partnership are preferred in partnership property & may attach partner’s share in
partnership assets (Art. 1827)

Remedies to the creditors of a partner

1. Separate or individual creditors should first secure a judgment on their credit; and
2. Apply to the proper court for a charging an order subjecting the interest of the debtor-partner in
the partnership for the payment of the unsatisfied amount of the judgment debt with interest
thereto.

Dissolution and Winding Up

Final stages of Partnership
Definition
1. Dissolution – it is a change in relation of the partners caused by any partner ceasing to be
associated in carrying on the business.
2. Winding up – Settling the partnership business or affairs after dissolution.
3. Termination – Point in time when all partnership affairs are completely wound up or completed;
end of partnership life.
Causes of Dissolution
1. Without violating 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 either before or after the termination of any specified term or
particular undertaking
d. Expulsion of any member in good faith of a member
2. Violating the agreement;
3. Unlawfulness of the business;
4. Loss;
 5. Death of any of the partners;
6. Insolvency of any partner or of the partnership;
7. Civil interdiction of any partner;
8. By decree of the court under Art. 1831.

Effects of dissolution
1. Partnership is not terminated;
2. Partnership continues for a limited purpose;
Note: The partner’s power of representation is confined only to acts incident to winding up of
completing the transactions begun but not then finished (Art. 1832)
3. Transaction of new business is prohibited.

Liability of partner where the dissolution is caused by the act, death or insolvency of a partner
Each partner is liable to his co-partners for his share of any liability created by any partner for the
partnership, as if the partnership had not been dissolved.
However, partners will not be liable when:
1. The dissolution, being by act of any partner, the partner acting for the partnership had
knowledge of the dissolution; or
2. The dissolution, being by the death or insolvency of a partner, the partner acting for the
partnership had knowledge or notice of the death or insolvency (Art. 1833)

Ways of Winding Up
The winding up of the dissolved partnership may be done either:
1. Judicially, under the control and direction of the proper court upon cause shown by any partner,
his legal representative, or his assignee; or
2. Extrajudicially, by the partners themselves without the intervention of the court.

Order of payment in winding up

A. In General Partnership
a. Those owing to creditors other than the partners;
b. Those owing to partners other than for capital or profits;
c. Those owing to partners in respect of capital; Those owing to partners in respect to profits
(Art. 1839 [2])
B. In a Limited Partnership
a. Those to creditors, in the order of priority as provided by law, except those to limited
partners on account of their contributions, and to general partners;
b. Those to limited partners in respect to their share of the profits and other compensation
by way of income on their contributions;
c. Those to limited partners in respect to the capital of their contributions;
d. Those to general partners other than for capital and profits;
e. Those to general partners in respect to profits;
f. Those to general partners in respect to capital. (Art. 1863)

Doctrine of Marshalling of Assets

The doctrine of marshalling of assets provides that:
1. Partnership creditors have preference in partnership assets.
2. Separate or individual creditors have preference in separate or individual properties.
3. Anything left from either goes to the other.
Persons that are required to render an account
1. Winding up partner
2. Surviving partner
3. Person or partnership continuing the business