PARTNERSHIP

Learning Outcomes
At the end of the lecture the students will be able to understand the following;
 Formation and Classification of Partnership.
 Rights and obligations of partners.
 Dissolution and liquidation of partnership
Partnership
A partnership arises from a contract entered into by people who trust one another and
are willing to contribute their money, property, and service to a common fund that will be
used for profit.
A partnership is a fiduciary relation- one entered into and maintained on the basis of
trust and confidence. As such, both partnership and the partners composing it must
observed the utmost good faith, fairness and integrity in their dealings not only with and
among themselves but more particularly, in their dealings with third parties who transact
with them.
A partnership is a type of business organization organized created by a contract. In
order that there may be a partnership, two or more persons must agree to unite their
money, property, labor, or skill in carrying out a legitimate business for profit.
In order to establish the existence of a partnership, there must be;
1. Valid contract;
2. Legal capacity of the person forming partnership;
3. Mutual contribution of money, property, or industry to a common business;
4. A lawful business;
5. Primary purpose to which is obtain profits and to divide the same among the
parties.
CHARACTERISTICS OF A PARTNERSHIP.
 Consensual- it is perfected by mere consent, when two or more persons agree
expressly of impliedly, except if real property is contributed wherein, it becomes a
formal or solemn contract that requires the contract of partneship to be notarized
and an inventory of real property attached to be said public instrument.
 Bilateral- it is entered between two or more persons with reciprocal rights and
obligations.
 Principal- it does not depend for its validity or existence upon some other
contract.
  Commutative- the undertaking of one partner is regarded as equivalent of that of
the other partners.
 Preparatory- it is entered into so that such persons may lawfully engage in
business to realize profits which will then be divided among themselves.
 Nominate- it has a special name or designation under the law.
 Onerous- where partners contribute something so that they may share in the
profits of the business.
Any person capacitated may enter into a contract of partnership. Person who
suffering from civil interdiction, minor, insane or demented persons, deaf-mutes
who do not know how to write and incompetents who are under guardianship cannot
enter into partnership.
The essential elements of a partnership are lawful object and common benefit or
interest of the partners. If the partnership has an unlawful object or purpose, then the
contract is void ab initio.
A partnership may either be a universal which refer to all the present property or to all
profits or a particular partnership which has for its object determinate things their use or
fruits or specific undertaking, or exercise of a profession or vocation.
Illustration:
Ric, Jerry and Glen entered into a universal partnership of all present property, and they
agreed that all properties subsequently acquired would belong to the partnership.
Subsequently, Glen received a parcel of a land by inheritance form his father. Ric
received a parcel of land with fruit bearing trees as payment for his services from the
client. Given the facts, only Ric parcel of land with fruit bearing trees will go to the
partnership.
The parcel of the land which Glen inherited will not go into the partnership since future
inheritance cannot be stipulated upon. However, the fruits of Glen’s land belong to the
partnership if there is a stipulation to that effect they may be considered as properties
subsequently acquired.
According to Article 1782
Persons who are prohibited by law to give donations to each other such as husband
and wife cannot form a universal partnership. A husband and a wife may however, form
a particular partnership. While spouses cannot enter into universal partnership, they can
form and be partner in a limited partnership.
According to Article 1783
A particular partnership known as a professional partnership formed by professional
who join together to practice their profession.
As a general rule, a contract of partnership may be made orally or in writing, unless real
property or rights re contributed, in which case, it should be in a public instrument.
When cash or property worth P3,000 or more is contributed as a capital, the Articles of
Partnership shall be in public instrument and registered with Securities and Exchange
Commission (SEC).
If the partnership is not written in a public instrument, the remedy of the partner is to
compel the execution of a public instrument through an action for specific performance.
To illustrate:
Berry and Charito orally agreed to form a partnership. Each contributed cash and
property worth P10,000 to a common fund but they did not register to SEC. In this, the
partnership is still valid.
Duration of partnership
Since a partnership is a consensual contract, that is, perfected by mere consent or
agreement of the parties, it exist from the moment of the execution of the contract
unless the parties stipulated otherwise. As to the duration, a partnership may either be
for a fixed term or a particular undertaking or at the will, the formation and dissolution of
which depends on the mutual desire and consent of the parties.
Rules to Determine the Existence
When the intent of the parties is clear, such intent shall govern. When it does not
appear, clearly, the following rules apply.
 Persons who are not partners to each other are not partners as to third persons
unless there is estoppel.
 Co-ownership or co-possession does not establish a partnership, even when
there is sharing of profits in the use of the property.
 Sharing of gross returns does not establish a partnership, even when the parties
have a joint or common interest in any property.
Illustration:
There is no partnership created in each of the following instances:
A. Jessa and Jera inherited from their mother a huge amount of money, which they
used to buy a condominium unit that is leased to Charise.
B. Sheila receives a share of the profits, as payment of a debt to her by partnership.
C. Jason agreed to manage the Sand and Gravel Co. he solicited hauling
transactions from different construction firms and receives as compensation 10%
of the proceeds.
Kind of partnership
There are different kinds of partnership, to wit:
  As to the legality of its existence, a partnership may either be a partnership de
jure that has complied with all the requisites for its lawful establishment, or a
partnership de facto that failed to so comply.
 As to its object, a partnership may either be a universal partnership of all the
present property or of all profits, or a particular partnership.
There are different kinds of partnership, to wit:
 As to the liability of the partners, a partnership may either be a general
partnership consisting of a general partner who are liable pro rata and
subsidiarily or at times solidarily with their separate property for partnership
obligations, or a limited partnership which is formed by two or more persons
having as members one or more general partners and one or more limited
partners who are not personally liable for the partnership obligations.
There are different kinds of partnership, to wit:
 As to its publicity, a partnership may either be a secret partnership, one where
the existence of a certain persons as partners is not made known by the partners
or an open or notorious partnership whose existence is made known to the
public.
 As to its purpose, a partnership may either be a commercial or trading that exist
for the transaction of business or a profession or non-trading partnership that
exist for the exercise of a profession.
There are different kinds of partners, to wit:
 Capitalist partners who contribute money and property
 Industrial partner who contributes only his industry, skill, or services
 General partner whose liability to third persons extend to his separate property
 Limited partner whose liability to third persons is limited to his capital contribution
 Managing partner who is designated to manage the affairs or business
partnership
 Liquidating partner who takes charge of the winding up of the partnership
 Partner by estoppel who is not really a partner but is liable as such for the
protection of innocent third persons
 Continuing partner who continues the business after the dissolution of the
partnership by admission of a new partner, or retirement, death, or expulsion of
existing partner.
 Surviving partner who remains a partner after the dissolution by death of the
partner.
Partnership as Distinguished from Other Contract
Partnership distinguishes from joint venture
A partnership operates with a firm name and a legal personality, while a joint
venture operates without a firm name and a legal personality.
Partnership distinguishes from co-ownership
A partnership is generally created by either an express or implied contract, while
co-ownership is generally created by law and may exist even without a contract.
Generally, the purpose of partnership is for profits while the purpose of co-ownership is
the common enjoyment of a thing or a right.
Partnership distinguishes from a corporation.
A partnership is created by agreement, while a corporation is created by
operation of law, Revised Corporation Code. A partnership’s personality can commence
from the moment of execution of a contract, while a corporation’s personality
commences from the issuances of certificate of incorporation of SEC. When
management is not agreed upon, every partner may act for the partnership, while
management in a corporation is vested in the board of directors or trustees. Partners
are generally liable for partnership debts, while stockholders are liable only as to their
shares.
Partnership distinguishes from association.
A partnership has juridical personality, while association has no juridical
personality. A partnership is organized for profits while an association is not always
organized for profit. Capital is contributed to a partnership, while capital is not
contributed to an association although fees are collected from members.
Rights and Obligation of a Partnership
Right to contribution.
The partnership has a right to the contribution from the partners. The money or
the property contributed, or their use or fruits becomes the property of the partnership.
Regardless of the nature of contribution, whether as a capitalist partner or an industry
partner, every partner is obliged to contribute at the beginning of the partnership or at
the stipulated time the money, property, or the industry that he may have promised to
contribute to the partnership.
To illustrate.
Jerry, James and John entered into a partnership where John contributed his
apartment situated in Bacolod City to be converted into an office of the firm. Before the
delivery of the title and possession of the said property to the partnership, a fire
completely razed the said apartment. In this case, the partnership is dissolved the
contribution he has promised.
If a partner promised to contribute specific property, he is obliged to preserve
said property with the diligence of a good father of a family pending delivery to the
partnership. If he fails to contribute the property that he promised, he becomes ipso
jure liable as a debtor of the partnership, without the need of demand, and the other
partners can file an action for specific performance.
To illustrate.
A, B, C, and D partnership, only D did not deliver his agreed capital contribution
in the form of a specific house and lot. The remedy against him is for specific
performances.
Right to Additional Contribution.
A capitalist partner is one who contributes money or property to the common
fund. As a general rule he is not bound to contribute to the partnership more that what
he agreed to contribute. However, in case of an imminent loss of the business of the
partnership where majority of the capitalist are of the opinion that an additional
contribution to the common fund would save the business, in the absence of an
agreement to the contrary, he is obliged to contribute an additional share to save the
business.
Right to Apply Payment Received to Partnership Credit.
One who manages the business of the partnership is commonly referred to as a
managing partner appointed by articles of partnership. A partner authorized to manage
collects a demandable sum owed in his own name from a person who also owes the
partnership a demandable sum, is obliged to apply the sum collected to both credits pro
rata, even if he issued a receipt for his own credit only.
However, in case the receipt was issued for the account of the partnership credit
only, the sum shall be applied to the partnership credit alone. Also, when the debtor
declares, at the time of making the payment, to which debt the sum must be applied, it
shall be so applied.
To illustrate.
Jenny is indebted to Sheila, the managing partner of Big Boy & Co. for P10,000
and to the partnership for P20,000. Sheila collected P15,000 from the Jenny when both
debts are due and demandable. The payment will be applied:
1. P15,000 to Big Boy & Co. if Sheila issued a receipt for partnership credit.
2. P10,000 to Big Boy & Co. and P5,000 to Sheila if Sheila Issued a Receipt for her
credit.
3. P15,000 to Sheila if Jenny applied the payment to her debt with Sheila provided
such debt is more onerous than the debt to Big Boy & Co.
Right to Return of Credit Received.
A partner, authorized to managed or not, who already received in whole or in part
his share of a partnership credit, is obliged to bring to the partnership capital what he
received when the other partners have not collected their shares and the partnership
debtor has becomes insolvent.
To illustrate.
Gerry, Bong and Trio of GBT Partnership have a partnership credit against Curt
in the amount of P300,000. In the course of conducting the business of the partnership,
Gerry, Bong and Trio agreed to equally divide the credit of P300,000 among
themselves. Bong and Trio were able to collect from Curt P100,000 each, but Gerry was
not able to collect because Curt became insolvent. In this case, Bong and Trio should
return to the partnership capital what they have collected.
Right to Indemnify for Damages.
Every partner is responsible for to the partnership for damages suffered by its
through his fault. The liability for damages cannot be set-off or compensated by profits
or benefits which the partner may have earned for the partnership by his industry; but if
unusual profits are realized through extraordinary efforts of the partner at fault, the
courts may equitably mitigate the liability for damages of the partner at fault.
Suit for Damages.
Before a partner may sue another for alleged fraudulent management and
resultant damages, there must be a liquidation first to determine the extent of the
damages. Without the liquidation of a partnership affairs. A partner cannot claim
damages.
Responsibility to Partners.
The partnership is obliged to refund to the partner the amounts disbursed by him
on behalf of the partnership such as advances for partnership obligations due and
payable, together with the interest from the time the expenses were incurred. It is also
obliged to answer for the obligation, which partner may have contracted in good faith in
the interest of partnership business and is obliged to answer for risk in consequences of
its management.
The partners have the following rights to wit;
 Right to Associate Another in Share
 Right to Inspect Partnership Books
 Right to a Formal Account
 Property Rights of Partners
 Ownership of Certain Properties
 Rights in a Specific Property
 Interest in Partnership
 Right to Participate in Management
  Right to Profits and Obligations for Losses
 Exclusion of Partner from Share
 Obligation to Render Information
 Obligation to account and Act as Trustee
DISSOLUTION AND WINDING UP
Law on Partnership defines dissolution as the change in the relation of the partners
caused by any partner ceasing to be associated in the carrying on the business.
Winding up is the actual process of settling the partnership business or affairs after
dissolution. It involves the collection and distribution of partnership assets, payment of
debts, and determination of the value of the interest of the partners in the partnership.
Termination is the point when all partnership affairs are completely wound up and
finally settled; it signifies the end of the life of the partnership.
There are many ways to dissolve a partnership, to wit:
Without violation of the agreement-a partnership may be dissolved without violation of
the agreement between the partners in the following instances:
1. Termination of the definite term or particular undertaking specified in the agreement;
2. The express will of any partner, who must act in good faith when no definite term or
particular undertaking is specified;
3. The express will of all the partners who have not assigned their interest or charged
them for separate debts, either before or after the termination.
4. The bona fide expulsion of any partner from the business in accordance with power
conferred by the agreement.
Cause of Dissolution
By operation of law- a partnership may also be dissolved by operation of law under the
following instances:
1. Any event which makes it unlawful for the business of the partnership to be carried on
or for the members to carry it on in a partnership.
2. When a specific thing which a partner had promised to contribute, perishes before
delivery, or by the loss of the thing, only the use or enjoyment of which has been
contributed;
3. The death of any partner;
4. The insolvency of any partner or the partnership;
5. The civil interdiction of a partner.
By decree of a court- a partner may apply for dissolution in court in case:
1. A partner is declared insane in any judicial proceeding or shown to be of unsound
mind;
2. Incapacity of a partner to perform his part of the partnership contract;
3. A partner is guilty of conduct prejudicial to the business of the partnership.
4. A partner's willful or persistent breach of the partnership agreement or conduct that
makes it reasonably impracticable to carry on the business of the partnership with him;
5. Business can only be carried on at a loss;
6. Other circumstances which render dissolution equitable; or
7. Upon application by the purchaser of a partner's interest;
a. After the termination of a specified term or a particular undertaking;
b. Anytime if partnership at will when interest was assigned or charging order was
issued.
A partnership is also dissolved under the following instances:
1. When a new partner is admitted into an existing partnership;
2. When any partner retires;
3. When the other partners assigned their rights to be the sole remaining partner;
4. When all the partners assign their rights in the partnership property to third persons.
Illustration:
Paula, Patrice and Precious formed a business partnership for the purpose of engaging
in neon advertising for a term of five years. Paula subsequently assigned to Paul her
interest in the partnership. When Patrice and Precious learned of the assignment, they
decided the dissolve the partnership before the expiration of its term as they had an
unproductive business relationship with Paul in the past. Unaware of the decision made
by Patrice and Precious but sensing their negative reaction to his acquisition of Paula's
interest, Paul simultaneously petitioned for the dissolution of the partnership. Based on
the given facts the dissolution done by Patrice and Precious without the consent of
Paula and Paul is valid. The dissolution by Patrice and Precious did not violate the
contract of partnership even though Paula and Paul did not consent thereto. The
consent of Paula is not necessary because she had already assigned her interest to
Paul.
Effect of Dissolution

The dissolution of the partnership produces the following effects, to wit;

 With respect to third person- a partner can still bind the partnership even after
the dissolution in the transactions in connection to winding up partnership affairs
or completing transactions unfinished at dissolution and transactions that would
 bind partnership if dissolution had not taken place when the other party or
creditor had extended credit to the partnership prior to the dissolution and had no
knowledge or notice of the dissolution.
 On liability for transactions after dissolution- the liability of a partner shall be
satisfied out of the partnership assets alone when such partner had been prior to
dissolution. But the partnership is in no case bound by any act of the partner after
dissolution:
1. Where the partnership is dissolved because it is unlawful to carry on the business
unless the act is appropriate for winding up affairs.
2. Where the partners has become insolvent.
3. Where the partner has no authority to wind up.
 On existing liability of partners- a partner is discharge form any existing
liability upon dissolution of the partnership by an agreement to that effect
between himself, the partnership creditor, and the person or partnership
continuing the business. The individual property of the deceased partner shall be
liable for all obligations of the partnership incurred while he was a partner, but
subject to the prior payment of his separate debts. As a general rule dissolution
of the partnership does not of itself discharge the existing liability of a partner,
except when there is an agreement to that effect between himself, the
partnership creditor, and the person or partnership continuing the business.
Rights of the Partners in Case of Dissolution
The following are the rights of partners in case of dissolution to wit:
 Dissolution without violation to the agreement- when dissolution is caused
not in contravention of the partnership agreement, each partner may have the
partnership property applied to discharge all its liabilities and the surplus applied
to pay in cash the net amount owing to the respective partners.
 Dissolution in contravention to the agreement- when the dissolution is
caused in contravention of the partnership agreement, the partners who did not
cause the dissolution wrongfully shall have the right to apply the partnership
property to discharge the liabilities of the partnership. They also have the right to
apply to surplus, if any, to pay in cash the net amount to partners and the right to
be indemnified for damages for breach of the agreement caused by the partner
who caused the dissolution wrongfully.
The liabilities of the partnership shall rank in the following order of payment:
 1. Those due to creditors other than partners;
 2. Those due to partners other than for the capital and profits;
 3. Those due to partners in respect of capital;
  4. Those due to partners in respect of profits.
LIMITED PARTNERSHIP
Formed by two or more persons, having as members one or more general partners and
one or more limited partners who are not bound by the obligations of the partnership. A
limited partnership has the following advantages- for general partners, to secure capital
from others while retaining control and supervision for the business, and for limited
partners, to share in the profits without the risk of personal liability.
Characteristics of Limited partnership
 It is formed by compliance with the statutory requirements.
 Its business is controlled or managed by one or more general partners, who are
personally liable to creditors.
 Its obligations or debts are paid out of the partnership assets and the individual
property of the general partners.
 One or more limited partners contribute to the capital and share in the profits but
do not manage the business and are not personally liable for partnership
obligations beyond their capital contributions.
 The limited partners may have their contribution back subject to conditions
prescribed by law.
Management of Limited partnership
Only general partners have the right to manage the partnership. If a limited partner
takes part in the control of the business, he becomes liable as a general partner. A
general partner in a limited partnership has the rights and powers and is subject to all
limitations and liabilities of a partner in a general partnership.

Thank you so much and God Bless