NATURE AND ORGANIZATION
Partnership is a two or more individuals (natural being) contribute
money, property, industry to share profit. This is similar with sole but
more owner. It includes General Professional Partnerships for practicing
professions.
o Key Characteristics: Mutual contribution, profit/loss sharing, co-
ownership of contributed assets, mutual agency, limited life,
unlimited liability, income taxes, and partner equity accounts.
o Advantages: Combines skills and expertise, easy and informal
setup, flexible decision-making, legal protection and less expensive.
o Disadvantages: Instability due to easy dissolution, mutual agency,
unlimited liability, difficulty raising capital, regulatory requirements,
potential conflicts.
o Compared to Corporation: Begins with commence of partnership
articles, partners act as agents, limited partnerships risk personal
assets, ownership is non-transferable, and existence depends on
partnership terms.
o Classification of it
According to Object
Universal partnership of all present property, universal
partnership of profits, and particular partnership.
According to liability
General (partners liable with personal assets) and
Limited (liability limited to contributions)
According to duration
Partnership with a fixed term and at will
According to purpose
Trading (merchandising and manufacturing) and non-
trading partnership like service and GPP
By Legality of existence
De Jure partnership (complies with legal requirements).
And De Facto partnership (fails to comply with
requirements)
Kind of Partners
General Partner: Liable up to their personal property.
Limited Partner: Liable only up to their capital contribution.
Capitalist Partner: Contributes money or property.
Industrial Partner: Contributes knowledge or service.
Managing Partner: Appointed to manage the partnership.
Liquidating Partner: Settles the partnership's affairs after
dissolution.
Dormant Partner: Not active in the business and not publicly
known as a partner.
Silent Partner: Not active but publicly known as a partner.
Secret Partner: Active in the business but not publicly known.
Nominal/Partner by Estoppel: Not a true partner but
represents themselves as one.
Articles of Partnership: A partnership may be formed orally or in writing,
with the written version being the Articles of Partnership, which includes
essential provisions. Note: Partnerships involving immovable property or
real rights require a public instrument and a signed inventory.
Organizing a Partnership: To operate legally, a partnership must register
with: SEC, City Mayor's Office, BIR, SSS, PhilHealth, and PAG-IBIG Fund:
Note: Partnerships with capital of P3,000 or more must register with the
SEC for legal operation and tax compliance.
ACCOUNTING FOR PARTNERSHIP FORMATION
Recording Similarity: Asset, liability, income, and expense recording is
similar to a sole proprietorship, but partnerships have multiple owners'
equity.
Capital and Drawing Accounts: Each partner has separate capital and
drawing accounts; capital is credited for initial investments, and drawings
are debited for temporary withdrawals.
Partnership Formation
o Involves (1) valuation of investment by partners: Cash is valued at
face value; non-cash contributions are valued by agreement or fair
market value if none. (2) Account Adjustments: Necessary before
formation to ensure equitable initial capital balances., and (3)
opening entries of a partnership formation.
Formation Methods:
o Individuals without existing businesses form a partnership.
o Conversion from a sole proprietorship to a partnership (one sole
proprietor with another individual or two sole proprietors).
o Admission or retirement of a partner.
PARTNERSHIP OPERATION
- Profits or losses are shared based on agreement, which may differ
from capital contributions.
Profit Sharing:
Divided according to agreement. If none exists, it is based on capital
contribution (original, if none, beginning balance). Industrial partners
receive a just and equitable share before capitalists divide profits.
Loss Sharing:
o Divided by agreement. If none exists, it follows the same rules as profit
sharing. Industrial partners are not liable for losses.
DISTRIBUTION OF PROFITS OR LOSSES BASED ON PARTNERS'
AGREEMENT
1. Equally or in an agreed ratio.
2. Based on Capital Contributions:
o a. Ratio of original capital investments.
o b. Ratio of beginning capital balances (discourages mid-year
investments).
o c. Ratio of year-end capital balances (encourages year-end
investments).
o d. Ratio of average capital balances (preferred as it reflects
actual available capital).
3. Allowing Interest on Capital and dividing the balance in an agreed
ratio.
4. Allowing Salaries to partners and dividing the balance in an agreed
ratio.
5. Allowing a Bonus to the managing partner based on profit, with the
balance divided in an agreed ratio.
6. Combination of Methods 3-5 with the balance divided in an agreed
ratio.
Statement of Comprehensive Income: Includes division of profits/losses
and a Statement of Changes in Equity, reflecting net asset changes
during the period.
