THE

LAW ON PARTNERSHIP

Notes from:
The Law on Partnerships and Private Corporations by Hector S. de Leon and Hector M. de Leon and
Philippine Corporate Law by Cesar L. Villanueva

General Provisions

Concept of Partnership
Art. 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.

Elements of a partnership
There shall be a partnership whenever:
a. There is a meeting of minds (i.e. contract)
b. To form a common fund
c. With intention that profits (and losses) of the common fund will be distributed among the
contracting parties

Characteristics
1. Essentially contractual in nature
2. Separate personality
3. Delectus personarum (choice of the person) - A term applied to the doctrine that no new
member can be introduced into a firm without the unanimous consent of the then partners.
4. Mutual agency
5. Personal liability of partners for partnership debts

Mutual contribution to a common fund
Form of contribution
1. Money
2. Property
3. Industry - Work or services of the party associated, which may be either personal manual
efforts or intellectual, and for which he receives a share in the profits of the business

Sharing of profits
Not necessarily in equal shares

Sharing of losses
Necessary corollary of sharing in profits

Partnership, a juridical person
Like a corporation, a partnership duly formed under the law is a juridical person to which the
law grants a juridical personality separate and distinct from that of each of the partners.
It may acquire and possess property, incur obligations, bring civil or criminal actions.

Rules to determine existence of partnership
Partnership is a matter of intention
Co-ownership does not of itself establish a partnership
The mere sharing of gross returns alone does not indicate a partnership
The mere fact of a right under a contract to participate in both profits and losses of a business
does not of itself have the effect of establishing a a partnership
Some incidents of partnership

1. They have equal rights in the management of the business

2. Every partner is an agent of the partnership and entitled to bind the other partners
3. All partners are personally liable for the debts of the partnership

Form of partnership contract
A partnership may be constituted in any form
If immovable property is contributed, a public instrument shall be necessary.
If the capital of the partnership is at least P3,000, then it shall appear in a public instrument and
recorded with the SEC.
Failure to comply with the above requirements does not prevent the formation of the
partnership or affect third persons.

Importance of giving publicity to articles of partnership
For the protection of the members but also third persons

Classification of partnership
1. As to the extent of its subject matter
a. Universal partnership or one which refers to all the present property or to all profits
i.
Universal partnership of all present property
ii.
Universal partnership of profits
b. Particular partnership
2. As to liability of partners
a. General partnership General partners are liable with their personal property for
partnership debts
b. Limited partnership One or more general partners with one or more limited partners, the
latter not being personally liable for the obligations of the partnership
3. As to its duration
a. Partnership at will no time specified, not formed for a particular undertaking, may be
terminated anytime by mutual agreement of the partners, or will of one partner alone, or
one for a fixed term, or particular undertaking which is continued by the partners after the
termination of such term or particular undertaking without express agreement
b. Partnership with a fixed term
4. As to the legality of its existence
a. De jure partnership complied with legal requirements for establishment
b. De facto partnership did not comply with legal requirements for establishment
5. As to representation to others
a. Ordinary or real partnership exists among the partners and also as to third persons
b. Ostensible partnership or partnership by estoppel not a partnership, but is considered a
partnership only in relation to those who, by their conduct or admission, are precluded to
deny or disprove its existence
6. As to publicity
a. Secret partnership
b. Open or notorious partnership
7. As to purpose
a. Commercial or trading partnership
b. Professional or non-trading partnership

Kinds of partners
1. Under the Civil Code
a. Capitalist partner one who contributes money or property
b. Industrial partner one who contributes only his industry or personal service
c. General partner liability to third persons extends to his separate property; participates in
the management of the business

d. Limited partner liability to third persons is limited to his capital contribution; does not
participate in the management of the business
e. Managing partner Manages the affairs or business of the partnership
f. Liquidating partner takes care of winding up of partnership upon dissolution
g. Partner by estoppel not really a partner but is liable as a partner for the protection of
innocent third persons; he is liable for the debts of the firm to those who in good faith
believed him to be a partner
h. Continuing partner one who continues the business of a partnership after it has been
dissolved by reasons of admission of a new partner, or the retirement, death or expulsion of
one or more partners
i. Surviving partner one who remains after partnership is dissolved by the death of any
partner
j. Subpartner not a member of the partnership , contracts with a partner with reference to
the latters share in the partnership
2. Other classification
a. Ostensible partner takes active part and known to the public as a partner in the business,
whether or not he has an actual interest in the firm. If he is not actually a partner, he is
subject to liability by the doctrine of estoppel
b. Secret partner takes active part in the business but is not known to be a partner by outside
parties nor held out as a partner by the other partners, although he participates in the
profits and losses of the partnership.
c. Silent partner does not take active part in the business although he may be known to be a
partner
d. Dormant partner does not take active part in the business and is not known or held out as
a partner. Both silent and secret partner.
e. Original partner a partner since the time of organization
f. Incoming partner about to be a member of the partnership
g. Retiring partner one withdrawn from the partnership

Obligations of the partners among themselves

Commencement of partnership
Art. 1784. A partnership begins from the moment of the execution of the contract, unless it is
otherwise stipulated. (1679)

Obligations of industrial partner
An industrial partner is one who contributes his industry, labor or services to the partnership
Partnership acquires an exclusive right to avail itself of his industry. Consequently, if he engages
in business for himself, such act is considered prejudicial to the interest of the other partners.
The prohibition is absolute and applies whether the industrial partner is to engage in the same
business in which the partnership is engaged or in any kind of business.
A capitalist partner is only prohibited to engage in business in which the partnership is engaged
in unless there is a stipulation to the contrary.

Extent of contribution to partnership capital
Partners can stipulate to contribute unequal shares
But if the partnership contract does not state the share of each partner, the presumption is that
each partner contributed equal shares. (Not applicable to industrial partner)

Responsibility of partnership to partners
1. Partnership should refund to a partner such amounts disbursed for the partnership plus
interest

2. Partnership should answer for the obligations a partner may have contracted in good faith for
the partnership
3. Partnership should answer for risks suffered by a partner in consequence of its management
(i.e. loss of his property, accidents)

Rules for distribution of profits and losses
The losses and profits shall be distributed in accordance with the agreement
If there is no agreement:
1. Share in profits or losses is based on capital contribution except for an industrial partner
2. The industrial partner shall not be liable for losses. The industrial partner shall receive a
share in the profits which is just and equitable under the circumstances

Stipulation excluding partners from any share in profits or losses is void
Reason: The partnership must exist for the common benefit and interest of the partners
With reference to an industrial partner, since the law itself excludes him from losses, a
stipulation exempting him from losses is naturally valid. This is without prejudice, however, to
the rights of third persons.
Partners can agree to unequal shares in profits or losses

Scope of power of managing partner
General rule a managing partner has all the necessary and incidental powers to carry out the
object of the partnership in the transaction of the business
Exceptions where the powers of the manager are specifically restricted or expressly withheld.

Compensation for services rendered
In the absence of an agreement to the contrary, no partner is entitled to compensation for his
services to the partnership without the consent of all the partners
A share in the profits is his only compensation.
Exception: In cases where partners intended a partner to receive additional compensation such
as, partners work was beyond normal partnership functions (ex. saving partnership property
from a flood) or in any capacity other than that of a partner (ex. performing clerical services of a
resigned employee)

Where unanimity of action stipulated
Partners may agree that none of the managing partners shall act without the consent of the
others. This consent is indispensable that neither the absence nor disability of any one of them
may be alleged as an excuse or justification to dispense with this requirement.
Exception when there is an imminent danger of grave or irreparable injury to the partnership,
a partner may act alone without the consent of all the partners.

Rules when manner of management has not been agreed upon
All partners are considered as managers and agents of the partnership
Unanimous consent required for any important alteration in immovable property of the
partnership

Contract of sub-partnership
Share in partnership may not be assigned but a partner may associate another person with him
in his share without the consent of the other partners. The associate is called a subpartner

Other duties of a partnership
1. Duty to keep partnership books
2. Duty to render information

Partner accountable as fiduciary

Fiduciary involving trust and confidence
1. Duty to act for common benefit
2. Duty to account for secret and similar profits
3. Duty to make full disclosure of information affecting partnership

Property rights of a partner

Extent of property rights of a partner
The property rights of a partner are as follows:
1. His rights in specific partnership property
2. His interest in the partnership
3. His right to participate in the management

Ownership of certain property
It is not unusual for an individual partner to allow his property to be used in the partnership
business, without intending to transfer ownership of it
Property acquired by a partner with partnership funds is presumed to be partnership property.
The intent of the parties whether the property in question shall belong to the partnership or
themselves is the controlling factor.

Nature of partners right in specific property
A partner is a co-owner with his partners of specific partnership property, but the rules on co-
ownership do not necessarily apply and the following rules shall apply:
1. Ordinarily, a partner has an equal right to possess specific partnership property for
partnership purposes. Thus, if the partnership of A, B and C owns a specific parcel of land,
none of them can possess and use the land other than for partnership purposes
2. A partners right in a specific partnership property is not assignable. Thus, partners A, B or C
cannot individually and separately assign or sell his right to partnership property.
3. A partners right in a specific partnership property is not subject to attachment or execution
(court process which confiscates the property in favor of a claimant).
4. A partners right in a specific partnership property is not subject to legal support.

Nature of partners interest in the partnership
Art. 1812. A partners interest in the partnership is his share of the profits and surplus.

Effect of assignment of partners whole interest in partnership
A partner can transfer his whole interest in the partnership without causing dissolution to any
person without the consent of the other partners, in the absence of agreement to the contrary.
The assignee (the person to whom the interest was transferred) only has the following rights:
1. Right to receive profits
2. In case of fraud, to avail of usual remedies
3. To receive assignors interest in case of dissolution
4. To require an account of partnership affairs in case of dissolution

Obligations of the partners with regard to third persons

Firm name
Art. 1815. Every partnership shall operate under a firm name, which may or may not include the
name of one or more of the partners. Those who, not being members of the partnership, include
their names in the firm name, shall be subject to the liability of a partner.
Firm is defined as the name, title, or style under which a company transact business.

The firm name of a partnership may be that of an individual partner, the surnames of all the
partners, or the surname of one or the surnames of more of the members with the addition of
and Company or it may consist of individual names wholly distinct from the names of any of
the members
Cannot use misleading names
Can use name of deceased partner provided the partnership indicates in all its communications
that said partner is deceased.
Persons who, not being partners, include their names in the firm name do not not acquire the
rights of a partner, but they shall be subject to the liability of a partners insofar as third persons
without notice are concerned.

Liability for contractual obligations of the partnership
1. The general rule is that a partner has the right to make all partners liable for contracts he makes
for the partnership in the name and for the account of the partnership
2. However, a partner may assume a separate undertaking in his name with a third party to
perform a partnership contract or make himself solidarily liable on a partnership contract.

Nature of individual liability of partners
The debts and obligations of the partnership are, in substance, also the debts and obligations of
each individual member of the firm. The liability to creditor is pro rata and subsidiary. It is
subsidiary because partners become personally liable only after partnership assets have been
exhausted
A stipulation among the partners contrary to the pro rata and subsidiary liability is void and of
no effect insofar as it affects the rights of third persons. It is valid and enforceable only as among
the partners.

Power of partner as agent of partnership
In the absence of an agreement to the contrary, all partners have equal rights in the
management and conduct of the partnership business.
1. As among themselves When a partner performs an act within the scope of his actual,
implied, or apparent authority, he is not only a principal as to himself, but is also for all
purposes, an agent as to his co-partners or to the partnership, considered as a group. The
actual authority of each partner is contained in the partnership agreement; if the agreement
is silent as to the partners authority, each partner has the implied authority to do all things
necessary to carry out the ordinary business of the partnership.
2. As to third persons
a. Limitations upon the authority of any one of the partners are not binding upon innocent
third persons who have the right to assume that every general partner has power to
bind the partnership especially those partners acting with ostensible authority.
b. Third parties have no duty to make inquiries as to acting partners authority
c. Third parties can presume that acting partner has authority to bind partnership (except
in specified circumstances)

Liability of partnership for act of partners
1. General rule: Every partner is an agent of the partnership. His acts for carrying on in the usual
way the business of the partnership, binds the partnership.
Exception: There are two requisites in order that the partnership will NOT be liable:
a. The partner has no authority
b. The third person knows that the said partner has no authority.
2. For acts which are not apparently for carrying on in the usual way the business of the
partnership, the partnership is not bound, unless authorized by all the other partners or unless
they have abandoned the business.

3. The partnership is not liable to third persons having actual or presumptive knowledge of the
restrictions, whether or not the acts are for apparently carrying on in the usual way the
business of the partnership

Admission by partner
Art. 1820. An admission or representation made by any partner concerning partnership affairs
within the scope of his authority in accordance with this Title is evidence against the
partnership.

Notice or knowledge of partner
Notice or or knowledge of any partner of any matter relating to partnership affairs operates as a
notice to or knowledge of the partnership except in case of fraud.

Liability arising from partners wrongful act or omission, or breach of trust
Partners and the partnership are solidarily liable to third persons for partners wrongful act or
omission or breach of trust, provided the subject partner was acting within the scope of the
firms business or with the authority of his co-partners. Whether innocent or guilty, all the
partners are solidarily liable with the partnership itself.
However, innocent partners have a right to recover from guilty partner.
Example
Partners and the partnership are liable for the negligent driving by a partner, acting in the
course of the business which results in a traffic accident.

Misapplication of money or property of a third person
Partnership is liable for losses of a third person whose money or property is misappropriated
(unfairly taken) by a partner
Example
! A, B and C are partners in a pawnshop business
! A received a diamond ring from D as a security for a loan D obtained from the partnership
! A misappropriates the diamond ring
! Is A solely liable to D for the misappropriation of the diamond ring?
! No. All the partners are solidarily liable to D for the misappropriation of the diamond ring.
Even innocent partners are liable to D. Innocent partners have the right to recover from the
guilty partner.

Partnership by estoppel
Estoppel is a bar which precludes a person from denying or asserting anything contrary to that
which has been established as the truth by his own deed or representation, either express or
implied.
Partner by estoppel - A person not a partner may become a partner by estoppel and thus be
held liable to third persons as if he were a partner, when by words or by conduct he:
1. Directly represents himself as a partner
2. Indirectly representing himself as a partner (by allowing another to represent him as a
partner)
Partnership by estoppel If all the actual partners consented to the representation, then the
liability of the person who represented himself to be a partner or who consented to such
representation and the actual partners is considered a partnership liability. This is a
partnership by estoppel

Liability of incoming (new) partner for existing obligations
New partner is liable for all obligations existing at the time of his admission
However, his liability is limited to his share in the partnership property, unless there is a
stipulation to the contrary


Limited Partnership

Concept of limited partnership
A form of business association composed of one or more general partners and one or more
special partners, the latter not being personally liable for the partnership debts

Characteristics of limited partnerships
1. Formed by compliance with law
2. One or more general partners control the business and are personally liable to creditors
3. One or more limited partners contribute to the capital and share in the profits but do not
participate in the management of the business and are not personally liable for partnership
obligations beyond their capital contributions
4. Limited partners may ask for the return of their capital contributions under certain conditions
5. Partnership debts are paid out of the common fund and the individual properties of the general
partners

Note: There is no prohibition against a limited partner engaging in business for himself

Business reason and purpose of statues authorizing formation of limited partnerships
1. Secure capital from others for ones business and still retain control
2. Share in profits of a business without risk of personal liability

Differences between a general and limited partner

General Partner
Limited Partner
Personally liable for partnership debts
Liability extends only to his capital
contribution
Right to manage the business
No share in the management of the business
Can contribute money, property or industry Can contribute money or property but not
services
Share in the partnership may not be
Share may be assigned
assigned
Name may appear in the firm name
Generally, name must not appear in the firm
name
Prohibited from engaging in a similar
No such prohibition
business (for capitalist partners) or any
business (for industrial partner).
Retirement, death, insolvency, insanity or
Retirement, death, insolvency, insanity or
insolvency of a general partner dissolves the insolvency of a limited partner does not
partnership
dissolves the partnership
Must have firm name
Firm name must be followed by Limited
Created by contract
Created by compliance with law

Presumption of a general partnership
A partnership transacting business is prima facie a general partnership

Limited partners contribution
A limited partner is not allowed to contribute services

Effect where surname of limited partner appears in partnership name
Limited partner will be liable as a general partner
However, limited partner will not enjoy the rights of a general partner


Liability of limited partner for participating in management of partnerships
Limited partner becomes liable as a general partner if he participates in the management of the
partnership

Specific rights of a limited partner
1. Inspect books
2. Demand information
3. Demand formal accounting
4. Ask for dissolution and winding up by decree of court
5. Receive share of the profits or other compensation by way of income
6. Receive return of his contribution

Priority in the distribution of partnership assets
Distribution order:
1. Partnership creditors
2. Limited partners
3. General partners

Dissolution and winding up

Dissolution
Point in time when the partners cease to carry on the business together.
On dissolution the partnership is not terminated, but continues until the winding up of
partnership affairs is completed.
After dissolution, the partnership should not enter into new transactions or business

Winding up
The process of settling the business or partnership affairs after dissolution

Termination
Point in time when all partnership affairs are completely wound up and finally settled. It
signifies the end of the partnership life.

Causes of dissolution
1. Dissolution effected without violation of partnership agreement
a. Termination of the definite term or particular undertaking
b. By the express will of any partner
c. By the express will of all the partner
d. By expulsion of any partner
2. Dissolution effected in contravention of partnership agreement
The withdrawing partner is liable for damage for unjustified dissolution
3. Business becomes unlawful
4. Loss of specific thing
5. Death of any partner
6. Insolvency of any partner or of partnership
7. Civil interdiction of any partner
Civil interdiction is an accessory penalty for criminal offenses
Civil interdiction deprives the offender during the time of his sentence of the right to
manage his property and dispose of such property by any act or any conveyance inter vivos.
8. Dissolution by decree of court
a. On application by a partner
i.
A partner is declared insane

ii.
A partner becomes incapacitated
iii.
Misconduct
iv.
Willfully or persistently breaches partnership agreement
v.
Business can be carried on only at a loss
vi.
Other circumstances
b. On application by a purchaser of a partners interest

Persons authorized to wind up
1. Partners designated under the agreement
2. In the absence of an agreement, all the partners who have not wrongfully dissolved the
partnership
3. Legal representative of the last surviving partner, not insolvent

Liquidation and distribution of assets of dissolved partnership
Process of winding up business is not continued, collect obligations due to the partnership,
reducing the property cash (by selling partnership property), pay creditors and distributing the
proceeds to partners

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