Nielgem S.
Beja
Partnership Notes 2016
Dean Villanueva
Limited Partnership
Art. 1843
- One formed by two or more persons
- Under the provisions of the following article,
- Having members one or more gen. Partners and
- One or more limited partners
- The Limited Partners as such shall not be bound
by the obligation of the partnership
REASON AND HISTORY
- Men in business often desire to secure capital
from others.
Three classes of contracts w/c can be made
from whom the capital is secured:
1. Ordinary Loan on interest
2. Loan where lender, in lieu of interest, takes
share in the profits of the business
3. Those cases in w/c the person advancing
the capital secures
o Aside from a share in profit
o Some measure of control over the
business
- Before the courts assumed that one who is
interested in the business is bound by its
obligations
- With the application of his principle insofar
that a contract where the only evidence of
interest was a share in the profits made
- One who supposed himself as a lender
- And who was probably unknown to the creditor
- At time they extended their credits
- IS ULTIMITEDLY liable as a partner
- For the obligations of those actually conducting
the business
However, the above rule has some modification
- Lender who takes a share in the profits
- Does not by reason of that fact,
- Run a risk of being held as a partner
o But if his contract falls in the third kind
of contract above mentioned
o And he has some control over the
business
o He has then risk of being liable for the
debts of the business as a partner
o The risk increases depending upon the
amount of the control
I. First Limited partnership act
- Was adopted by New York in 1822
- This has become the basis our laws on limited
partnership
Concept of limited Partnership
The correct usage of the term confines it to the
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.
The limited partners liability is limited only to a
fixed amount (his contribution)
- Limited liability is the key characteristic of a
limited partnership.
Characteristics
1. Formed by complying the statutory
requirement
2. General Partner(s) control the business and are
personally liable to creditors
3. Limited partner(s) contribute to the capital and
share in the profits
o But does not participate in the
management of the business
o Not personally liable for partnership
obligations beyond the amount of their
capital contributions
4. LP may ask for the return of their Capital
contributions under the conditions prescribed
by law
5. The partnership debts are paid out of common
fund and the individual properties of the
general partners
Note:
LP are investors. Exception to Art. 1816
De leon
GP vs LP
 Nielgem S. Beja
Partnership Notes 2016
Dean Villanueva
1. GP is personally liable for partnership
obligations
- LPs liability extends only to his capital
contribution
2. Partners have generally have equal rights in the
administration. Unless there is a contrary
agreement
- LP has no share in the management
- His rights are only limited to Art. 1851 and 1848
3. GPmay contribute money , property or service
- LP cannot contribute service
4. LP is not a proper party to proceedings by or
against a partnership
- Unless he is also a general partner
- Or where the object of the proceeding is to
enforce a limited partners right against, or
liability to the partnership
5. GPs interest in the partnership may not be
assigned or to make the assignee a new partner
w/o the consent of other partners.
- LPs interest is assignable
- Hence, the assignee acquires all the rights of
the LP
- But subject to some qualifications
6. GPs name may appear in the firm name
- LP must not (subject to some exceptions)
7. GP (capitalist) is prohibited from engaging in a
business w/c is of the kind of business in w/c
the partnership is engaged
GP (industrial) cannot engage in a business for
himself.
- But there is no such prohibition for LP
8. The retirement, death, insanity, or insolvency of
a general partner dissolves the partnership
- In LP not the same effect.
Art. 1844 Statutory Requirement ( Certificate)
- Not created by mere voluntary agreement
Reason?
As a rule a business owner can avoid personal liability
for business debts only if it is provided in a statute.
- In LP , a person is allowed to share in the profits
w/o becoming personally liable to partnership
creditors
- Hence, it can only be created if permitted by
statute
- LP creation is a formal proceeding
- Registration serves as a public notice
- Substantial compliance w/ the statute is
sufficient
TWO ESSENTIAL REQUIREMENTS FOR THE FORMATION
OF LP
1. Certificate or articles of LP w/c states the
matters enumerated in the article, must be
signed and sworn to
2. Certificate must be filed for record in the SEC
- No time is fixed by law for the filing of the
certificate for a LP
- Reasonable time is allowed depending on the
circumstances
WHEN THERE IS NO SUBSTANTIAL COMPLIANCE IN GF?
- The firm is a general partner as to 3rd persons
- Limited as to partners
o Hence, the parties are bound by their
agreement
Art. 1845 The contributions of a limited partner may be
cash or other property but not services.
Reason?
Because if he contributes service
- He becomes an industrial partner
- Hence, he is no longer exempted from personal
liability
- A LP cannot be an IP w/o being a GP
Art. 1846 LP name/surname
Art. 1847 False statement is the certificate
 Nielgem S. Beja
Partnership Notes 2016
Dean Villanueva
LP whose capital contribution is greater than that
specified in the certificate of LP
- Is not liable for making a false statement
- Under the LIMITED PARTNERSHIP ACT (NY)
- Since, there is no liability w/o showing loss
- Such loss can be established only by showing
capital contribution w/c is less, not greater than
that specified
1847 only imposes penalty
Hence, it does not say that the guilty partner shall
be liable as a GP
1848 When LP is liable as GP
- LPs abstinence from participation in the
transaction of the business is ESSENTIAL to his
exemption from liability
- The grant of apparent control to LP is not
sufficient
o For him to be liable he must ACTUALLY
participate in the control of the
partnership
- Control contemplates active participation in the
management of the partnership business
- LP may suggest or express opinions
Art. 1849 ADMISSION OF ADDITIONAL LIMITED
PARTNERS
Art. 1850 Rights, powers and liabilities of a GP
GP
- Vested w/ the entire control of the firms
business
- Has all the rights and powers
- Subject to all the liabilities and restrictions of a
partner in a partnership w/o limited partners
- He has unlimited personal liability for the
obligation
- Hence, he is granted general authority to
manage
Note : GP not entitled to compensation for his services
beyond his share of the profits
- Except there is a contrary agreement
Acts of admin./acts of strict dom
Gen. Rule : GP may bind the partnership by any act of
administration
BUT he has no power to do specific acts enumerated in
1850 (acts of strict dominion)
- Except upon the written consent or
- Ratification of all LP
OTHER LIMITATIONS
- GP has no power to bind LP beyond the latters
investment
- GP cannot act beyond the purpose and scope of
the partnership
- No power to change the nature of the business
w/o others consent
- Duties and disabilities arising out of the firms
transactions w/ 3rd persons rest solely on the
general partners.
Art. 1851 Same rights of LP and GP
Limited Partner is a partner only to a certain extent
- Hence, a GP has more powers
- In order to protect his interests, he has the
same RIGHTS as the GP
- But whenever the liability of a GP is imposed on
a LP, he is given the corresponding rights of a
general partner.
Note:
Wrongdoing or improper acts on the part of the general
partners does not give the LP greater rights than the law
and what his contract grants him
Art. 1852 Failure to create limited partnership
If the statutory requirement is not complied
- The attempt to limit the liability of LP is
INEFFECTIVE
- At least as to creditors
- Who have not recognized or dealt with the firm
as a LP
De Leon
- Sometimes the limited partnership exists
despite the failure to comply with the law
- The L. Partner is merely made liable for the
debts of the firm as if he were a GP
 Nielgem S. Beja
Partnership Notes 2016
Dean Villanueva

What does ART. 1852 grant?
- Exemption from liability in favour of :
1. One who has contributed to the capital of
the business conducted by a person or
partnership, ERRONEOUSLY BELIEVING that
he has BECOME A LP or
2. In a GP thinking he is a LP.
- When the right to be a GP is in the articles of
partnership
o The heir may waive such right
o He cannot be forced to acquire liability
o Note : they may freely choose to
become a GP

Status of the person who erroneously believed

1. Conditions for exemption from liability of a GP
- He is not personally liable as a GP due to his
exercise of the rights of the GP , provided:
i. On ascertaining the mistake, he
promptly renounces his interest
in the profits of the business or
other compensation by way of
income
ii. His surname does not appear in
the partnership name
iii. He does not participate in the
management of the business

2. Necessity of renouncing his interest

- The person, must promptly renounce his
interest
- Before the partnership has become liable to
third persons who cannot be blamed for
considering him a general partner
- BUT: Where no partnership creditors are
prejudiced
o It would seem that renunciation of his
interest in the profits of the business

Status of Heirs of deceased general partner admitted

as partners

Heir of a deceased GP
- When admitted as a partner under the articles
of partnership providing for such admission
- ORDINARILY becomes a LIMITED PARTNER
- For his own protection
- But the heir may choose to become a GP
o HENCE, he may also add his personal
fortune to the partnership
o The heir may exercise this right even
w/o the assent of the surviving partner