PARTNERSHIP

 The earliest form of conducting business – sole proprietorship

The disadvantage – small capital, limitation of skills and knowledge

 Governing Law in our Jurisdiction

- New Civil Code (RA 386) enacted 30 Aug 1950, when enacted, it repealed the Code of
Commerce
- Article 1767 to Article 1867, are intended to provide all the rules regarding
partnerships, supplemented by other provisions of the Civil Code, insofar as they are
applicable,
- particularly those on contracts and agency.
- Before the New Civil Code – Code of Commerce

 Art 1767 – Contract of Partnership

- Two or more persons bind themselves to contribute money, property, industry to a
common fund – the intention is to divide the profits among themselves.
- Two or more persons may also form partnership for the exercise of profession

- Sometimes called as Co-partnership

- Intention – to divide profits and bear losses in certain proportions
- The binding may be implied / express agreement between parties
- Partnership is an entity – separate and distinct from its members
It is a person having its own assets and liabilities

- Civil Law Concept vs American Concept of Partnership

Civil Law
Contract
Based on Civil Code Art 1767 – partnership is created
Distinct and separate personality of the members

American Partnership
Relation
Partnership is a result of contract / agreement
No recognition of separate personality, and considered as extension of its
members

- In our jurisdiction, partnerships, except general professional partnerships, are treated

for income tax purposes as corporations and subject to tax as such.

- Par 2 of Art 1767 – refers to the exercise of profession

Profession – group of men pursuing a learned art in the spirit of public service;
profession as a means of livelihood is only incidental.

Strictly speaking, the practice of a profession is not a an enterprise for profit (mainly for
public service. However, the law allows the joint pursuit thereof by two or more persons
as partners. (that the exercise of profession could be an object of partnership)
Still the individual partners exercises the profession and liable for their individual acts.

- The law does not allow individuals to practice a profession as a corporate entity.

- Corp vs Partnership
Corporation – consist of at least 5 – 15 incorporators, each must hold at least 1 share
Governed by Corporation Code
It has right of succession
Acquires juridical personality from issuance of incorporation
Corporation as an entity may only exercise those powers granted by law
Members may transfer their interest to another without prior consent of stockholders
Corporation may adopt any name, not similar to any other name

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 May be dissolved with consent of the state
Exist for 50 years, may be extended for another 50 years

Partnership
Governed by Civil Code
No right of succession
Acquires juridical entity from the execution of contract of partnership
May exercise power authorized by the partners, not contrary to law
Partners may not transfer interest without the unanimous consent of all the existing
partners
Limited partnership – law requires to add Ltd
Dissolves by agreement of the parties
Exist as stipulated by partners

- Partnership for the practice of law

1. A mere association for non-business purpose, not partnership for the purpose of
carrying out a business
Thus, the use of pen name / trade name is improper in the practice of law.
Right to practice law is a privilege.

2. Distinguished from business

Practice of law is related to the administration of justice; the compensation is only
incidental to the main intent which is for public service.

i. Public Service
ii. Lawyers are officers of the court, to help in the administration of justice

- Elements of Partnership; the contract of partnership:

1. Consensual – perfected upon consent
2. Nominate – special designation attached to it
3. Bilateral – entered into by 2 or more persons; the rights and obligations are
reciprocal
4. Onerous – the party contributes to procure benefits
5. Commutative
6. Principal – it does not depend for existence or validity upon some other contracts
7. Preparatory

- Partnership – in its essence is a contract of agency

Art 1818:
Every partner is an agent of the partnership; every act of a partner binds the
partnership.
Unless a partner has acted without authority of the partnership, and the person whom
the partner was dealing with had knowledge of such fact.

- Essential Feature of Partnership

1. Valid Contract
2. Legal capacity of the parties
3. Mutual contribution
4. Object must be lawful
5. Primary purpose must be to obtain profits and divide among themselves

- Articles of partnership must not be kept secret among the members; otherwise, the
association shall have no legal personality and shall be governed by the provision of
the Civil Code relating to co-ownership. (Art. 1775.)

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 - Existence of Valid Contract
1. Partnership relation is basically contractual
It is created by agreement of the parties, there is no such thing as partnership by
operation of law (conjugal partnership / religious society).

Form – subject to Art 1771 – 1773

1. May be constituted in any form, except for contribution of real rights /
immovable property – public instrument; otherwise the contact of
partnership is void.
2. Contract of partnership having capital of Php 3, 000 – contract should
appear in public instrument and recorded in SEC
3. No necessity that the member should sign any articles of partnership.

Articles of Partnership
 Partnership relation may be informally created, its existence may be proved by
manifestation of the parties
 Articles of Partnership – where the terms of association is written; defining the
rights, duties, and liabilities of the partners; contribution; manner of sharing the
profit; manner of dissolving the partnership.
 Requisites – of a valid contract
Object – property, skills, labor
Consideration – e.g. to maintenance labor in exchange of half of the purchase;
should the laborer failed to comply – no partnership relation was formed, in the
absence of consideration (a requisite for contract of partnership)

- A party cannot be compelled to execute a contract of partnership – it is a voluntary

agreement of the party to form a partnership relation, and same cannot be compelled;
otherwise it shall be an invalid contract of partnership for lack of consent / meeting of
the minds or it was entered into by means of force.

2. Partnership relation fiduciary in nature (involves trust and confidence)

- Voluntary association entered into by associates
- Delectus personae – involves trust and confidence between the partners
 Right to choose partners
No one can become a partner, without the consent of the other associates
Acts of one partner (unless the contrary is stipulated in the contract)

 Power to dissolve partnership

A partner / associate may ask for the dissolution of partnership regardless of the
time duration of contract / the non-compliance of the purpose for which the
partnership was instituted.
Doctrine of delectus personae allows them to have the power, although
not necessarily the right, to dissolve the partnership
The act of dissolving must be done in good faith and the said partner may be
held liable for damages (breach)

3. Application of Principle of Estoppel

Partnership may be imposed upon a person under the principle of estoppel –
where he permits himself to be liable as partner
Where no actual partnership relation, but only a partnership liability in favor of 3rd
persons.
 The existence or non-existence of a partnership must be determined from the
conduct of the parties, any documentary evidence bearing thereon, and the
testimony of the parties.

- Legal Capacity of the Parties to Enter into Contract

1. Individuals
Necessary that the parties have legal capacity

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  Article 1782 - persons who are prohibited from giving each other any donation
or advantage cannot enter into a universal partnership

2. Corporations - Unless authorized by statute or by its charter, a corporation is

without capacity or power to enter into a contract of partnership.
If corporation is bound to enter into a partnership, the former would be bound by
acts of persons not duly authorized, which is contrary to the policy of the
corporation.
 Corporation may enter into a joint venture agreement with a partnership,
provided that it is authorized by its charter.
 Entry of foreign corporation as limited partner is merely for investment
purposes it shall not take part in the management of the business operation of
the partnership, it shall not be deemed “doing business’’ in the Philippines,
and hence, it is not required to obtain a license to do business in the Philippines.

- Contribution of money, property, industry to a common fund

1. Existence of proprietary interest
Without mutual contribution to the common fund their could be no partnership
(object of the contract)
 Money – legal tender; as to the negotiable / non-negotiable instrument they
cannot produce the effect of contribution until they have been cashed.
 Property – personal / real, corporeal / incorporeal
Evidence of obligation may be contributed
It was also held that a license to contract / operate may be given as
contribution.
 Industry - manual / intellectual efforts of a partner

Partnership exists even if it is shown that the partners have not contributed any
capital of their own to a “common fund’’ for the contribution may be in the
form of credit or industry not necessarily cash or fixed assets.

A limited partner in a limited partnership, however, cannot contribute mere

industry or services (only money / property) (Art. 1845.)

LIMITED
Liability extends only to his capital contributions
No participation in management
Contribute cash or property only, not industry
Not proper party to proceedings by/against partnership
Interest is freely assignable
Name must appear in firm name
No prohibition against engaging in business
Does not have same effect; rights transferred to legal representative

2. Proof of Contribution
To acquire the right and liabilities of a co-partner, it is necessary that a contribution
must be furnished; otherwise there can be no partnership relation.

The contribution to such fund need not be cash or fixed assets; it could be an
intangible like credit or industry (e.g. boats purchased by money loaned by one
partner)
Law on estoppel, knowing it to be those acting on behalf of a corporation and
those benefited by it, knowing it to be without valid existence, are held liable as
general partner.

- Legality of the Object

 The object is unlawful when it is contrary to law, morals, good customs, public
order, or public policy.
 Partnership may not engage in an enterprise for which the law requires a
specific form of business organization, such as banking which, under the

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 General Banking Law of 2000 (R.A. No. 8791, Sec. 8.), only stock corporations
may undertake.
- Purpose to obtain profits
 The very reason for the existence of partnership is to carry on a business
 All that is needed is a profit motive. Hence, even an unprofitable business can
be a partnership provided the goal of the business is to generate profits.

- Sharing of profits:
1. Not essentially equal sharing
2. Not conclusive evidence of partnership

- Sharing of losses
1. Necessary corollary (consequence) of profit sharing
2. Agreement to share the losses is not necessary – the obligation is implied
 If only the share of each partner in the profits has been agreed upon, the share
of each in the losses shall be in the same proportion.
 A stipulation which excludes one or more partners from any share in the
profits or losses is void. (Art. 1799.)
 Only the stipulation is void, the contract of partnership is valid.

ART. 1768.

The partnership has a juridical personality separate and distinct from that of each of the partners even
in case of failure to comply with the requirements of Article 1772, first paragraph

 independent juridical person:

- may enter into contracts,
- acquire and possess property of all kinds in its name,
- as well as incur obligations and bring civil or criminal actions

Having a separate juridical entity, the partners cannot be held liable for the obligations of the
partnership. Unless otherwise the partners intended the separate juridical personality of the
partnership to be utilized in fraudulent / unlawful purpose.

 Effect of failure to comply with statutory requirements.

- Art 1772. Partnership with capital of exceeding Php 3K shall comply with the following
requirement:
1. Execution of public instrument;
2. Registration with SEC

- Event when partnership does not acquire juridical personality because of void contract:
1. Art 1773 – contract of partnership is void , whenever an immovable property is
contributed thereto, inventory of such property was not made, not signed by the
parties and not attached to public instrument.
2. Art 1775 – Association whose articles of partnership are kept secret among the
members, and wherein one members may contract in his own name with 3rd
persons – no juridical personality and shall be governed by co-ownership.

 To organize a partnership not an absolute right but a mere privilege and may be enjoyed only
under such terms as the State may deem necessary.

 ART. 1769. Rules in determining the existence of partnership: v

(1) Except as provided by article 1825, persons who are not partners as to each other are not
partners as to third persons;
(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-
owners or co-possessors do or do not share any profits made by the use of the property;
(3) The sharing of gross returns does not of 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.

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 (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 vary 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. (n)

 Rules to determine the existence of partnership:

1. Where the terms of contract not clear – where the contract does not provide / indicate the
relations of the members as partners.
2. Where existence disputed – may be disputed by interested party
Existence of partnership may be disputed by factual matter.

 Persons not partners as to each other, cannot be partners as to the 3rd persons.
1. Intension to create partnership
- Each party given consent to become partner.
- Where the partners clearly express that they are not partners – no partnership, because
it is formed by consent of the members thereof.
2. Partnership by Estoppel
- This is an exception to the general rule that no partnership is formed without the
express / implied consent of the member or formed through contract of partnership.
- where persons by their acts, or representations have misled third persons that the
former are partners in a non-existing partnership, such persons become subject to
liabilities of partners to all who, in good faith, deal with them in their apparent
relations. (they shall be deemed as partners as to the 3rd persons)

 Co-ownership or co-possession
- Co-ownership – the ownership of undivided thing / right belong to different persons
1. Two or more persons may become co-owners without contracts
But they cannot become partners in the absence of a contract.
In the event that the member merely transfers the possession / enjoyment of
property he contributed – partnership is NOT formed, but merely a co-ownership. In
partnership, the ownership of the contribution becomes the property of the
partnership.

The mere sharing of returns does not establish partnership, even if they form a
common fund; there must be a clear intent to establish a partnership. Thus 2
persons buying parcels of land, and sold the same and divide the profits, does not
make them partners.

2. Existence of Fiduciary Relationship

Should the interest in the common fund in “several” liability extends only unto their
own interest / obligation – the relationship is that of the co-ownership and not
partnership.

The proceeds becomes a common funds and thereafter divided; should the
proceeds be directly received by the member in accordance with the proceeds of his
own interest / undivided interest – partnership.

If, after such partition, an heir allows his shares to be held in common with his co-
heirs under a single management to be used with the intent of making profit
thereby in proportion to his share, there can be no doubt that, even if no document
or instrument were executed for the purpose, for tax purposes, at least, an
unregistered partnership is formed

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  Receipt of share in the profits
1. Strong presumptive evidence of partnership
Agreement to share profits and losses – prima facie evidence of partnership, but not
conclusive.
2. When no such inference will be drawn.

In the following cases, Y is not a partner in partnership X

(1) Y, creditor of partnership X, is entrusted by the partners to manage the business, and Y
shall receive, in addition to his compensation, a share in the net profits of the business in
settlement of his credit; no contribution from creditor; what he received from the
partnership are compensation as an employee and payment for loan.

(2) Y, an employee of partnership X, shall receive instead a fixed salary, or being the
owner of a building rented by the partnership, Y shall receive as rent a certain percentage of
the monthly net profits of the business. Did no make any contribution; he was a lessor not a
partner.

(3) Y, the widow of a deceased partner in partnership X, in consideration of the continuation

of the business without liquidation and satisfaction of the deceased’s interest, shall receive
an annuity for a period of five (5) years based on a certain percentage of the net profits; no
transmission of right as a partner to the heir, what the heir received is an annuity, not
profits.

4) Y, creditor of partnership X, agreed that the payment of interest shall be taken from the
net profits to be realized by the partnership; and creditor not partner

(5) Y sold property to partnership X, and he agreed that the purchase price shall be paid out
of the net profits of the business. Creditor

 Burden of proof and presumption

- The burden of proving the existence of a partnership rests on the party having the affirmative
of that issue:
1. The existence of partnership must be proved and will not be presumed.
2. Where the law presumes the existence of partnership, the burden of proof is upon the party
denying its existence.

 The basis of legal intent is what determines the existence of partnership

Under the law, what should be the relation of the parties.
They may call themselves partners, but under the law they may be just co-owners.

 Tests and incidents of partnership:

Test: the legal intent
If proven under the law that the relation between the parties is a partnership, rest of the
incidents / consequences of the contract:

1. Sharing of profits and losses

2. Equal rights in the management of partnership
3. Every partner / member is considered as agent of the partnership, and their acts bind the
other members
4. All partners are personally liable to the debts of the partnership;
As for the limited partners – are not bound beyond the amount of investment
5. Fiduciary relationship exists between the partners.
6. On dissolution, the partnership is not terminated, but continues until the winding up of
partnership is completed.

 Partnership vs Business Trust

- Distinction between the partnership and trust relations is that in the partnership, all of
the members are principals and are agents for each other.
- Only the trustee and not the beneficiaries is empowered to make contracts to carry on
the business affairs and the only one who has legal title to the property.

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  Partnership distinguished from co-ownership
- (1) Creation. — Co-ownership is generally created by law. It may exist even without a
contract, but partnership is always created by a contract
- (2) Juridical personality. — A partnership has a juridical personality separate and
distinct from that of each partner (Art. 1768.), while a co-ownership has none.
- (3) Purpose. — The purpose of a partnership is the realization of profits (Art. 1767.),
while in co-ownership, it is the common enjoyment of a thing or right (not necessary
involves realization of profit.
- (4) Duration. — Under the law, there is no limitation upon the duration of a
partnership (see Arts. 1767, 1785.) while in coownership, an agreement to keep the
thing undivided for more than ten years is not allowed.
- (5) Disposal of interests. — A partner may not dispose of his individual interest in the
partnership (Art. 1812.) so as to make the assignee a partner unless agreed upon by all
of the partners (see comments under Art. 1814.), while a co-owner may freely do so.
- (6) Power to act with third persons. — In the absence of any stipulation to the
contrary (Art. 1803.), a partner may bind the partnership, while a co-owner cannot
represent the co-ownership (see Arts. 491, 492.); hence, a judgment secured against
only one of the co-owners will not bind the other co-owners.
- (7) Effect of death. — The death of a partner results in the dissolution of the
partnership (Art. 1830[5].), but the death of a co-owner does not necessarily dissolve
the co-ownership.

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