ARTICLE 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.
Two or more persons may also form a partnership for the exercise of a profession. (1665a)

Other definitions of Partnership CALSOEJ

(1) “A partnership is a contract of two or more competent persons to place their money, effects, labor
and skill, or some or all of them, in lawful commerce or business and to divide the profits and bear the
losses in certain proportions.” (40 Am. Jur. 126, 474; 68 C.J.S. 398.)
(2) “A partnership is an association of two or more persons to carry on as co-owners of a business for
profit.” (Uniform Partnership Act, Sec. 6.)
(3) “A partnership is a legal relation based upon the express or implied agreement of two or more
competent persons whereby they unite their property, labor or skill in carrying on some lawful business
as principals for their joint profit.” (Mechem, Elements of the Law of Partnership [1923], p. 1.)
(4) “A partnership is the status arising out of a contract entered into by two or more persons whereby
they agree to share as common owners the profits of a business carried on by all or
any of them on behalf of all of them.” (31 Words and Phrases [1957 ed.], p. 291.)
(5) “A partnership is an organization for production of income to which each partner contributes one or
both of the ingredients of income, which are capital or service.” (Ibid., p. 292.)
(6) “A partnership is an entity, distinct and apart from the members composing it, and, for the purpose
of which it was created, it is a person having its own assets and liabilities and any benefit or liability
attaching to a member of the partnership, results from the partnership relation.” (Ibid., p. 293.)
(7) “A partnership is a joint undertaking to share in the profit and loss.” (Eastman vs. Clark, 53 N.H. 276,
16 Am. Rep. 192.)

Partnership is a legal concept, but the determination of the existence of a partnership may involve
inferences drawn from an analysis of all the circumstances attending its creation and operation. (68
C.J.S. 399; see Art. 1769.) As a form of business organization, it falls between two extremes of
organizational form — the single proprietorship and the corporation.

Characteristic elements of partnership.

The contract of partnership is:CNABAOBACAPAPA
(1) Consensual, because it is perfected by mere consent, that is, upon the express or implied agreement
of two or more persons;
(2) Nominate, because it has a special name or designation in our law;
(3) Bilateral, because it is entered into by two or more persons and the rights and obligations arising
therefrom are always reciprocal;
(4) Onerous, because each of the parties aspires to procure for himself a benefit through the giving of
something;
(5) Commutative, because the undertaking of each of the partners is considered as the equivalent of
that of the others;
(6) Principal, because it does not depend for its existence or validity upon some other contracts; and
(7) Preparatory, because it is entered into as a means to an end, i.e., to engage in business or specific
venture for the realization of profits with the view of dividing them among the contracting parties.

A partnership contract, in its essence, is a contract of agency. (see Art. 1818.)

Essential features of partnership.

The following are the essential features of a partnership contract:
(1) There must be a valid contract;

Partnership relation fundamentally contractual. — Partnership is a voluntary relation created

by agreement of the parties. It excludes from its concept all other associations which do not
have their origin in a contract, express or implied. There is no such thing as a partnership
created by law or by operation or Implication of law alone.

a) Form. — The relation is evidenced by the terms of the contract which may be oral or written,
express or implied from the acts and declarations of the parties, subject to the provisions of
Articles 1771 to 1773 and to the Statute of Frauds. (infra.)

(b) Articles of Partnership. — While the partnership relation may be informally created and its
existence proved by manifestations of the parties, it is customary to embody the terms of the
association in a written document known as “Articles of Partnership”

1)stating the name, nature or purpose and location of the firm, and
2)defining, among others, the powers, rights, duties, and liabilities of the partners among
themselves, their contributions,
3)the manner by which the profits and losses are to be shared, and
4)the procedure for dissolving the partnership.
(c) Requisites. — Since partnership is fundamentally contractual, all the essentials of a valid
contract must be present. Under the law, the following requisites must concur: 1) Consent and
capacity of the contracting parties; 2) Object which is the subject matter of the contract; and
3) Cause which is established. (Art. 1318.)

Obviously, a person cannot enter into a contract of partnership solely with himself; there must
be at least two competent parties.

As in other cases of contracts, in order to make an agreement for a partnership valid, there must
be a valid consideration existing as between the partners. Each partner surrenders to the
partnership an interest in his property, labor, skill, or energy, in accordance with the express
or implied stipulations of their mutual agreement.

Partnership relation fiduciary in nature. — Partnership is a form of voluntary association

entered into by the associates. It is a personal relation in which the element of delectus
personae exists (choice of the person or choice of the persons), involving as it does trust and
confidence between the partners.
 (a) Right to choose co-partners. — Unless otherwise provided in the partnership agreement, no
one can become a member of the partnership association without the consent of all the other
associates. The fiduciary nature of the partnership relation and the liability of each partner for
the acts of the others within the scope of the partnership business (Art. 1818.) require that each
person be granted the right to choose with whom he will be associated in the firm.
(b) Power to dissolve partnership. — Neither would the presence of a period for its specific
duration or the statement of a particular purpose for its creation prevent the dissolution of any
partnership by an act or will of a partner. (see Art. 1830[2].) Among partners, mutual agency
arises and the doctrine of delectus personae allows them to have the power, although not
necessarily the right, to dissolve the partnership. Verily, any one of the partners may, at his
sole pleasure, dictate a dissolution of the partnership at will. He must, however, act in good
faith, not that the attendance of bad faith can prevent the dissolution of the partnership but
that it can result in a liability for damages.

Application of principles of estoppel. — A partnership liability may be imposed upon a person

under principles of estoppel where he holds himself out, or permits himself to be held out, as a
partner in an enterprise. In such cases, there is no actual or legal partnership relation but merely
a partnership liability imposed by law in favor of third persons. (40 Am. Jur. 137; see Art. 1825.)

(2) The parties (two or more persons) must have legal capacity to enter into the contract;

(1) Individuals. — Before there can be a valid contract of partnership, it is essential that the
contracting parties have the necessary legal capacity to enter into the contract. As a general
rule, any person may be a partner who is capable of entering into contractual relations.
Consequently, any person who cannot give consent to a contract cannot be a partner.

Hence, the following cannot give their consent to a contract of partnership:

(a) Unemancipated minors;
(b) Insane or demented persons;
(c) Deaf-mutes who do not know how to write;
(d) Persons who are suffering from civil interdiction; and
(e) Incompetents who are under guardianship.
Under Article 1782, persons who are prohibited from giving each other any donation or
advantage cannot enter into a universal partnership.
A married woman may enter into a contract of partnership even without her husband’s consent,
but the latter may object under certain conditions.

(2) Partnerships. — There is no prohibition against a partnership being a partner in another

partnership. When two or more partnerships combine with each other (or with a natural person
or persons) creating a distinct partnership, say, partnership X, all the members of the
constituent partnerships will be individually liable to the creditors of partnership X.

(3) Corporations. — The doctrine adopted by our Supreme Court is that, unless authorized by
statute or by its charter, a corporation is without capacity or power to enter into a contract of
partnership. This limitation, it is said, is based on public policy, since in a partnership the
corporation would be bound by the acts of persons who are not its duly appointed and
authorized agents and officers, which would be entirely inconsistent with the policy of the law
that the corporation shall manage its own affairs separately and exclusively.
 (a) A corporation, however, may enter into joint venture partnership with another where the
nature of the venture is in line with the business authorized by its charter.
(b) Where the partnership agreement provides that the two partners will manage the
partnership so that the management of corporate interest is not surrendered, the partnership
may be allowed. (SEC Opinion, Dec. 22, 1966.)
(c) Where the entry of the foreign corporation as a limited partner in a limited partnership
(Chap. 4.) is merely for investment purposes and it shall not take part in the management and
control 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
as required by Sections 123-126 of the Corporation Code. (B.P. Blg. 68.) Such investment is
allowed by and complies with R.A. No. 7042, the Foreign In- vestment Act. (SEC Opinion, Aug. 6,
1998.)

(3) There must be a mutual contribution of money, property, or industry to a common fund;

Existence of proprietary interest. — The partners must have a proprietary interest in the
business or undertaking, that is, they must contribute capital which may be money or property,
or their services, or both, to the common business.

Without the element of mutual contribution to a common fund there can be no partnership (see
Art. 1784.), although its presence is not necessarily a conclusive evidence of the existence of
partnership.

(a) Money. — The term is to be understood as referring to currency which is legal tender in the
Philippines. It must be pointed out that checks, drafts, promissory notes payable to order, and
other mercantile documents are not money but only representatives of money. Consequently,
there is no contribution of money until they have been cashed. (Art. 1249.)
(b) Property. — The property contributed may be real or personal, corporeal or incorporeal.
Hence, credit such as promissory note or other evidence of obligation or even a mere goodwill
may be contributed, as they are considered property. (see City of Manila vs. Cumbe, 13 Phil. 677
[1909].) It has been held that a license to construct and operate a cockpit may be given as a
contribution to a partnership. (Balon vs. Pajarillo, [C.A.] No. 146-R, Nov. 29, 1956.)
(c) Industry. — In the absence of money or property, or in concurrence with these two, the law
permits the contribution of industry. The word “industry” has been interpreted to mean the
active cooperation, the work of the party associated, which may be either personal manual
efforts or intellectual, and for which he receives a share in the profits (not merely salary) of the
business. (11 Manresa 273-274.)

The contribution of a partner may be in the three forms of money, property and industry, or any
two or one of them. A partnership may, therefore, exist 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. (Lim Tong Lim vs. Philippine
Fishing Gear Industries, Inc., 317 SCRA 728 [1999].) Note that the law does not specify the kind
of industry that a partner may contribute. (see Evangelista & Co. vs. Abad Santos, 51 SCRA 416
[1973].) A limited partner in a limited partnership, however, cannot contribute mere industry or
services. (Art. 1845.)
 Proof of contribution. — In partnership, proof is necessary that there be contribution of money,
property, or industry to a common fund with the intention of dividing the income or profits
obtained therefrom. If the partnership agreement provides simply that one of the parties is to
give and the other is to receive a half interest in the profits of an enterprise started by the
former, without anything being promised by the latter toward the accomplishment of its object,
no enforceable contract exists, but if the latter takes part in carrying on the enterprise, and thus
subjects himself to partnership liability to outsiders, he furnishes sufficient consideration for the
former’s promise and acquires all the rights of a co-partner. (68 C.J.S. 414.)

(4) The object must be lawful;

The object is unlawful when it is contrary to law m morals, good customs, public order, or public
policy. (Art. 1306.) As in other kinds of contract, the purpose of a partnership must be lawful
(Art. 1770.) otherwise, no partnership can arise as the contract is inexistent and void ab initio.

Subject to this general limitation on contracts, a partnership may be organized for any purpose
except that it may not engage in an enterprise for which the law requires a specific form of
business organization, such as banking which, under the General Banking Law of 2000 (R.A. No.
8791, Sec. 8.), only stock corporations may undertake.

Instances of unlawful object are:

1) to create illegal monopolies or combinations in restraint of trade (Art. 185, Revised Penal
Code.);
2) to carry on gambling (Arbes vs. Polistico, 53 Phil. 489 [1929].);
3) to engage in smuggling;
4) to lease furnished apartments to prostitutes;
5) to prevent competition in bidding for government contracts;
6) to control the price of a commodity in the interest of its members, etc.

(5) The primary purpose must be to obtain profits and to divide the same among the parties.

Purpose to obtain profits

(1)The very reason for existence of partnership. — A partnership is formed to carry on a

business. The idea of obtaining pecuniary profit or gain directly through or as a result of the
business to be carried on is the very reason for the existence of a partnership.

One without any right to participate in the profits, cannot be deemed as partner since the
essence of partnership is that the partners share in the profits and losses. (Tacao vs. Court of
Appeals, 365 SCRA 463 [2001].) 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.

(2) Need only be the principal, not exclusive aim. — The realization of pecuniary profit, however,
by engaging in some business activity through their joint contributions and efforts need not be
the exclusive aim of a partnership. It is sufficient that it is the principal purpose even if there are,
 incidentally, moral, social, or spiritual ends. (see 11 Manresa 264.) In a partnership, the parties
intend to share the profits in certain proportions.

Sharing of profits

A partnership is essentially a business enterprise established for profit.

(1) Not necessarily in equal shares. — Since the partnership is engaged for the common benefit
or interest of the partners (Art. 1770.), it is necessary that there be an intention to divide the
profits among the members, although not necessarily in equal shares.

In the words of the Supreme Court, “there must be a joint interest in the profits.” (Fernandez vs.
De la Rosa, supra.) Without this sharing of profits, it cannot be said that an agreement of
partnership has been entered into, and exists. (see Art. 1799.)

If all the other elements create a partnership, a stipulation which excludes one or more partners
from any participation in the profits (or losses) is void. (Art. 1799.)

(2) Not conclusive evidence of partnership. — The sharing in profits is merely presumptive and
not conclusive, even if cogent, evidence of partnership. There are numerous instances of
parties who have a common interest in the profits and losses of an enter- prise but who are
not partners. (Art. 1769.)

Thus, if the division of profits is merely used as a guide to determine the compensation due to
one of the parties, such one is not a partner. (see Art. 1769[4].)

Sharing of losses.

(1) Necessary corollary of sharing in profits. — The definition of partnership under Article 1767
refers to “profits” only and is silent as to “losses.” The reason is that the object of a
partnership is primarily the sharing of profits, while the distribution of losses is but a
“consequence of the same.”
Be that as it may, the right to share in the profits carries with it the duty to contribute to the
losses, if any. (see Art. 1797.)

In other words, a community in losses is a necessary corollary of a participation in profits, where

it is determined that a partnership exists. (Lyon vs. MacQuarrie, 46 Cal. App. [2d], 119.)

(2) Agreement not necessary. — It is not necessary for the parties to agree upon a system of
sharing losses, for the obligation is implied from the partnership relation but 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. (Art. 1797, par. 1.)
Generally, a stipulation which excludes one or more partners from any share in the profits or
losses is void. (Art. 1799.)

(6) It is also required that the 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
provisions of the Civil Code relating to co-ownership. (Art. 1775.)
ART. 1768. The partnership has a juridical personality separate and distinct from that of each of the part-
ners even in case of failure to comply with the requirements of Article 1772, first paragraph. (n)

A partnership is sometimes referred to as a “firm’’ or a “company,’’ terms that connote an entity

separate from its aggregate individual partners.

Like the 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. (Art. 44, par. 3.)

As an independent juridical person:

1) a partnership may enter into contracts, acquire and possess property of all kinds in its name, as well as
2)incur obligations and
3)bring civil or criminal actions in conformity with the laws and regulations of its organizations. (Art. 46.)

Effect of failure to comply with statutory requirements.

(1) Under Article 1772. — This article makes it clear that even in case of failure to comply with the
requirements of Article 1772, with reference to the execution of a public instrument and
registration of the same with the Securities and Exchange Commission in cases when the
partnership capital exceeds P3,000.00, such partnership acquires juridical personality.

Note: The law recognizes that in the Philippines, most partnerships are created with very small capital to
engage in small business and it would be impractical to require that they appear in a public instrument
and be registered as provided in Article 1772.

To organize a corporation or a partnership that could claim a juridical personality of its own and transact
business as such, is not a matter of absolute right but a privilege which may be enjoyed only under such
terms as the State may deem necessary to impose.