Chapter 4- Law on Partnership and Corporation

Law on Partnership

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.

Discussion of Law

• A partnership is an association of two or more persons to carry on as co-owners of a business

for profit.
• The definition of a partnership does not include religious associations, conjugal partnerships and
others of a similar nature because a partnership as defined by law refers only to associations the
purpose of which is to obtain profits to be distributed among the partners.
• A partnership contract is based on trust and confidence. Hence, the fiduciary relation in a
partnership stems from the principle of delectus personae, wherein no one can become a
partner in a partnership without the consent of all the partners.

The essential requisites of a partnership are:

(1) An agreement to contribute money, property, industry to a common fund. This is complied with
if:

(a) each one of the partners brings or is obliged to bring something to the partnership; and

(b) that which is brought becomes common property.

(2) Intent to divide the profits among themselves.

This is complied with if:

(a) partnership is established to obtain profits;

(b) profit must be common to all the parties; and

(c) profit or loss must be divided among the partners.

Advantages of forming a partnership:

1. Easy to form

2. Improved growth possibilities

3. Freedom from bureaucracy

Disadvantages of forming a partnership:

1. Instability

2. Difficulty in obtaining large sums of capital

3. Firm is tied to the acts and judgment of one partner as agent

4. Difficulty in severing partnership ties

 Classification of Partnerships

1.) According to subject matter:

a. Universal partnership – a partnership where all of the partners contribute all of their
properties to the common fund and speaks of no particular purpose or subject matter, as
long as the purpose in forming a partnership is to obtain profits and is not contrary to law,
morals, public order and public policy. Nowadays, seldom if none do you experience
business establishments forming a universal partnership.
b. Particular partnership – a particular partnership has for its object determinate things, their
use or fruits, or a specific undertaking, or the exercise of a profession or vocation.
2.) According to liability:
a. General partnership – composed of general partners where liabilities extend to their
personal properties.
b. Limited partnership – (usually attaches the word “Ltd” or “Limited” at the end of the
company name), one formed by two or more persons having as members one or more
general partners and one or more limited partners, where the liability of the latter to third
persons is limited to their capital contribution.
3.) According to duration:
a. Partnership for a fixed term – is one in which the term of its existence has been agreed upon
expressly (as when there is a definite period) or impliedly, (as when a particular enterprise
or transaction is undertaken). The expiration of the term thus fixed or the accomplishment
of the particular undertaking specified will cause the automatic dissolution of the
partnership.

Forms of Partnership

-A partnership can be in any form, even if not recorded at the Office of the Securities and Exchange
Commission, except:

1.) when it is stipulated;

2.) when immovable property or real rights are contributed, in which case there must be a public
instrument to which is attached an inventory of the immovable properties and signed by the parties,
otherwise the partnership is void.

3.) In case of limited partnership, the parties must:

a. sign and swear to a certificate which shall state, among others the name of the partnership
adding the word “Limited,” and the character of the business;

b. file for record the certificate in the Office of the Securities and Exchange Commission.

-Failure to comply with the foregoing formal requirements will only make the partnership a General
Partnership.

-The succeeding pages show a sample each of the Article of Partnership for both a general partnership
and a limited partnership.

Obligations of the Partners

1.) Where contribution is money or property. If a partner promises to contribute money during the
celebration of the contract and he fails to do so, he shall pay the interest and damages from the
time he should have complied without need of any demand.
2.) Where contribution is industry. An industrial partner (a partner who merely contributed industry
or services to the common fund) cannot engage in business for himself, unless the partnership
expressly permits him to do so; and if he should fail to do so, the capitalist partners may either
exclude him from the fi rm or avail themselves of the benefits which he may have obtained in
violation of this provision, with a right to damages in either case.
 3.) Obligation of the capitalist partner. A capitalist partner (a partner who contributed money and
property to the common fund) is prohibited from engaging in a business in competition with the
partnership, unless there is stipulation to the contrary, otherwise all profits of such partner
belong to the partnership and all losses shall be for his account.
4.) Responsibility between partnership and partner. The partnership shall be responsible to every
partner for the amounts he may have disbursed on behalf of the partnership. It shall also
answer to each partner for the obligations he may have contributed in good faith in the interest
of the partnership business and for risks in consequence of its management.
5.) Sharing of profit and loss among partners. The distribution of profits and losses shall be in
conformity with the agreement. If only the share in the profits is agreed upon, the share in the
losses shall be in the same proportion.
6.) Property rights of a partner. A partner cannot assign his right with respect to the specific
partnership property for the partner’s individual debts or for legal support. However, a partner
can assign his share in the profits to a third person. The right to participate in the management
is governed by stipulation of the partners; if none, all of the partners participate in the
management.
7.) Liability of individual partners to third persons. All partners, including the industrial partner, are
liable pro rata with all their properties for contracts with third persons provided:
a.) they were entered into in the name and for the account of the partnership
b.) under its signature;
c.) by persons authorized to act for the partnership;
d.) the partnership assets are already exhausted.
8.) Liability of the limited partner. A limited partner is liable as a general:
a.) when he allows his surname to appear in the partnership name and
b.) when he takes part in the control of the business.

Dissolution and Winding Up of a Partnership

Discussion of the Law

• In the case of a limited partnership, the same is dissolved:

1.) in case of retirement, death, insolvency, insanity or civil interdiction of a general partner;

2.) when asked for by a limited partner under the provisions of Article 1857, as when he rightfully
but unsuccessfully demands the return of his contribution, or as when the limited partner would
otherwise be entitled to the return of his contribution but there are remaining liabilities of the
partnership which have not been paid or the partnership property is insufficient for their payment.

• In a limited partnership, the retirement, death, insolvency, insanity or civil interdiction of a

general partner dissolves the partnership unless the business shall be continued by the
remaining general partners.
• In such a case, an amendment of the certificate of limited partnership shall be executed and
recorded at the Securities and Exchange Commission.
• On the other hand, the death of all of the limited partners shall dissolve the partnership
unless a substituted limited partner will be admitted to all the rights of a limited partner
who has died or has assigned his interest in the partnership.
• Take note that the amendment of the certificate of limited partnership must comply
substantially with requirements set forth in Article 1844 as well as Article 1843 of the Civil
Code of the Philippines.

- “Civil Interdiction” is defined as an accessory penalty for the commission of an offense, which deprives
the offender during the time of his sentence of the rights of parental authority, or guardianship, either
as to the person or property of any ward, of marital authority, of the right to manage his property and of
the right to dispose of such property by any act or any conveyance inter vivos.

- “Insolvency” is defined as a financial condition in which one is unable to meet his obligations as they
mature in the ordinary course of business or in which one’s liabilities exceed his assets at any given time.
Order of Liquidation for a General Partnership

The Law

-Article 1839. In settling accounts between the partners after dissolution, the following rules shall be
observed subject to any agreement to the contrary

Discussion of the Law

-Take note that the liquidation process under the above provision applies only to a general partnership.
There is a different process for the liquidation of a limited partnership.

Order of Liquidation for a Limited Partnership

The Law

-Article 1863. In settling accounts after dissolution, the liabilities of the partnership shall be entitled to
payment in the following order

- Discussion of the Law The above provision expressly provides for priority in the distribution of assets
after dissolution of a limited partnership. Those due to creditors under No. 1 Article 1863 are the
outside creditors, including those owing to the limited partners.

- In the absence of any statement in the certificate as to the share in the profits for which each partner
shall receive, a limited partner’s share in the profits shall be in proportion to the amount of the partners’
respective capital contribution. This proportional sharing takes place where the partnership assets are
insufficient to pay each of the partners’ claims.

Law on Corporation

The Law

- Sec. 2. Corporation defined. – A corporation is an artificial being created by operation of law, having the
right of succession and the powers, attributes and properties expressly authorized by law or incident to
its existence.

Discussion of the Law

-In the Philippines, the law which governs the creation of private corporations is Batas Pambansa Blg.
68, known as the Corporation Code of the Philippines. “Right of Succession” means that a corporation
has the capacity to exist regardless of the death, withdrawal, insolvency or incapacity of the individual
stockholders and regardless of the transfer of interest or shares of stock.

-The powers of all corporations are limited to those mentioned in their charters or in the general acts
under which they are created.

Kinds of Corporation

a.) Stock Corporation – one which has a capital stock divided into shares and is authorized to distribute
to the holders of such shares/dividends or allotments of the surplus profits (i.e., retained earnings)
on the basis of the shares held. A stock corporation is organized for profit. The governing body of a
stock corporation is usually the Board of Directors.
b.) Non-stock Corporation – one where no part of its income is distributable as dividends to its
members, trustees, or officers, subject to the provisions of the Code on dissolution. A non-stock
corporation is one not organized for profit. The governing body is usually the Board of Trustees.
c.) Corporation De Jure – a corporation organized in accordance with the requirements of law.
d.) De Facto Corporation – a corporation where there exists a fl aw in its incorporation.
e.) Public Corporation – one formed or organized for the government of a portion of the State. It is
created by its own charter for the exercise of a public function. Examples: barangay, city,
municipality.
f.) Private Corporation – one formed for some private purpose, aim or end. It is created by
incorporation under the general corporation law. This includes a government owned and controlled
corporation with an original charter and quasi-public corporation, a private corporation performing
public functions.

g.) Corporation Sole – one organized for the purpose of administering and managing, as trustee, the
affairs, property and temporalities of any religious denomination, sect or church. In this
corporation, there is only one incorporator.

h.) Eleemosynary Corporation – one organized for a charitable purpose.

i.) Domestic Corporation – a corporation formed, organized and existing under the laws of the
Philippines.

j.) Foreign Corporation – a corporation formed, organized or existing under any laws other than those
of the Philippines and whose laws allow Filipino citizens and corporations to do business in their
own country or state.

Advantages of a Corporate Organization

1) Strong separate juridical personality

2) Limited liability to investors

3) Free transferability of units of ownership

4) Centralized management through the Board of Directors

5) Professionalism

6) Easier to sell small amounts of stock to raise capital

Disadvantages of a Corporate Organization

1) Extensive government regulation

2) Double taxation

3) Activities are limited by charter and various laws

Distinction Between a Partnership and a Corporation

1) A partnership is created by the agreement of the parties, while a corporation is created by law (B.P.
68).

2) In a partnership, the liability of the partners (except limited partners) extends to their personal
properties, while the liability of the stockholders in a corporation is limited only to the extent of the
shares of stock subscribed by them.

3) In a partnership, when the management is not agreed upon, every partner is an agent of the
partnership; while the power to do business and manage the affairs of the corporation is vested in the
board of directors or trustees.

4) A partnership commences to acquire juridical personality from the moment of the execution of the
contract of partnership; while a corporation commences its corporate existence only from the date of
the issuance of the certificate of incorporation by the Securities and Exchange Commission.

5) A partnership may be organized by only two persons; while a corporation requires at least five but not
more than 15 incorporators to organize.

6) A partnership has no right of succession, while a corporation has such right.

7) In a partnership, a partner cannot transfer his interest in the partnership without the consent of all
the partners because the partnership is based on the principle of delectus personae; while in a stock
corporation, a stockholder has the right to transfer his shares without the prior consent of the other
stockholders.

8) A partnership may be established for any period of time stipulated by the partners, while a
corporation may exist for a term of 50 years to be extended for another term not exceeding 50 years.

9) A partnership may be dissolved at any time by the will of any or all of the partners, while a
corporation can only be dissolved with the consent of the state.

Dissolution of a Corporation

1. Voluntarily, by fi ling the proper papers with the Securities and Exchange Commission. No
hearing is required if there are no creditors affected but a hearing is required where creditors
are affected.
2. Involuntarily upon verified complaint fi led with the Securities and Exchange Commission, upon
notice and hearing, and on grounds authorized by law as in the following:
• Fraud or misrepresentation as to the paid up capital of the corporation;
• Ultra vires acts which are persistent despite SEC warnings (Republic vs. Security Credit &
Acceptance Corporation, 19 SCRA 58 [1967])
• Continuous inactivity of the corporation for at least 5 years;
• Refusal to adopt or approve by-laws (P.D. 902-A); and
• Serious dissension in the corporation.
3. Expiration of the term of the Corporation;
4. Shortening of the corporate term under Sec. 120 of the Corporation Code;
5. Failure to organize and commence business within two (2) years from the date of issuance of
certificate of incorporation; or
6. Legislative dissolution.

Corporate Liquidation

-After the dissolution of the corporation, it continues to exist as a body corporate, but only for the
purpose of enabling it to settle and close its affairs but not for the purpose of continuing the business
for which it was established.

-The liquidation of partnership affairs shall be for a period of three (3) years. A dissolved corporation
cannot extend corporate life during the 3-year liquidation period by amendment of its articles of
incorporation extending corporate term. However, if a corporation has a pending case which it fi led
during the 3-year liquidation period and it is still pending after said period, then the stockholders should
meet and transfer all the rights of action to the trustee so that he can continue the case until its
termination.

- Finally, it has been held that even after the lapse of the 3-year liquidation period, the officers and
directors of the defunct corporation are the proper parties in interest insofar as they may be held
personally liable for the unpaid deficiency tax assessment made against the defunct corporation.

Chapter 5- Law on Sales, Agency and Credit Transactions

Law on Sales

The Law

Article 1458. By the contract of sale, one of the contracting parties obligates himself to transfer
ownership of and to deliver a determinate thing, and other to pay therefor a price certain in money or its
equivalent. A contract of sale may be absolute or conditional.
Discussion of the Law

Characteristics of a Contract of Sale

1. Consensual – A contract of sale is perfected by mere consent. No form is prescribed for the
perfection in a contract of sale
2. Bilateral – because it gives rise to reciprocal obligations.
3. Principal – because it can stand by itself without need of another contract
4. Onerous – because the consideration for each party is the delivery of the thing or the payment
of the price.
5. Commutative – because what the vendor (seller) delivers is considered equivalent of the price
paid by the vendee (buyer).
6. Nominate – because it has a designated name under the Civil Code of the Philippines which is
“sale.”
7. Nominate – because it has a designated name under the Civil Code of the Philippines which is
“sale.”

Requisites of a Contract of Sale

1. Consent – Consent is manifested as the meeting of the offer (which must be certain) and the
acceptance (which must be absolute) upon the thing and the cause which are to constitute the
contract.
The following are disqualified to enter into a contract:
a. Husband and Wife – A sale between husband and wife in violation of Article 1490 is
inexistent and void from the beginning because such contract is expressly prohibited by law.
b. The following persons cannot acquire by purchase even at public auction or judicial auction,
either in person or through the mediation of another:
• Guardian
• Agents
• Executors and administrators
• Public officers and employees
• Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and
other officers and employees connected with the administration of justice
• Any others especially disqualified by law

Contracts entered in violation of the above shall render the contracts void by reason of public policy8
and because such contracts are also expressly prohibited by law.

Effect of Loss of the Object in a Contract of Sale

The Law

Article 1480. Any injury to or benefit from the thing sold, after the contract has been perfected, from the
moment of the perfection of the contract to the time of delivery, shall be governed by Articles x x x 1262.

Article 1262. An obligation which consists in the delivery of a determinate thing shall be extinguished if
it should be lost or destroyed without the fault of the debtor, and before he has incurred in delay.

Article 1496. The ownership of the thing sold is acquired by the vendee from the moment it is delivered
to him in any manner of the ways specified in Articles 1497 to 1501, or in any other manner signifying an
agreement that the possession is transferred from the vendor to the vendee.

Sale of Personal Property Payable in Installments

The Law

Article 1484. In a contract of sale of personal property, the price of which is payable in installments, the
vendor may exercise any of the following remedies:
 1. Exact fulfillment of the obligation should the vendee fail to pay;
2. Cancel the sale, should the vendee’s failure to pay cover two or more installments;
3. Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the
vendee’s failure to pay cover two or more installments. In this case, he shall have no further
action against the purchaser to recover any unpaid balance of the price. Any agreement to the
contrary shall be void.

Double Sale

The Law

Article 1544. If the same thing should have been sold to different vendees, the ownership shall be
transferred to the person who may have first taken possession in good faith, if it should be movable
property.

Should it be immovable property, the ownership shall belong to the person acquiring it who in good
faith first recorded it in the Registry of Property.

Should there be no inscription, the ownership shall pertain to the person who in good faith was first
in the possession; and in the absence thereof, to the person who presents the oldest title, provided
there is good faith.

Pacto de Retro Sale (Conventional Redemption)

The Law

Article 1601. Conventional redemption shall take place when the vendor reserves the right to repurchase
the thing sold, with the obligation to comply with the provisions of Article 1616 and other stipulations
which may have been agreed upon.

Obligations of the Vendor

The Law

Article 1495. The vendor is bound to transfer the ownership of and deliver, as well as warrant the thing
which is the object of the sale.

Article 1496. The ownership of the thing sold is acquired by the vendee from the moment it is delivered
to him.

Article 1497. The thing sold shall be understood as delivered, when it is placed in the control and
possession of the vendee

Warranty Against Hidden Defects (Redhibitory)

-A defect is considered redhibitory if it is hidden, unknown to the buyer, existing prior to the sale at least
in origin, and which renders the thing unfit for the use intended.

Obligations of the Vendee

The Law

Article 1582. The vendee is bound to accept delivery and pay the price of the thing sold at the time and
place stipulated in the contract.

Actions for Breach of Contract of Sale

Extrajudicial remedies:

1. Of the buyer:
a. The buyer need not pay unless there is delivery.
b. The buyer may reject improper deliveries.
c. The buyer may suspend payment if he is disturbed in the possession or ownership of the
thing or has reasonable grounds to fear such disturbance.
 2. Of the seller:
a. Vendor is not bound to deliver the thing sold if the vendee has not paid the price.
b. Installment sales (Recto and Maceda Law)

Judicial remedies:

1. Of the buyer:
a. Damages for breach of contract
2. Of the seller:
a. Recovery of the price
b. Damages in case of bad faith

Law on Agency

The Law

Article 1868. By the contract of agency, a person binds himself to render some service or to do something
in representation or on behalf of another, with the consent or authority of the latter.

Liability of the Principal and the Agent

The Law

Article 1883. If an agent acts in his own name, the principal has no right of action against the persons
with whom the agent has contracted; neither have such persons against the principal.

In such case the agent is the one directly bound in favor of the person with whom he has contracted, as if
the transaction were his own, except when the contract involved things belonging to the principal.

Law on Credit Transactions

Companies in the tourism industry are likely to face debts. That is why it is important to know the
different ways in handling debts in relation to third persons as well as credit transactions emanating
within their respective companies.

The Law

Article 1933. By a contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which case the
contract is called a commodatum; or money or other consumable thing, upon the condition that the
same amount of the same kind and quality shall be paid, in which case the contract is simply called loan
or mutuum.

Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay
interest.

Simple Loan or Mutuum

The Law

Article 1956. No interest shall be due unless it has been expressly stipulated in writing.

Pactum Commissorium

The Law

Article 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose
of them. Any stipulation to the contrary is null and void.

Discussion of the Law

Pactum Commisorium is defined as a stipulation giving power to the creditor to automatically

appropriate the thing given as security, if the principal obligation is not fulfilled without any formality,
such as foreclosure proceeding and public sale.