IRS CPA REVIEW
Iloilo City and Leganes, Iloilo
REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS
LAW ON PARTNERSHIP
GENERAL PRINCIPLES
1. Definition of Partnership
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.
2. Partnership as a juridical person
A partnership in itself is a juridical person, separate and distinct from the
partners composing it. It has the capacity of acting as a legal unit.
Test in determining the existence of partnership
The existence of partnership may be established by:
a. The existence of contract; or
b. The intention to create a partnership.
There is no partnership in the following instances:
a. Persons who are not partners as to each other are not partners as to third
persons except in case of partnership by estoppel;
b. Co-ownership or co-possession does not of itself a partnership, whether
such co-owners or co-possessors do or do not share any profits made by
the use of the property;
c. 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 which the returns are derived.
3. Presumption of existence of partnership
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. The share must be in the net
profit, not in gross returns.
The presumption is controverted when the share in the profits is given as
payment of:
a. Debt;
b. Wages of employee or rent of landlord;
c. Annuity to a widow or representative of deceased partner;
d. Interest on a loan.
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4. Common benefit
The partnership must be established for the common benefit of all the
partners. Any stipulation which excludes one or more partners from any share
in the profits and losses is void.
5. Form of partnership contract
A partnership may be constituted in any form, except where immovable
property or real rights are contributed thereto, in which case a public
instrument shall be necessary.
If the contribution is money or personal property:
The contract may be oral or written, express or implied.
The law requires that if the capital of the partnership P3,000.00 or more in
money or property (other than immovable), the contract of partnership must
be in public instrument and registered with the Securities and Exchange
Commission (SEC). Such requirement is only directory, not mandatory. Non-
compliance thereof does not affect the validity of the contract of partnership.
If immovable property or real rights are contributed:
The partnership contract must appear in public instrument, together with an
inventory of the immovables or real rights contributed, signed by the parties
and attached to the public instrument, otherwise, the contract is void.
6. Associations treated as co-ownership
Associations and societies whose articles are kept secret among the
members, and wherein any one of the members may contract in his own
name with third persons, shall have no juridical personality, and shall be
governed by the provisions relating to co-ownership.
7. Classification of partnership as to object
As to its object, a partnership is either universal or particular.
Universal partnership
A universal partnership is classified into:
a. Universal partnership of all the present property; and
b. Universal partnership of all the profits.
Universal partnership of all the present property
In a universal partnership of all present property, the property which belong to
each of the partners at the time of the constitution of the partnership,
becomes the common property of all the partners, as well as all the profits
which they may acquire therewith.
A stipulation for the common enjoyment of any other profits may also be
made; but the property which the partners may acquire subsequently by
inheritance, legacy, or donation cannot be included in such stipulation, except
the fruits thereof.
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Coverage of universal partnership of all present property:
a. All present property of each partner;
b. All the profits that may be derived from such properties;
c. If stipulated, the fruits of properties acquired by a partner by inheritance,
legacy or donation.
Universal partnership of all the profits
A universal partnership of profits comprises all that the partners may acquire
by their industry or work during the existence of the partnership.
Movable or immovable property which each of the partners may possess at
the time of the celebration of the contract shall continue to pertain exclusively
to each, only the usufruct passing to the partnership.
Coverage of universal partnership of all the profits:
a. All properties acquired by each partner from his work or industry;
b. Usufruct of movable or immovable property belonging to each partner at
the time of the perfection of the contract of partnership.
Profits earned or acquired by the partners by lucrative title like donations,
succession or hereditary title or the findings of hidden treasure are not
included.
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.
Coverage of a particular partnership:
a. Determinate thing and their use or fruits;
b. Specific undertaking;
c. Exercise of profession or vocation.
8. Persons prohibited from entering into a universal partnership
Persons who are prohibited from giving each other any donation or
advantages cannot enter into universal partnership.
Persons who are prohibited from donating to each other:
a. Between spouses;
b. Between persons who are guilty of adultery or concubinage at the time of
donation;
c. Between persons found guilty of the same criminal offense in consideration
thereof;
d. Between a public officer or his wife or some other person by reason of the
former’s office.
9. Classification of partnership as to liability of partners
As regards the liability of the partners, a partnership may be general or
limited.
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In a general partnership, all the partners are general partners. They are liable
beyond their contributions.
In a limited partnership, there is at least one limited partner and at least one
general partner. A limited partner is liable only to the extent of his
contribution.
10. Kinds of partners
The following are the kinds of partners:
a. As to liability
1) General partner;
2) Limited partner.
b. As to nature of contribution
1) Capitalist partner;
2) Industrial partner.
c. As to knowledge by the public
1) Ostensible partner;
2) Secret partner.
d. As to connection with the partnership
1) Real partner;
2) Nominal partner.
e. As to power in partnership management
1) Silent partner;
2) Dormant .
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