Partnership Formation 1

• Limited Life. Partnership may be dissolved by

HISTORY the admission, death, insolvency, incapacity,
• In 2200 B.C., Hammurabu, King of Babylon
withdrawal of partner or expiration of the term
provided the regulation for partnership.
specified in the partnership agreement.
• In ancient Rome, the partnership was called a
societa. • Unlimited Liability. All partners (except limited
partners) are personally liable for all the debts
• Middle Ages in Italy – Laws of partnership began
incurred by the partnership. If a partnership can
to develop. Italian merchants operated as limited
not settle its obligations, creditors’ claims will be
partners.
satisfied from the personal assets of the partners
• Partnership Act of 1890 – the partnership law in without prejudice to the rights of the separate
the United States evolved from English Law that creditors of the partners.
originated from the approach of Italian
• Income Taxes. Partnership (except general
merchants.
professional partnerships) are subject to tac at
• Uniform Partnership Act of 1914 and Uniform the rate of 25% (per CREATE Act) of taxable
Limited Partnership Act of 1916 – both are in US. income.
• Two types of partnership in the Philippines before • Partners’ Equity Accounts. Each partner has a
he eOectivity of the Civil Code (on Aug. 30, 1950): capital account and withdrawal account.
Commercial and Civil.
o Commercial or mercantile partnership – ADVANTAGES AND DISADVANTAGES
governed by the Code of Commerce Advantages versus Proprietorship
o Civil or non-commercial partnership –
governed by the old Civil Code 1. Brings greater financial capability to business.
• The new civil code reappealed the provisions of 2. Combine special skills, expertise, and
the two codes relating to the commercial or experience of the partners.
mercantile partnership. Rules from the two 3. OOers relative freedom and flexibility of action in
American Uniform Partnership Acts were also decision-making.
incorporated. Advantages versus Corporations

PARTNERSHIP 1. Easier and less expensive to Organize

Two or more persons bind themselves to contribute 2. More personal and informal.
money, property, or industry to a common fund, with the
Disadvantages
intention of dividing the profit among themselves. Two or
more persons may also form a partnership for the 1. Easily dissolved and thus unstable compared to
exercise of a profession. (Civil Code of the Philippines, corporation
Article 1767) 2. Mutual agency and unlimited liability may create
personal obligations to partners
An association of two or more persons to carry on, as co-
3. Less eOective than a corporation in raising large
owners, a business for profit. (Uniform Partnership Act,
amounts of capital.
Section 6)

CHARACTERISTICS PARTNERSHIP VS CORPORATION

• Manner of Creation. Partnership is created by
• Mutual Contribution. There cannot be a
mere agreement of the partners while
partnership without contribution of money,
Corporation is created by operation of law.
property or industry (work or services that is
• Number of Persons. Two or more persons may
either personal manual eOorts or intellectual) to
form a partnership; in a corporation, not
common fund.
exceeding fifteen people. A single stockholder is
• Division of Profit or Losses. Each partner must
share in the profits or losses of the venture. considered a One-person corporation
• Commencement of Juridical Personality. In
• Co-Ownership of Contributed Assets. All
assets contributed into the partnership are partnership, it commences from the execution of
the articles of partnership; in a corporation, from
owned by the partnership by virtue of its separate
the issuance of certificate of incorporation by the
and distinct juridical personality.
SEC.
• Mutual Agency. Any partner can bind the other
• Management. In a partnership, any partner is an
partners to a contract if he is acting within his
agent of partnership if the partners did not
express or implied authority (regarding the
appoint a managing partner; in a corporation,
partnership operations)
management is vested on the Board of Directors.
 Partnership Formation 2

• Extent of Liability. In partnership, each partner 5. According to the legality of existence;

(except limited partners) is liable to the extent of a. De jure partnership. One which has
his personal assets; in a corporation, complied with all the legal requirements
stockholders are liable only to the extent of their for its establishment.
interest or investment in the corporation. b. De facto partnership. One which has
• Right of Succession. In partnership, there is no failed to comply with all the legal
right of succession; in corporation, there is right requirements for its establishment.
of succession. A corporation has the capacity of
continued existence regardless of death, KINDS OF PARTNERS
withdrawal, insolvency or incapacity of its 1. General Partner. Liable to the extent of his
directors or stockholders. separate property after all the assets of the
• Terms of Existence. In partnership, for any partnership are exhausted.
period of time stipulated by the partners; in 2. Limited partner. Liable only to the extent of his
corporation, shall have a perpetual existence capital contribution. He is not allowed to
unless articles of incorporation provide contribute industry or services only.
otherwise. 3. Capitalist partner. Contributes money or
property to the common fund of the partnership.
CLASSIFICATIONS OF PARTNERSHPS 4. Industrial partner. Contributes his knowledge or
1. According to object: personal services to the partnership,
a. Universal partnership of all present 5. Managing partner. Appointed as manager of the
property. All contributions become part partnership.
of the partnership fund. 6. Liquidating partner. Designated to wind up o
b. Universal partnership of profits. All that settle the aOairs of the partnership after
partners may acquire by their industry or dissolution.
work during the existence of the partnership 7. Dormant partner. Does not take active part in
and the use of whatever the partners the business of the partnership and is not known
contributed at the time of the institution of as a partner.
the contract belong to the partnership. If the 8. Silent partner. Does not take active part in the
article of universal partnership did not
business of the partnership though may be
specify its nature, it will be considered a
known as a partner.
universal partnership of profits.
9. Secret partner. Takes active part in business but
c. Particular partnership. The object of the
is not known to be a partner by outside parties.
partnership is determinate-its use or
10. Nominal partner or partner by estoppel. Not
fruit, specific undertaking or the exercise
actually a partner but represents himself as one.
of a profession or vocation.
2. According to liability:
a. General. All partners are liable to the ARTICLES OF PARTNERSHIP
A partnership may be constituted orally or in writing. In
extent of their separate properties.
the latter case, partnership agreements are embodied in
b. Limited. Liable only to the extent of their
the Articles of Partnership. The following essential
personal contributions. (in limited
provisions may be contained in the agreement;
partnership, there should be at least one
general partner) 1. Partnership Name, Nature, Purpose, Location;
3. According to duration: 2. Names, Citizenship, residences of the partners;
a. Partnership with a fixed term or for a 3. Date of formation and the duration of the
particular undertaking partnership;
b. Partnership at will. One in which no term 4. Capital contribution of each partner, the
is specified and is not formed for any procedure of valuing non-cash investment,
particular undertaking. treatment of excess contribution (as capital or as
4. According to purpose: a loan) and the penalties for a partner’s failure to
a. Commercial or trading partnership. invest and maintain the agreed capital;
One formed for the transaction of 5. Rights and duties of each partner;
business. 6. Accounting period to be adopted, nature of
b. Professional or non-trading accounting records, financial statements and
partnership. One formed for the exercise audits by independent public accountants;
of profession. 7. Method of sharing profit or loss, frequency of
income measurement and distribution, including
 Partnership Formation 3

any provisions for the recognition of diOerences certificate on the capital

in contributions; contribution of partners;
8. Drawings and salaries to be allowed to partners; • Pay the registration/filling and miscellaneous
9. Provisions of arbitration of disputes, dissolution, fees: filling fee is 1/5 of 1% of the partnership
and liquidation. capital but not less than P1,000 and legal
research fee which is 1% of the filling fee;
A contract of partnership is void whenever immovable
• Forward documents to the SEC Commissioner
property or real rights are contributed and a signed
for signature.
inventory of the said property is not made and attached to
a public instrument.

SEC REGISTRATION
The partnership having a capital of P3,000 or more is valid
and therefore has a legal personality, even if not
registered. When the partnership capital is P3,000 or more, in money
or property, the public instrument must be recorded with the SEC.

The SEC shall not register any corporation organized for

the practice of public accountancy (The Philippine
Accountancy Act of 2004, Sec. 28)

The purpose of the registration is to set “a condition for

the issuance of the licenses to engage in business or
trade. In this way, tax liabilities of big partnership cannot
be evaded, and the public can also determine more
accurately their membership and capital before dealing
with them.”

STEPS TO REGISTER PARTNERSHIP WITH SEC:

• Have you proposed business name verified in the

verification unit of SEC; (SEC Memorandum Circular 5,
Series 2008)
o The partnership name shall bear the
word “Company” or “Co.”
o If it is a limited partnership, the word
“Limited” or “Ltd”
o A professional partnership may bear the
word “Company,” “Associates” or
“Partners” or other similar descriptions.
• Submit the following documents:
o Articles of Partnership
o Verification Slip for the Business Name
o Written undertaking to change business
name if required
o Tax identification number of each
partner and/or that of the partnership
o Registration data sheet for partnership
duly accomplished in six copies
o Other documents that may be required
§ Endorsement from other
government agencies if the
proposed partnership will
engage in an industry regulated
by the government
§ For partnership with foreign
partners: SEC Form F-105, bank