Partnership

Concept of Partnership

A partnership is a contract of two or more persons

who bind themselves to contribute money, property
or industry to a common fund, with the intention of
dividing the profits among themselves.
 Concept of Partnership

Two or more persons may also form a partnership

for the exercise of a profession.
 Concept of Partnership
It is both:

1.) A contract; and

2.) A business organization
It is a juridical entity which has a personality separate and distinct from that
of each of the partners. (Art. 1768) It begins from the moment of the
execution of the contract, unless it is otherwise stipulated. (Art. 1784)
Characteristics of a contract of partnership

1. Consensual
2. Principal
3. Bilateral
4. Nominate
5. Preparatory
6. Onerous
Characteristics of a contract of partnership

1. Consensual
It is perfected by mere consent.
Characteristics of a contract of partnership

2. Principal
It does not depend upon any other contract for its
validity or existence.
Characteristics of a contract of partnership

3. Bilateral or multilateral
It is entered into by two or more persons whose rights
and obligations are reciprocal.
Characteristics of a contract of partnership

4. Nominate
It has a special given name to it by law. (Art. 1767)
Characteristics of a contract of partnership

5. Preparatory
It is a means by which other contracts will be entered
into as the partnership pursues its business.
Characteristics of a contract of partnership

6. Onerous
The partners contribute money, property or industry to
a common fund. (Art. 1767)
 Essential requisites of partnership

1. There must be a valid contract.

2. There must be a mutual contribution of money,
property or industry to a common fund.
3. It must have a lawful object or purpose.
 Essential requisites of partnership

4. The partnership must be established for the common

benefit or interest of the partners which is to obtain
profits and to divide the profits among the partners.
 Form of a partnership contract
A partnership contract may be constituted in any form, i.e., oral or
written, except as follows:
1. Where immovable property or real rights are contributed to the
partnership (regardless of the amount thereof)
a. The partnership contract must be in a public instrument; and
b. An inventory of the said property must be made, signed by the
parties and attached to the public instrument. (Art. 1773)
 Form of a partnership contract
Effect if the above requirements are not complied with

a.) The partnership contract is void (Art. 1773)

b.) The partnership will not have any juridical personality.
 Form of a partnership contract

2. Where the capital of the partnership is ₱3,000.00 or more, in

money or property
a. The partnership contract must be in a public instrument, and
b. Registered with the Securities and Exchange Commission
(SEC)
 Form of a partnership contract
Effect if the above requirements are not complied with
a. The partnership contract is still valid. Accordingly, the
partnership still acquires juridical personality.
b. The liability of the partnership and the members thereof to
third persons are not affected.
 Form of a partnership contract
3. If the partnership is a limited partnership, a certificate signed
under oath by the partners and recorded with the Securities and
Exchange Commission is required.
 Form of a partnership contract
Effect if requirements are not complied with
The partnership will be considered as a general partnership.
 Who may become partners
1. Any natural person who is capacitated may become a partner
2. Artificial persons like partnership and corporations may likewise
form a partnership with individuals or other partnerships or
corporations.
Partnership
 Question No. 1 - Identification
1. It is a contract of two or more persons who bind themselves to
contribute money, property or industry to a common fund, with the
intention of dividing the profits among themselves.
 Question No. 2 – Multiple Choice
2. It means that it is a contract that is perfected by mere consent because all the
partners had a meeting of the minds to enter into a contract of partnership.
A. Consensual
B. Principal
C. Preparatory
D. Commutative
 Question No. 3 – True or False
3. Where immovable property or real rights are contributed to the
partnership (regardless of the amount thereof), the partnership
contract must be in a private instrument.
 Question No. 4 – True or False

4. Partnership does not retain its juridical personality in case of

failure to register with the Securities and Exchange
Commission.
 Question No. 5 – Multiple Choice
One of the following is not a requisite of a contract of partnership. Which is it?
A. There must be a valid contract.
B. There must be a mutual contribution of money, property or industry to the
common fund.
C. It is established for the common benefit of the partners which is to obtain profits
and divide the same among themselves
D. The articles are kept secret among the members.
 Kinds of Partnership
1. As to object
a. Universal Partnership – a universal partnership may either
be a universal partnership of all present property or a
universal partnership of profits
 Kinds of Partnership – as to object
• Universal partnership of all present property
This is a partnership in which all the partners contribute all the
property which actually belonged to them to the common
fund, with the intention of dividing the same among themselves, as
well as the profits which they acquire therewith. (Art. 1778)
 Kinds of Partnership – as to object
In a universal partnership of all present property, the property which belonged
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. (Article 1779)
 Kinds of Partnership – as to object
• Universal partnership of all present property
Property which shall belong to the common fund:
a. Property belonging to the partners at the time of the constitution of the
partnership (present property).
b. Profits that may be acquired from the present property
 Kinds of Partnership – as to object
• Universal partnership of all present property
c. Property acquired by each partner after the formation of the partnership
but only if stipulated. (Art. 1779) This property shall include:
1. The property itself except that the stipulation shall not include property
acquired by inheritance, legacy, or donation.
2. The profits and fruits therefrom including those from property acquired
by inheritance, legacy or donation. (Art. 1779)
Example:

A and B formed a universal partnership of all present property. At the

time of the establishment of the partnership, A owned a fleet of taxis
which he had purchased and an agricultural lot which he had inherited.

B, on the other hand, owned an apartment which he had earlier acquired

by exchange and shares of stock which were donated to him.

The partners agreed that property acquired by each partner after the
formation of the partnership shall belong to the partnership.
During the first year of operations of the partnership, the following
transactions took place:

a. Fare revenues of P300,000.00 were realized from the operation of

the fleet of taxis
b. Crops amounting to P200,000.00 were gathered from the agricultural
lot
c. Rentals of P200,000.00 were collected from the apartment
d. Dividends of P150,000.00 were received from the shares of stock
e. A coconut plantation was purchased by A from his own funds
f. Coconuts worth P100,000.00 were gathered from the coconut
plantation
g. A fishpond was received by B by way of donation from a rich aunt
h. Fish valued at P200,000.00 were harvested from the fishpond.

Based on the foregoing, what are the properties that belong to the
partnership?
 Kinds of Partnership – as to object
• Universal partnership of profits
This comprises all that the partners may acquire by their work or
industry during the existence of the partnership. (Art. 1780)
 Kinds of Partnership – as to object
• Universal partnership of profits
Profits/property which shall belong to the partnership:
a. Profits obtained by the partners by their work or industry during the
existence of the partnership.
b. The usufruct (the use) of the property belonging to each partner at the
time of the constitution of the partnership.
c. The profits and fruits from the properties aforementioned
 Kinds of Partnership – as to object
• Universal partnership of profits
d. Profits and fruits, if stipulated, of property acquired by each partner
after the constitution of the partnership.
Example:

A and B formed a universal partnership of profits. At the time of the

establishment of the partnership, A owned a fleet of taxis which he had
purchased and an agricultural lot which he had inherited.

B, on the other hand, had an apartment which he had earlier acquired by

exchange and shares of stock which were donated to him. The parties
stipulated that fruits of future property shall belong to the partnership.

During the first year of operations of the partnership, the following

transactions took place:
a. Fare revenues of P300,000.00 were realized from the operation of
the fleet of taxis
b. Crops amounting to P200,000.00 were gathered from the agricultural
lot
c. Rentals of P200,000.00 were collected from the apartment
d. Dividends of P150,000.00 were received from the shares of stocks
e. Salary of P250,000.00 was received by A as professor of a certain
college
f. P2,000,000.00 was won by B in the lotto draw
g. A coconut plantation was purchased by A from his own funds
h. Coconuts worth P100,000.00 were gathered from the coconut
plantation
i. A fishpond was received by B by way of a donation from his rich
uncle
j. Fish valued at P150,000.00 were harvested from the fishpond.

Based on the foregoing, what are the properties that belong to the
partnership?
 Rule in case universal partnership is
without any specification
Articles of universal partnership entered into without specification
of its nature, only constitute a universal partnership of profits. (Art.
1781)
 Prohibition to enter into a universal
partnership
Persons prohibited from giving any donation or advantage cannot
enter into a universal partnership. (Art. 1782)
 Prohibition to enter into a universal
partnership
The following donations are void:

• Donations between spouses during the marriage except moderate gifts on

the occasion of a family rejoicing. These prohibition applies to persons living
as husband and wife without the benefit of marriage. (Article 87, Family
Code)

• Those made between persons who were guilty of adultery or concubinage at

the time of the donation.
 Prohibition to enter into a universal
partnership
The following donations are void:

• Those made between two persons found guilty of the same criminal offense,
in consideration thereof. (Art. 789)

• Those made to a public officer or his wife, descendants or ascendants by

reason of his office. (Art. 789)
 Kinds of Partnership – as to object
• Particular Partnership
A particular partnership has for its object determinate things,
their use or fruits, or a specific undertaking, or the exercise of the
profession.
 Kinds of Partnership – as to object
Examples of Particular Partnership:
1.) A real estate partnership whereby partner X contributed a parcel
of land and partner Y a building
2.) A real estate lessor partnership whereby X contributed cash and
Y the use and lease of his building
3.) A partnership formed for the exercise of the profession
 Kinds of Partnership – as to liability
As to liability:

1. General partnership
2. Limited partnership
 Kinds of Partnership – as to liability
• General partnership – A partnership where all the partners are
general partners who are liable to the extent of their separate
property after the partnership assets have been exhausted.
 Kinds of Partnership – as to liability
• Limited Partnership – A partnership where there is at least one
general partner and at least one limited partner.

The general partners are liable up to the extent of their

separate property, while the limited partners are liable only to
the extent of their investment in the partnership.
 Kinds of Partnership – as to duration
• Partnership for a fixed term
• Partnership for a particular undertaking
• Partnership at will
 Kinds of Partnership – as to duration
• Partnership for a fixed term
One for which a period for its duration is fixed by the partners, such
as a partnership with a term of years.
 Kinds of Partnership – as to duration
• Partnership for a particular undertaking
One which is organized for a certain undertaking which, when
attained, will cause the termination of the partnership, such as a
partnership formed to construct 100 residential houses.
 Kinds of Partnership – as to duration
• Partnership at will
One where no period is fixed by the parties for its duration; hence,
may be terminated at will by the partners.
 Kinds of Partnership – as to duration
Article 1785 – If a partnership for a fixed term or a particular
undertaking is continued after the expiration of the said term or
the attainment of the said undertaking, without any express
agreement, the partnership becomes a partnership at will.
 Kinds of Partnership – as to duration
Article 1785 – The continuation of the business in such a case has
the following effects:
1. The rights and duties of the partners remain the same as they
were at such termination, so far as is consistent with a
partnership at will.
2. The absence of settlement or liquidation of partnership affairs
is a prima facie evidence of the continuation of the partnership.
Kinds of Partnership – as to representation
to others
• Ordinary Partnership
• Partnership by estoppel
Kinds of Partnership – as to representation
to others

• Ordinary Partnership – One which actually exists among the

partners as well as to third persons
Kinds of Partnership – as to representation
to others

• Partnership by estoppel– One which in reality is not a

partnership but is considered as one with respect to those who, by
reason of their conduct or admission, are precluded from denying
its existence. (Art. 1825)
Kinds of Partnership – as to representation
to others
• Partnership by estoppel
It may arise through any of the following means:
1. When a person represents himself as a partner in an existing
partnership.
2. When a person represents himself as a partner in a non-existing
partnership
Example:

X, Y, and Z are partners in XYZ partnership. Subsequently, A

misrepresented to B that he is a partner in XYZ partnership. When B
inquired from X, Y, and Z if A is one of their partner, X, Y, and Z
answered in the affirmative.

Is there a partnership by estoppel in this case?

Answer:

Yes, there is a partnership by estoppel. Likewise, X, Y, Z, and A are

partners by estoppel so that if B suffered damages because of that
misrepresentation, the net assets of XYZ partnership is liable together
with their separate properties.
Kinds of Partnership – as to the legality of
its existence
• De jure partnership
• De facto partnership
Kinds of Partnership – as to the legality of
its existence
• De jure partnership – it is one which has complied with all the
legal requirements for its creation
Kinds of Partnership – as to the legality of
its existence
• De facto partnership – it is one which has not complied with all
the legal requirements for its creation
Kinds of Partnership – as to the legality of
its existence
• De facto partnership
Example: A, B, and C formed ABC Partnership where A
contributed P2,000,000.00 cash, B contributed his car and C will
contribute his industry during the term of the partnership. Their
agreement is verbal.

Here, the partnership is a de facto partnership as it was not written

in a public instrument and it was not registered in the SEC.
 Kinds of Partners – as to liability
• General Partner
• Limited Partner
• General-limited Partner
 Kinds of Partners – as to liability
• General Partner – One who is liable for partnership debts to the
extent of his separate property after all the assets of the
partnership have been exhausted. (Art. 1816)
 Kinds of Partners – as to liability

• Limited partner – One who is liable for partnership debts to the

extent of his capital contribution only. (Art. 1843)
 Kinds of Partners – as to liability

• General-limited partner – One who has all the rights and powers and is
subject to all the restrictions of a general partner, except that, in respect to
his contribution, he shall have the rights against the other members which he
would have had if he were not also a general partner. (Art. 1853)

He shall be liable pro-rata to partnership creditors to the extent of his separate

assets after the partnership assets have been exhausted, but he can demand
reimbursement of the amount he paid from his co-partners.
Example:

Manuel, Alberto and Conrado are partners in MAC

Company, Ltd. with Manuel as limited partner, Alberto
as general partner, and Conrado as general-limited
partner.

The partnership has assets of P60,000.00 and liabilities

of P90,000.00.
Example:

In the settlement of the liabilities, the assets will first be exhausted.

Thereafter, the creditors can collect the balance of P30,000.00 from

the separate assets of Alberto and Conrado who will be liable for
P15,000.00 each.

After payment to the creditors, Conrado may demand

reimbursement of P15,000.00 from Alberto.
 Kinds of Partners – as to contribution
• Capitalist partner
• Industrial partner
• Capitalist-industrial partner
 Kinds of Partners – as to contribution

• Capitalist partner – One who contributes money or property to

the common fund
 Kinds of Partners – as to contribution

• Industrial partner– One who contributes his services or industry

to the partnership. Such industry may be physical or intellectual
industry.
 Kinds of Partners – as to contribution

• Capitalist-industrial partner– One who contributes not only

money or property but also his services to the partnership.
 Kinds of Partners – Other Classifications
• Managing Partner – One who manages the business or the
affairs of the partnership. (Art. 1800)
• Liquidating Partner – One who takes charge of the winding up
of the affairs of the partnership after it is dissolved.
• Nominal Partner – One who is not actually a partner but who
may become liable as such to third persons, (such as a partner by
estoppel)
 Kinds of Partners – Other Classifications
• Ostensible partner – One who is active and known to the public
as a partner, such as by allowing his name to be included in the
firm name.
• Secret partner – One whose connection with the partnership is
kept from the public
 Kinds of Partners – Other Classifications
• Silent Partner – One who has no voice in the management of
the business (though he shares in the profits and losses)
• Dormant Partner – A partner who does not participate in the
management of the business and not known to the public as a
partner.
 Rules on Division of profit and losses
• If all are capitalist partners
a. Profits and losses shall be divided according to their agreement.
b. If only the sharing of the partners in the profits has been
agreed upon, the share of each partner in the losses shall be in the
same proportion as the share of each in the profits.
c. In the absence of both, the share of each partner in the profits
and losses shall be in proportion to his capital contribution.
Example:

MINE Enterprises is owned by partners Maria, Issa, Norma and Elma

with capital contributions of P10,000.00, P20,000.00, P30,000.00 and
P40,000.00, respectively. During the year, the partnership realized a net
profit of P8,000.00.

1.) Assuming that the partners agreed to divide profits in the ratio of
[Link], how much is the share of each partner?
Example:

Maria will have a share of P1,600.00; Issa, P800.00; Norma, P1,600.00;

and Elma, P4,000.00.
Example:

MINE Enterprises is owned by partners Maria, Issa, Norma and Elma

with capital contributions of P10,000.00, P20,000.00, P30,000.00 and
P40,000.00, respectively. During the year, the partnership realized a net
profit of P8,000.00.

2.) If the partners have no profit sharing agreement, how much is the
share of each partners?
Example:

The profit shall be divided according to the ratio of their capital

contribution.

Thus, Maria’s share of the profit is P800.00; Issa, P1,600.00; Norma,

P2,400.00; and Elma, P3,200.00.
Assuming the partnership sustained a loss of P7,000.00 and they agreed
to a loss sharing of [Link]

1. How much is the share of each partners?

2. How about if the partners do not have any loss sharing agreement?

3. How about if the partners do not have any profit and loss sharing
agreement?
1.) Maria’s share is P2,100.00, Issa, P1,400.00; Norma,
P700.00; and Elma, P2,800.00.
2.) If the partners do not have any loss sharing agreement, such loss
shall be divided according to their profit sharing agreement in the
ratio of [Link].

Thus, Maria’s share is P1,400.00; Issa, P700.00; Norma, P1,400.00;

and Elma, P3,500.00
3.) If the partners do not have any profit and loss sharing agreement, the
loss shall be divided according to the ratio of their capital contribution
as follows:

Maria, P700.00; Issa, P1,400.00; Norma, P2,100.00; and Elma,

P2,800.00.
 Rules on Division of profit and losses
• If aside from the capitalist partners, there is also an industrial
partner (or there are industrial partners)
a. Profits
1.) The profits shall be divided according to their agreement.
2.) In the absence of any agreement thereon, the industrial partner
shall first receive a just and equitable share of the profits, and
thereafter, each capitalist partner shall share in the profits in
proportion to his capital contribution.
Example:

Pia, Ahtisa, Lorraine and Elliana are partners in PALE Company.

Pia, Ahtisa and Lorraine are capitalist partners with contributions
of P20,000.00, P30,000.00 and P50,000.00, respectively. Elliana is
an industrial partner. They have no profit-sharing agreement. PALE
Company earned P15,000.00 during the year.
Example:

Elliana shall first be given an equitable share to be decided by

the partners, say P3,000.00.

The remaining profit of P12,000.00 shall be divided among the

three capitalist partners in the ratio of their capital contribution
of [Link].

Thus, Pia’s share is P2,400.00; Ahtisa P3,600.00; and Lorraine,

P6,000.00.
 Rules on Division of profit and losses
• If aside from the capitalist partners, there is also an industrial partner (or there
are industrial partners)
a. Losses
1.) The industrial partner shall not share in the losses.
2.) The capitalist partners shall share in the losses as follows:
a.) According to their agreement.
b.) In the absence of any agreement thereon, each capitalist partner shall
share in the losses in the same proportion as the share of each in the
profits.
c.) In the absence of both, each capitalist partner shall share in the losses in
proportion to his capital contribution.
Example:

Carlos, Albert, Roland and Edwin are partners in CARE Company with Carlos
contributing P20,000.00; Albert, P30,000.00; and Roland, P50,000.00. Edwin
contributed his industry. During the year, CARE suffered a loss of P12,000.00.

1.) Assuming that the losses were agreed upon to be shared by Carlos, Albert and
Roland in the ratio of [Link], how much is the share in the loss of each partner?
Example:

Carlos’ share in the loss is P2,000.00; Albert, P4,000.00; and Roland, P6,000.00.
Edwin will not share in the loss.
Example:

Carlos, Albert, Roland and Edwin are partners in CARE Company with Carlos
contributing P20,000.00; Albert, P30,000.00; and Roland, P50,000.00. Edwin
contributed his industry. During the year, CARE suffered a loss of P12,000.00.

2.) If the partners do not have a loss sharing agreement but have one as to profit in
the ratio of [Link], how much is the share in the loss of each partner?
Example:

The loss will be shared by Carlos, Albert and Roland in the ratio of [Link] or
P3,000.00, P4,000.00 and P5,000.00, respectively. Edwin will not share in the loss
being an industrial partner.
Example:

Carlos, Albert, Roland and Edwin are partners in CARE Company with Carlos
contributing P20,000.00; Albert, P30,000.00; and Roland, P50,000.00. Edwin
contributed his industry. During the year, CARE suffered a loss of P12,000.00.

3.) If the partners do not also have a profit sharing agreement, how will the partners
divide the loss?
Example:

Carlos, Albert and Roland will divide the loss according to the ratio of their capital
contribution of [Link] or P2,400.00, P3,600.00 and P6,000.00, respectively. Edwin will
not share in the loss.
 Rules on Division of profit and losses
• If aside from the capitalist partners, there is also a capitalist-industrial partner
(or there are capitalist-industrial partners)
a. Profits
1.) The profits shall be divided according to their agreement.
2.) In the absence of any agreement thereon, profits shall be divided as
follows:
a.) The capitalist-industrial partner shall first receive a just and equitable
share of the profits in his capacity as industrial partner;
b.) Thereafter, each capitalist partner, including the capitalist-industrial
partner in his capacity as capitalist partner, shall share in the profits in
proportion to his capital contribution.
Example:

Mark, Orland, Robert and Edgar are partners in MORE Enterprises. Mark, Orland
and Robert are capitalist partners with contributions of P10,000.00; P20,000.00 and
P30,000.00, respectively. Edgar is a capitalist-industrial partner with a capital
contribution of P40,000.00. During the year, MORE realized a profit of P20,000.00.

Assuming that the partners have no profit sharing agreement, Edgar will first
receive an equitable share in the profit in his capacity as industrial partner.
Example:

Thus, if the partners decide that such equitable share is P4,000.00, the balance of
P16,000.00 will be shared by the partners including Edgar in his capacity as capitalist
partner according to the ratio of their capital contribution of [Link] or
P1,600.00, P3,200.00, P4,800.00, and P6,400.00, respectively.
 Rules on Division of profit and losses
• If aside from the capitalist partners, there is also a capitalist-industrial partner (or
there are capitalist-industrial partners)
a. Losses
1.) Losses shall be divided among the partners, including the capitalist-
industrial partner in his capacity as capitalist partner, according to their
agreement.
2.) In the absence of any agreement thereon, losses shall be divided among the
partners including the capitalist-industrial partner in his capacity as capitalist
partner, according to the ratio of their capital contribution.
3.) In both of the above cases, the capitalist-industrial partner shall not share in
the losses in his capacity as industrial partner.
Example:

Sonia, Ursula, Rowena and Elsa are partners in SURE Enterprises with capital
contributions of P10,000.00, P20,000.00, P30,000.00 and P40,000.00, respectively.
Elsa is also an industrial partner being the manager of the partnership. The
partnership sustained a loss of P14,000.00 during the year.

1.) Assuming that the partners agreed to share in the losses in the ratio of [Link],
how much is the share of each partner?
Example:

Sonia’s share is P2,000.00; Ursula, P3,000.00; Rowena, P5,000.00; and Elsa,

P4,000.00.
Example:

Sonia, Ursula, Rowena and Elsa are partners in SURE Enterprises with capital
contributions of P10,000.00, P20,000.00, P30,000.00 and P40,000.00, respectively.
Elsa is also an industrial partner being the manager of the partnership. The
partnership sustained a loss of P14,000.00 during the year.

1.) Assuming that the partners have no profit-sharing agreement, how much is the
share of each partner?.
Example:

The loss will be divided according to the ratio of their capital contribution of [Link]
or P1,400.00; P2,800.00; or P4,200.00; and P5,600.00.
Example:

In both cases, Elsa shall not share in the loss in her capacity as industrial partner.
 Rules on Division of profit and losses
Note: Any stipulation which excludes one or more partners from
any share in the profits and losses is void (Art. 1799) except one
which exempts an industrial partner from losses because the law
provides that he shall not be liable therefor. (Art. 1797)
Designation of shares in the profits and losses by a third
person or by a partner

1.) If entrusted by the partners to a third person

The same shall be binding upon the partners and may be
impugned only when it is manifestly inequitable. However, even
if such designation by a third person is manifestly inequitable, it
can no longer be impugned:
a.) By a partner who has begun to execute it; or
b.) By any partner if three months had already lapsed from the
time he obtained knowledge thereof. (Art. 1798)
Designation of shares in the profits and losses by a third
person or by a partner

2.) If entrusted to one of the partners

The designation is void because it cannot be entrusted to one of
the partners. (Art. 1798) Accordingly, the profits and losses shall be
divided among the partners as if there was no stipulation thereon.