The Law on Partnerships

Atty. Christopher Llamado Chapter 1: General Provisions A partnership has a separate juridical personality apart from that of the partners (Art. 1772) Effects of a Separate Juridical Personality: 1. Partnership can acquire immovable property (Art. 1774); 2. Partnership can convey property acquired (Art. 1774). Partnership Contract and Registration General Rule: Partnership contract need not be registered with the SEC. Art. 1772 is not required to acquire juridical personality, but is needed for issuance of a license to engage in trade or business. EXCEPTION: When partners contribute immovable property: a) Partnership contract must appear in a public instrument (Art. 1771); and b) There must be an inventory of the immovable properties attached to the contract. (Art. 1773) OTHERWISE the partnership is VOID. Elements of a Partnership (Art. 1767) Valid contract Mutual contribution of money, property, or industry to a common fund Intent by the partners to engage in a lawful business, trade, or profession Purpose is to obtain profits and divide the same among the partners Art. 1769: Tests in Determining the Existence of a Partnership Persons not actually partners to each other. EXC: Partner by estoppel (Art. 1825) Co-ownership or co-possession is not a partnership Sharing of gross returns is not proof of a partnership Receipt of profits is prima facie evidence of a partnership except when received as: Payment of debt; Payment of wages or rent to landlord; Payment of annuity to a widow or representative of a deceased partner; Payment for goodwill or other property. Art. 1770: Partnership must have a lawful purpose. Types of Partnerships As to Object Universal Particular As to liability of partners General Limited

TYPES OF UNIVERSAL PARTNERSHIP 1. All Present Property (Arts. 1778, 1779) Common fund consists of: All the properties which belong to the partners at the time of the constitution of the partnership; Profits derived from (1) If agreed upon, fruits of the properties subsequently acquired by the partners after the constitution of the partnership (by inheritance, donation, etc.)

2. All Profits (Art. 1780) Common fund consists of: All properties and profits acquired by each partner from his work or industry during the existence of the partnership; Usufruct of properties belonging to the partners at the time of the perfection of the contract of partnership. refer to Art. 1795, the risk of loss is borne by the partner who owns them.

Art.

1782:

Persons

prohibited

in

entering

into

Universal

Partnership

Persons prohibited from giving donations or advantage: Spouses during the marriage; Persons who are guilty of adultery or concubinage; Persons found guilty of the same criminal offense; A public officer and his spouse or some other person (by reason of the formers office).

PARTICULAR PARTNERSHIP (Art. 1783) Common fund consists of: Determinate things; The use or fruits of (1); or Specific undertaking; or The exercise of a profession. When a partnership begins Art. 1784: A partnership begins from the moment of the execution of contract, unless it is otherwise stipulated. Types of Partnerships as to Duration At Will (Art. 1785) No time is fixed for the partnerships existence; or Partnership business continues even after the expiration of definite term of after the accomplishment of its purpose. Fixed Term (Art. 1785) Expiration of the fixed term or termination of a particular undertaking results in termination of the partnership.

Chapter 2: Obligations of the Partners

Section 1: Obligations of the Partners among Themselves Obligations of a Partner to the Partnership To deliver property or money to the partnership in accordance with the partnership contract (Art. 1786); If property is delivered, appraisal of the same is required (Art. 1787). To warrant the things delivered against possible eviction (Art. 1786); In case of delay, to deliver the fruits (or interest (Art. 1786)) from the time such property should have been delivered. To contribute additional share to the partnership capital in case of imminent loss of the partnership business (Art. 1791) To return to the partnership capital his share of the partnership credit when his other partners have not received their shares and the debtor should subsequently become insolvent (Art. 1793) o receipt of the partners share must be before the dissolution of the partnership To compensate the partnership for damages suffered by it due to the fault of the partner (Art. 1794). o the law provides for mitigation of the partners liability if through the partners efforts unusual profits have been realized by the partnership. To give true and full information of all things affecting the partnership to any partner or legal representative of a deceased partner or partner under legal disability (Art. 1806); To render an accounting of any benefit or profit derived by him without the consent or knowledge of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership, or from the use of partnership property (Art. 1807). Obligations of partner who misappropriates partnership money (Art. 1788) To return the amount of money taken; To pay interest; and To pay damages. Obligation of an Industrial Partner (Art. 1789) Not to engage in any business for himself Remedies of the capitalist partners when industrial partner violates the above-mentioned obligation (Art. 1789) Expulsion of industrial partner from the partnership plus damages; or The industrial partner surrenders the profits or benefits obtained from such violation plus damages. Obligations of a Capitalist Partner (Art. 1808) Not to engage in a business similar to the partnership business, unless permitted by agreement with the partnership; Effects of Non-fulfillment of obligation: All profits from such transaction shall be brought to the partnership; Partner shall bear all losses from such transaction. Partners Contribution to the Common Fund

Art. 1790: Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the capital of the partnership.

Partners Obligation to Contribute to the Common Fund in case of Imminent Loss of t he Business of the Partnership (Art. 1791) Those exempted from this obligation are: 1) Industrial partners; 2) Partners exempted by stipulation or agreement; and 3) Insolvent partners. Partners who are not exempted but who refuse to contribute are obliged to sell their partnership interest to the other partners.

Definition of Managing Partner One who is appointed by the other partners to be the manager of the business of the partnership. Types of Managing Partners Appointed in the Articles of Partnership 1) Power to administer partnership affairs cannot be revoked without just or lawful cause. 2) If with just cause, vote of controlling partners is necessary to revoke. 3) If without just cause, unanimous vote is required to revoke power. Appointed in another instrument other than the Articles of Partnership 1) Power to administer partnership affairs can be revoked with or without just or lawful cause by the vote of the controlling partners. 2) Types of Management 3) Solidary Management (Art. 1801) Types of Management: No agreement as to management (Art. 1803) Joint Management (Art. 1802) Solidary Management (Art. 1801) Solidary Management Elements of Solidary Management: 1) 2 or more partners designated as managing partners; 2) No specification of respective duties; and 3) No stipulation requiring unanimity among the managing partners. Effects of Solidary Management: 1) Each manager may act separately (execute all acts of administration); 2) If one of the managers oppose, the decision of the majority of the managers shall prevail; 3) In case of a tie in (2), the decision of the partners owning the controlling interest shall prevail. Joint Management (Art. 1802) Elements of Joint Management: 1) 2 or more partners designated as managing partners; 2) Unanimity is required in management decisions. Effects of Joint Management: 1) Consent of all the managing partners is required in all managerial acts; 2) If one of the managers oppose, the act will not be executed unless there is an imminent danger of grave or irreparable injury to the partnership. 3) Absence or incapacity of a managing partner is immaterial. Unanimity is still required unless there is an imminent danger of grave or irreparable injury to the partnership.

No agreement as to Management (Art. 1803) Each partner is considered an agent of the partnership, and can bind the partnership if acting in the name of the partnership. If there is an opposition from one partner, the decision of the majority shall prevail. In case of a tie, the decision of the partners owning the controlling interest shall prevail. Concurrence of all the partners is needed in making important alterations of the partnerships immovable property. o If refusal to give consent is prejudicial to the partnerships interest, the acting partner may seek the courts intervention. Obligation of a Managing Partner who collects a demandable sum of money from a third person who owes him and the partnership (Art. 1792) If the receipt is in the name of the managing partner, the payment must be applied to both obligations proportionally. If the receipt is in the name of the partnership, payment must be applied to the partnership credit. Example: Mr. Cara and Ms. Cruz are partners with the former as the managing partner. Ms. Y owes Mr. Cara the sum of 50,000, and the partnership the sum of 25,000. Both debts are due and demandable when Ms. Y paid Mr. Cara the sum of 9,000. How should the payment be applied if: a. Mr. Cara issues a receipt in his name? b. Mr. Cara issues a receipt in the partnership name? Answers a. Mr. Cara issues a receipt in his name? 6,000 will be applied to the credit of Mr. Cara, and 3,000 will be applied to the credit of the partnership. b. Mr. Cara issues a receipt in the partnership name? 9,000 will be applied to the credit of the partnership. Exceptions to Art. 1792 In the following instances, no proportional application is needed when receipt is in the name of the receiving partner. When the partnerships credit is not yet due and demandable (Art. 1252); When the partners credit is more onerous (Art. 1252). When payment is received by a non-managing partner. Obligation of the Partnership to the Partners To compensate the partner for the amounts the partner may have disbursed on behalf of the partnership plus interest (Art. 1796); To answer for the obligations incurred by the partner may have entered into in good faith in the interest of the partnership (Art. 1796). To allow each partner access to the partnership books at any reasonable hour. Access includes inspecting and copying the partnership books (Art. 1805) To render a formal accounting to any partner as to partnership affairs as provided in Art. 1809. Profit and Loss Sharing Among the Partners (Art. 1797) 1. Distribution of Profits In accordance with stipulation or agreement; No agreement, then in accordance with capital contribution. 2. Distribution of Losses According to stipulation or agreement; No agreement, then in accordance with the profit sharing agreement; In the absence of (1) and (2), then in accordance with capital contribution.

Industrial Partners Share in the Partnership Profit and Loss Distribution of Net Profits (Not Gross Profits) In accordance with stipulation or agreement; No agreement, then what is just and equitable depending upon the circumstances. Distribution of Net Losses In accordance with stipulation or agreement; No agreement, not liable for Net Losses. Note: Industrial partner are not exempted from liability to third persons. After payment to the third person, he may ask reimbursement from the capitalist partners because he is not liable for partnership losses. Profit and Loss Sharing Among Partners (Art. 1798) Designation of the shares of each partner may be entrusted to a third person, but not to a partner. Designation may be impugned when it is inequitable. o designation cannot be impugned by a partner when he has begun to execute the decision of such third person or after the lapse of 3 months from the time he had knowledge of the decision. When designation is made by a partner (which is void) or when designation by third person is successfully impugned, profit and loss sharing shall be based on the partners capital contributions.

Void Stipulation Art. 1799: A stipulation which excludes one or more partners from any share in the profits and losses is void. EXC: An industrial partner can be excluded from the share of the net losses of the partnership. Assignment of right in share of a partnership (Art. 1804) Each partner may transfer his interest in the partnership, in whole or in part, to a third person (called associate of a partner or sub-partner). The person associated will not be a partner unless consented to by the other partners.