Partnership

General Provisions

Joseph Giancarlo C. Agdamag

BusLaw2 – K38 & K39
25 January 2018
Partnership
Art. 1767, Civil Code

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.
Co-Partnership
• A contract
• Between two or more persons
• For the investment in a common fund, of:
– Money
– Property
– Industry
• For purposes of dividing the profits
General Professional Partnership
• A partnership for the practice of a profession
• Profession
– a group of men pursuing a learned art as a common
calling in the spirit of public service
• The law does not allow individuals to practice a
profession as a corporate entity
– Personal qualifications (age, character, etc.) cannot be
possessed by a corporation
Characteristic Elements
• Consensual
• Nominate
• Bilateral
• Onerous
• Commutative
• Principal
• Preparatory
• A contract of agency
Essential Features
1. There must be a valid contract
2. Parties must have legal capacity to enter into
the contract
3. Mutual contribution of money, property, or
industry to a common fund
4. Object must be lawful
5. Primary purpose: to obtain profits and to
divide it among the parties
Fiduciary in Nature
• Involves trust and confidence among the partners
• There is mutual agency among them
– Its fiduciary nature and the liability of each partner for
the acts of the others require that each person be
granted the right to choose with whom he will be
associated with
Who May Be a Partner
• Individuals
– Must have legal capacity
• Capable of entering into contractual relations with other persons
– Persons who are prohibited from giving each other
donations cannot enter a universal partnership

• Partnerships & Corporations

– Generally not allowed to form partnerships
– Instead, they may form joint ventures
• Joint ventures, by nature, are treated like partnerships
Contribution to a Common Fund
• Existence of a proprietary interest
– Money – legal tender
– Property –
– Industry

• Purpose: to realize and divide profits

– Not necessarily in equal shares
– Losses are also shared
Art. 1768, Civil Code

The partnership has a juridical personality

separate and distinct from that of each of the
partners even in case of failure to comply with
the requirements of art. 1772, 1st paragraph.
Separate Juridical Personality
• May enter into contracts
• May acquire & possess property of all kinds in its name
• May incur obligations
• May sue or be sued

• General Rule
– Partners cannot be held liable for the obligations of the
partnership
• Exception
– The partnership is being used as a shield for fraudulent,
unfair, or illegal purposes
Art. 1769, Civil Code
In determining whether a partnership exists, these
rules shall apply:

1. Except as provided by art. 1825, persons who

are not partners as to each other are not
partners as to 3rd persons;
2. Co-ownership or co-possession does not of itself
establish a partnership, whether such co-
ownership or co-possessors do or do not share
any profits made by the use of the property;
Art. 1769, Civil Code

3. 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 from which the
returns are derived;
Art. 1769, Civil Code
4. 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, but no such inference shall be drawn
if such profits were received in payment:
a.) As a debt by installments or otherwise;
b.) As wages of an employee or rent to a landlord;
c.) As an annuity to a widow or representative of a
deceased partner;
d.) As interest on a loan, though the amount of payment
vary with the profits of the business;
e.) As the consideration for the sale of a goodwill of a
business or other property by installments or
otherwise.
1: Persons not partners as to each
other
• If persons are not partners between themselves,
they cannot be partners as to third persons

• General rule
– A contract is needed to establish a partnership
• Exception
– Partnership by estoppel – A person misleads third
persons into believing that they are partners in a non-
existent partnership
2: Co-ownership / Co-possession
• The ownership or possession of an undivided
thing or right belongs to different persons

• Clear intent to derive profits from the operation

of business, as opposed from profits from mere
ownership
 2: Co-ownership / Co-possession
Partnership Co-Ownership
Creation Always by contract By law; no need for contract
Personality Separate juridical personality No separate personality
Purpose Realization of profits Common enjoyment of a thing
Duration No limitation 10-year limit
Disposal of Needs consent of all partners Co-owner may assign even
interests in order to dispose interest without consent of co-owners
Dealing w/ Partner may bind Co-owner cannot represent
third person partnership. co- ownership.
Effect of Death of partner results in Death does not necessarily
death dissolution. dissolves it
3: Sharing of gross returns
• Mere sharing of gross returns alone does not even
constitute prima facie evidence of partnership
– In a partnership, the partners share profits after
satisfying all of the partnership’s liabilities

• Examples:
– Commission of broker
– Wages of a taxi driver in a boundary system
4. Receipt of share of profits
• General Rule
– An agreement to share both profits and losses tends
strongly to establish the existence of a partnership

• Exceptions: Payment received as:

– Payment of debt by installments
– Wages of an employee / rent to a landlord
– Annuity / allowance given to a widow
– Interest of a loan
– Sale of property by installments
Indications of Partnership
• The partners share in profits and losses
• They have equal rights in the management and conduct of
the partnership business
• Every partner is an agent of the partnership, and entitled to
bind the others by his acts
• All partners are personally liable for the debts of the
partnership with their separate property except for limited
partners
• A fiduciary relation exists between the partners
• On dissolution, the partnership is not terminated, but
continues until the winding up of partnership is completed.
Art. 1770, Civil Code

A partnership must have a lawful object or purpose,

and must be established for the common benefit or
interest of the partners.

When an unlawful partnership is dissolved by a

judicial decree, the profits shall be confiscated in
favor of the State, without prejudice to the
provisions of the Penal Code governing the
confiscation of the instruments and effects of a
crime.
 1. The contract is void ab initio
and the partnership never
existed in the eyes of the law
2. The profits shall be
confiscated in favor of the
Effects of government
Unlawful 3. The instruments or tools and
proceeds of the crime shall
Partnership
also be forfeited in favor of
the government
4. The contributions of the
partners shall not be
confiscated unless they fall
under #3.
Art. 1771, Civil Code

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
Form of Partnership Contracts
• General Rule
– No special form required for validity or existence
– Contract may be made orally or in writing
regardless of the value of the contributions

• Exceptions:
– Where immovable property or real rights are contributed
• For validity of contract à A public instrument must be executed
• To bind 3rd persons à transfer of real property to the partnership
must be registered with the Registry of Deeds
Art. 1772, Civil Code

Every contract of partnership having a capital of

three thousand pesos or more, in money or
property, shall appear in a public instrument, which
must be recorded in the Office of the Securities and
Exchange Commission.

Failure to comply with the requirements of the

preceding paragraph shall not affect the liability of
the partnership and the members thereof to third
persons.
Registration of Partnership
• Partnerships with capital of PhP3,000 and up
– Contract must be in a public instrument
– Registered with the Securities and Exchange
Commission
• File an Articles of Partnership

• Failure to Comply
– Does not prevent the formation of partnership
– Does not affect liability of partners to third persons
– Partners may compel each other to execute public doc.
Art. 1773, Civil Code

A contract of partnership is void, whenever

immovable property is contributed thereto, if an
inventory of said property is not made, signed
by the parties, and attached to the public
instrument.
Contribution of Immovables
• Requisites if immovable property is
contributed:
1. Contract must be in a public instrument
2. An inventory of the property contributed must be made

• Failure to comply
– Partnership contract is void

• Reason for the rule

– To protect third persons
Art. 1774, Civil Code

Any immovable property or an interest therein

may be acquired in the partnership name. Title
so acquired can be conveyed only in the
partnership name.
Art. 1775, Civil Code

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.
Art. 1776, Civil Code

As to its object, a partnership is either universal

or particular.

As regards the liability of the partners, a

partnership may be general or limited.
Classifications of Partnership
• As to extent of its subject matter

1.Universal partnership
a. Universal partnership of all present property
b. Universal partnership of profits

2.Particular partnership
Classifications of Partnership
• As to liability of partners

1.General partnership
• Consists of general partners who are liable pro rata and subsidiarily
and sometimes solidarily with their separate property for
partnership debts.

2.Limited partnership
• Formed by two or more persons having as members one or more
general partners and one or more limited partners, the latter not
being personally liable for the obligations of the partnership.
Classifications of Partnership
• As to duration
1.Partnership at will
• One in which no time is specified and is not formed for a particular
undertaking or venture
• May be terminated at any time by mutual agreement of the
partners, or by the will of any one partner alone;
• One for a fixed term or particular undertaking which is continued
after the end of the term or undertaking which express agreement

2.Partnership with a fixed term

• One which the term for which the partnership is to exist is fixed or
agreed upon or one formed for a particular undertaking
Classifications of Partnership
• As to the legality of its existence

1.De jure partnership

• Complied with all the legal requirements for its
establishment

2.De facto partnership

• Failed to comply with all the legal requirements
Classifications of Partnership
• As to representation to others

1.Ordinary or real partnership

• It actually exists among the partners and as to third
persons

2.Ostensible partnership or partnership by estoppel

• Not really a partnership, but is considered a partnership
only in relation to those who, by their conduct or admission,
are precluded to deny or disprove its existence
Classifications of Partnership
• As to publicity

1.Secret partnership
• The existence of certain persons as partners is not avowed
or made known to the public by any of the partners

2.Open or notorious partnership

• One whose existence is avowed or made known to the
public by the members of the firm
Kinds of Partners
1. Capitalist partner
– One who contributes money or property to the common
fund
2. Industrial partner
– One who contributes only his industry or personal service.
3. General partner (“real partner”)
– One whose liability to 3rd persons extends to his separate
property.
4. Limited partner (“special partner”)
– One whose liability to 3rd persons is limited to his capital
contribution.
Kinds of Partners
5. Managing partner
– One who manages the affairs or business of the partnership

6. Liquidating partner
– One who takes charge of the winding up of partnership
affairs upon dissolution

7. Partner by estoppel (“partner by implication” or

“nominal partner” or even “quasi-partner”)
– One who is not really a partner but is liable as a partner for
the protection of innocent 3rd persons. He is one
represented as being a partner but who is not so between
the partners themselves
Kinds of Partners
8. Continuing partner
– One who continues the business of a partnership after it has
been dissolved

9. Surviving partner
– One who remains after a partnership has been dissolved
by the death of any partner

10.Sub-partner
– One who, not being a member of the partnership,
contracts with a partner with reference to the latter’s
share in the partnership
Art. 1777, Civil Code

A universal partnership may refer to all the

present property or to all the profits.
Art. 1778, Civil Code

A partnership of all present property is that in

which the partners contribute all the property
which actually belongs to them to a common
fund, with the intention of dividing the same
among themselves, as well as all the profits
they may acquire therewith.
Art. 1779, Civil Code
In a universal partnership of all present property,
the property which belongs 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.
Universal partnership of all present
property
• The following become the common property of all
the partners:
1. Property which belonged to each of them at the time of
the constitution of the partnership;
2. Profits which they may acquire from the property
contributed

• Future property (inheritance, donation)

– Cannot be the subject of contribution
– Property contributed must be determinate
Art. 1780, Civil Code

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.
Universal partnership of profits
• Partners contribute the property for purposes of
earning profit
– Each partner retains ownership of their respective
properties
– Upon dissolution, such property is returned to the
partner who owns it

• Less onerous for the parties

Art. 1781, Civil Code

Articles of universal partnership, entered into

without specification of its nature, only
constitute a universal partnership of profits.
Art. 1782, Civil Code

Persons who are prohibited from giving each

other any donation or advantage cannot enter
into a universal partnership.
Prohibited from being partner
• Persons who are prohibited by law to give
donations cannot enter into a universal
partnership
– Why? Each of the partners virtually makes a donation

• Violation of this rule makes the partnership void

– No legal personality is acquired
Prohibited donations (Art. 739)
1. Those made between persons who are guilty of
adultery or concubinage at the time of the
donation
– No need for conviction; preponderance of evidence only
2. Those made between persons found guilty of the
same criminal offense, in consideration thereof
3. Those made to a public officer or his wife,
descendants and ascendants, by reason of his
office
Art. 1783, Civil Code

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.
Particular Partnership
• Main difference with universal partnership is with
regard to scope or object
– Universal – General business; scope is indefinite
– Particular – Scope is limited and well-defined, being
confined to an undertaking of a single, temporary, or ad
hoc nature
Next Meeting
• Obligations of the Partners Among Themselves
(Arts. 1784 – 1809)