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Law on Partnerships

Chapter 1. - GENERAL PROVISIONS

Business Organizations

In the Philippines nowadays, the common business organizations are partnerships and private corporations. If one
prefers to undertake his own business devoid of associates, then he has to put up a business under sole proprietorship.
Business Organizations

Ownership and structural forms of business organization, applicable laws, requirements for their formations, and
advantages and disadvantages.

Existing Types of Ownership in the Philippines:

1. Single or Sole Proprietorship. It is a form of business organization which is owned by one person. The owner
personally manages his business. Most of businesses in the Philippines (including those which are not registered)
belong to single proprietorship. Examples are retailers, market vendors, barbers, tailors, and so forth.

a) Advantages of Single or Sole Proprietorship

1) It is easy to organize. Financial capital is small, and registration requirements are not difficult to comply with.
In fact, in the remote rural areas small businesses do not even bother to apply for license.
2) The single proprietor is the boss. He makes the decisions and enjoys substantial freedom of action.
Possibilities of conflicts or quarrels are minimized.
3) The owner acquires all the profits from his business. This gives him more incentives to make his business
grow.
b) Disadvantages of Single or Sole Proprietorship
1) In general the financial resources of a single proprietorship are not enough to transform the business into a
large scale enterprise. Considering its small assets and high mortality rate, banks are reluctant to grant big loans to
single proprietorship type of business organizations.
2) Benefits of specialization in business management are not present in small scale proprietorship. There is only
one manager. In not a few cases, the owner is the only employee.
3) The owner has unlimited liability. This means that the owner of the business risks not only the assets of his
small enterprise, but also his other personal assets like his piece of land, bank deposits, and other personal
properties which are not part of his business. In case of loss, such assets are subject to financial claims by creditors.
c) Requirements for formation
Since it is the simplest form of business it is the easiest to register. It is registered through the Bureau of Trade
Regulation and Consumer Protection (BTRCP) of the Department of Trade and Industry (DTI).
d) Applicable Laws
Republic Act No. 9178 Barangay Micro Business Enterprises (BMBEs) Act of 2002

2. Partnership. It is a form of business organization in which two or more persons agree to own and operate a
business. The partners agree to combine their resources (money, materials, and management). They also share their
profits and losses. However, there are “silent” partners. They only provide the financial capital but they do not
participate in the management. There is also the “industrial” partner. He does not contribute money to the business
organization but he is responsible for its management.

a) Advantages of Partnership
1) It is also easy to organize like single proprietorship. Legal red tape in connection with its registration is not
much.
2) Better management because of the presence or more participants in the operations of the business.
3) Possibility of bigger resources than in the single proprietorship exists. Financial institutions may extend
bigger loans to such business organization considering the combined resources of the partners.

b) Disadvantages of Partnership
1) Conflicts or quarrels between or among the partners regarding the management or policies of the business are
likely to crop up. In fact, under Filipino style, some partners cheat their other partners in matters of profits or
expenses.
2) It lacks stability. The death or withdrawal of one partner dissolves the partnership. To continue its operation,
a complete reorganization is needed.
3) Like the single proprietor, the partners are also subject to unlimited liability, except the limited partners. Such
partners, liabilities are only confined to their share of capital contributions in the form of cash or property.

c) Requirements for formation

A partnership consists of two or more persons who bind themselves to contribute money or industry to a common
fund, with the intention of dividing the profits among themselves. The most common example of partnerships are
professional partnerships, like in the case of law firms and accounting firms. Just like a corporation, it is registered with the
Securities and Exchange Commission (SEC).

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A partnership, just like a corporation, is a juridical entity, which means that it has a personality distinct and separate from
that of its members. A partnership may be general or limited. In a general partnership, the partners have unlimited liability
for the debts and obligation of the partnership, pretty much like a sole proprietorship. In a limited partnership, one or more
general partners have unlimited liability and the limited partners have liability only up to the amount of their capital
contributions. Unlike a corporation, which survives even when a member/stockholder dies or gets out, a partnership is
dissolved upon the death of a partner or whenever a partner bolts out.

d) Applicable Laws
Unlike corporations whose governing law is a special law - the Corporation Code of the Philippines, partnerships in the
Philippines are governed by and covered under Articles 1767 to 1867 of the Civil Code of the Philippines [circa 1950]. These
are the provisions of law which govern all aspects of partnerships - from their creation, formation, existence, operation and
management to their dissolution and liquidation, including the obligations of the partners to one another, to the public or
third persons and to the government.

3. Cooperative. It is an organization composed primarily of small producers and consumers who voluntarily join
together to form business enterprises which they themselves own, control and patronize.

A cooperative is also defined as a duly registered association of persons, with a common bond of interest and have
voluntarily joined together to achieve a lawful common social or economic end, and making equitable contributions to the
capital required and accepting a fair share of the risks and benefits of the undertaking in accordance with universally
accepted cooperative principles.

a) Advantages of a Cooperative
The advantageous factors of the cooperative type of organization are given below: -
1. Elimination of middlemen. The management of the consumer cooperative society directly purchases the finished
goods from the manufacturer and producer. Producer cooperative society procures the raw material from the
producer. Thus they try to free themselves from the grip of the middlemen and make the goods available to
consumers at lower prices.
2. Saving in management expenses. Cooperative society enjoys some economies in the field of management due to
voluntary services performed by the members themselves. Thus, it is possible to minimize the expenses of
management and supervision.
3. Minimum stock. Society purchases the same goods which are actually demanded by its members. Thus there is
need to have minimum stock at hand due to constant and regular demands.
4. Economy in distribution and production expenditure. Society is saved from any distribution and production
expenses. It has got its regular customers; therefore society has not to face any trouble for marketing its goods. Thus
is has not to incur any expenditure for publicity and advertisement, which is a big item in the budget of the
capitalist producer.
5. Integration. Under this type of organization, complete integration between producers, wholesalers and retailers
is always possible. This is thus a clear advantage over capitalist economy.

b) Disadvantages of a Cooperative
The following are the reasons of failure or defects and disadvantages of cooperative organization.
1. Lack of capital.
a) Its members are generally related to the poor group of the society and they are not in a position to invest a
large amount.
b) External financial resources of the society are limited.
c) It cannot borrow money from non-members.
d) It cannot issue any kind of debentures.
e) It share cannot be transferred to nonmembers.
2. It thus suffers shortage of capital for the operation of business.

3. Limited scale. Due to the various hindrances behind the growth of capital, it is not possible for the cooperative
society to start its business at a large scale; it therefore, keeps its business limited in the narrow field of cooperation.

4. Inefficient management. Expert and efficient management is important factor for running the business successfully.
But a society cannot afford to hire the services of superior abilities due to its limited resources. Therefore its
business cannot be carried on smoothly.

5. Lack of prompt decision. As all the matters are decided by the management committee and complied by another
authority, it cannot act with promptness, if a chance comes to make a timely purchase or sale, they have to wait to
get others consent.

4. Corporations. It is a company recognized by law as a single body with its own powers and liabilities, separate from
those of the individual members. Corporations perform many of the functions of private business, governments,
educational bodies, and the professions.

a) Advantages of a Corporation
1) A member has unlimited liability. In case the corporation becomes bankrupt, only the capital contributions of
the members are affected. The other personal properties of the stockholders of a corporation are excluded from
financial claims of creditors of the corporation.

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2) It has the most effective means of raising money capital for its operations, by selling stocks and bonds. Stocks
are certificates of ownership while bonds are certificates of indebtedness. These are financial institutions which specialize
in helping a corporation sell its securities (stocks and bonds).
3) It has permanent existence. The life-span of a corporation is 50 years, and subject to renewal for another 50
years. The death withdrawal of some officers and members does not affect the existence of the corporation. The
corporation can easily get officers or managers from inside or outside the organization. Transfer of corporate
ownership may take place any time through a sale of stocks, but this does not disrupt the continuity of a
corporation. As a legal entity, the life of a corporation is independent from its owners and officials.
4) It is capable of getting the most efficient management considering its huge resources and large scale-
corporations.

b) Disadvantages of a Corporation
1) It is not easy to organize a corporation. Aside from complying with capital requirements, there is much
paperwork involved in securing a charter. A charter is a written document which contains the objectives and
activities of the corporation, among other things. It takes a longer time to secure the approval of the Securities and
Exchange Commission regarding the organization and operation of a corporation.
2) Abuses of corporation officials are likely to emerge in situations where many stockholders do not participate
actively in the affairs of their corporation. Not few stockholders do not exercise their voting rights during
important meetings. Either, they are absent or they let others cast their votes (proxy voting).
Examples of abuses of corporate officials are large salaries and fat allowances for them.
3) Some corporations are engaged in questionable activities. For instance, they sell worthless securities;
they pollute the environment; or sell substandard goods. In short, they do not comply with their social
responsibility.
4) There is a very impersonal or formal relationship between the officers and employees of a corporation. In the
case of single proprietorship and partnership, constant and close contact between owners and employees create a very
personal and friendly atmosphere. Everybody knows everybody. In a giant corporation, it is not possible for the president or
the board chairman to meet personally all his employees in a year. His very valuable time is devoted to planning and
decision making.

c) Requirements for their formation

A corporation is a juridical entity established under the Corporation Code and registered with the SEC. It must be
created by or composed of at least 5 natural persons (up to a maximum of 15), technically called “incorporators.” Juridical
persons, like other corporations or partnerships, cannot be incorporators, although they may subsequently purchase shares
and become corporate shareholders/stockholders.
d) Applicable Laws
Batas Pambansa Blg. 68 The Corporation Code of the Philippines

Scope of the subject:

1. Law on Partnership found in the Civil Code and continuation of obligations and contracts from Articles 1787 to
1867.
2. Law on Private Corporation, Batas Pambansa Bilang 68, The Foreign Investment Act (R.A. 7042, 1991, amended
by R.A. 8179, 1996), "Financial Rehabilitation and Insolvency Act (FRIA) of 2010", P.D. No. 902-A in relation to R.A.
No. 8799

Historical Background of Partnership

Business in the olden times was carried on more popularly either in the form of lone business venture or in
partnerships with other adventurous traders. Partnerships in the early times was recognized as “Societas” ( now known as
general partnership) or Societe en Commandite (Limited Partnership.
Before the effectivity of the New Civil Code on August 30, 1950, there were two kinds of partnership in the
Philippines, namely commercial partnerships which were governed by the Code of Commerce and civil partnerships which
were governed by the Old Civil Code of Spain of 1889.
With the advent of the New Civil Code, the law on partnerships is now governed by Articles 1767 to 1867 of the
said law. Incidentally these provision were taken from the old civil code of Spain, Uniform Partnership Act and Uniform
Limited Partnership Act of the USA… which were incorporated in the Uniform State Laws of 1907 drafted, enacted and
signed by 31 states of the US in 1907 to resolve diversities of interpretation of courts in declaratory common laws observed
by these states and apply uniformity as to the interpretation and applicability of these laws
Be it noted that the passage of R.A No. 386 repealed the provisions of the Code of Commerce and the Old Civil
Code relating to civil and commercial partnerships. Hence, the New Civil Code governs all partnership transactions,
whether civil or mercantile.

Art. 1767. 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. (1665a)

Define partnership.

Partnership is a contract whereby 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. (Art. 1767.) Two or more persons may also
form a partnership for the exercise of a profession. (Ibid.)

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Characteristic s of Partnership
1. Consensual – as a contract, it is perfected by mere consent. Art. 1315, contracts are perfected by mere consent and
form that moment parties are bound not only of what has been expressly stipulated but also to all the consequences
which according to their nature, may be in keeping with good faith, usage and law. Once perfected, principle of
obligatory in force and compliance in good faith applies, Obligation arising from contract have the force of law
between the contracting parties and should b complied with good faith (Art. 1159).
2. Nominate - BECAUSE IT HAS A DESIGNATED NAME. The Civil Code identifies the same with a special name,
Partnership
3. Bilateral, or multilateral – because it is entered into or stipulated upon by two or more persons.
4. Onerous-because it involves consideration in the form of contributions by the parties to the common fund. Each of
the parties to procure for himself a benefit through the giving of something.
5. Commutative – because the undertaking of each of partner is considered as the equivalent of that of the others.
6. Principal – because it does not depend for its existence or validity upon some other contract; and
7. Preparatory because it is entered into as means to an end. i.e., to engage in business for the realization of profits
with the view of dividing them among the contracting parites.

A partnership contract, in its essence, is a special contract of agency.

Essential Features of Partnership – Elements

1. There must be a valid contract – A partnership can exist only if there is a valid contract entered by two or more
persons creating the same. The three essential elements of the contract must be present, namely consent, object and
the cause or consideration. There must be an intent to create a partnership. There exists a personal relation in
which the element of delectus personae exists.

Delectus personae ( in Latin delectus personarum – choice of person or persons)) means the person has the right to
choose person/persons he wants to become his partner taking consideration the sterling qualities of honesty,
integrity and more importantly trust and confidence
Affectio societatis – desire to formulate an active union with people among whom there exist mutual trust and
confidence (delectus personarum) exists.
2. The parties must have legal capacity to enter into a contract. Capacity to become a partner. – Since partnership
involves making a contract, the persons constituting the same must be capable of entering to a contractual relation.
Minors, insane or demented persons and deaf mutes who do not know how to write cannot give intelligent
consent.
3. There must be contribution of money, property or industry in the common fund.

It is required that partners must have proprietary or financial interest in the business, that is the contribution of
money, property or services.
a) Money refers to the legal tender of the Phils. Although, parties are free to stipulate that the contribution be
made in currency other than the legal tender (R.A. No. 8183 in relation to Art. 1249). Contribution through
checks, drafts, promissory notes are not considered money unless they have been converted into cash.
b) Property – The property contributed may be real or personal, tangible or intangible. Credit such as promissory
notes or evidence of indebtedness even goodwill may be contributed even if these are intangible.
c) Industry – means the work or services of the party associated which may be either personal manual efforts or
intellectual and for which he receives a share in the profits ( not salary) of the business. A limited partner in a
limited partnership cannot contribute industry or services. Industry contributed may be intellectual or physical
4. The object must be lawful. – the object of the partnership must be lawful (Art 1770) and must be established for the
common benefit or interest of the partners. It must not be contrary to law, morals, good customs, public order or
public policy. OTHERWISE, the contract of partnership shall be void ab initio (Art. 1409).

5. The purpose or primary purpose must be to obtain profits and to divide the same among the parties. This is the
element that distinguishes partnership from other social or religious associations or organization. Though silent, it
is not only profits that are shared but including losses as this could be an expected consequence or risk of a
business undertaking.

6. There must be intent to engage in a lawful business, trade or profession.

7. A new personality created – that of the firm- must arise separate and distinct from the separate personality of the
partners.

Art. 1768. The partnership has a judicial personality separate and distinct from that of each of the partners, even in case of
failure to comply with the requirements of Article 1772, first paragraph. (n)

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Art. 1772. 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.

A partnership is a juridical person.

As an association of persons, a partnership duly formed under the law has a juridical personality separate and district
form that of each of the partners. Thus, in the partnership X & Co., in which A and B are the partners, there are three (3)
district persons namely: (1) X & Co., (2) A, and (3) B. As a consequence of its distinct legal personality, a partnership may
acquire the possess property, incur obligations, and bring civil or criminal actions in its own name. (Art. 46.)

Note: There is no prohibition against a partnership being a partner in another partnership.

Consequences of Juridical Personality
1. It has separate and distinct juridical personality from that of each partner.
2. The partnership as a juridical personality can
a. Acquire and possess properties of all kinds
b. Incur obligations
c. Bring criminal or civil actions

If there is non-compliance with Article 1772, the partnership is still a juridical person as Article 1772 is NOT a requisite
for acquisition of juridical personality by the partnership, but merely a condition for the issuance of licenses to engage
in business or trade. In this way, the tax liabilities of big partnerships cannot be evaded and the public can also
determine more accurately their membership and capital before dealing with them.

Distinguish partnership from an ordinary voluntary association.

(1) A partnership is a voluntary association with a legal personality, ordinarily created for the purpose of engaging
in business for profit, while an ordinary voluntary association has no legal personality and is usually formed for moral,
social, or benevolent purposes; and

(2) In a partnership, capital is contributed, while in an ordinary voluntary organization, no capital is given although
fees are usually collected. (As distinguished from other business organizations, see (VII. - Corporation Law.)

May a partnership be a partner in another partnership?

Yes. There is no prohibition against a partnership being a partner in another partnership. When two or more
partnerships combine with each other (or with a natural person or persons) creating a distinct partnership, say, partnerships
will be individually liable to the members of the creditors of partnership X.

What is a sole proprietorship?

Sole proprietorship or, as it is also called, individual proprietorship, is a form of business organization in which a persons
conducts his business alone and entirely for his own profit, being solely responsible for all its activities and liabilities.

Give the advantages and disadvantages of the sole proprietorship as a form of business organization.

They are:

(1) Advantages:

(a) It is easy to organize since no formality is required in its formation;

(b) The proprietor or owner exercises exclusive control of the business;

(c) He enjoys privacy in the operation of his business;

(d) He gets all the profits which fact is a strong incentive to industry;

(e) It is entirely flexible as to management:

1) The owner may discontinue one form of activity and take on another at will; and

2) He may even engage in other lines of business totally unconnected with his main business should he so desire;
(f) It is subject to less government control; and

(g) Its income is subject to less taxes.

(2) Disadvantages:

(a) The owner is solely responsible for all its activities and liabilities;

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(b) His liability for debts of the business is unlimited;

(c) It is difficult for one man to keep close control of the detailed operations of a large business;

(d) The general credit of the business is limited to the principal resources of the proprietor;

(e) The inability to obtain large amounts of capital usually prevents the growth or expansion of the business;

(f) The business lacks stability or permanence, for it ends with the death, bankruptcy, etc. of the owner and
this prevent borrowing for long periods of time on the general credit of the business.

Summarize the advantage and disadvantages of a partnership as a business organization.

They may be set forth as follows:

(1) Advantages:

(a) It is easy and inexpensive to organize as it is formed by a simple contract between two or more
persons;

(b) The unlimited liability of the partners makes it reliable from the point of view of the creditor;

(c) The combined personal credit of the partners offers better opportunity for obtaining additional
capital than does the sole proprietorship;

(d) The participation in the business by more than one person makes possible a closer supervision of all
its activities;

(e) The direct gain to the partners is an incentive to close attention to the business;

(f) The personal element in the characters of the partners is retained; and

(g) It is generally free from government control.

(2) Disadvantages:

(a) The personal liability for firm debts deters many from investing capital in it;

(b) A partner may be subject to personal liability for the wrongful acts or omissions of his associates;

(c) It also lacks stability due to the ease by which it may be dissolved;

(d) There is divided authority; and

(e) There is constant likelihood of dissension and disagreement when each of the partners has the same
authority in the management of the concern.

Art. 1769. In determining whether a partnership exists, these rules shall apply:

(1) Except as provided by Article 1825, persons who are not partners as to each other are not partners
as to third persons;

(2) Co-ownership or co-possession does not of itself establish a partnership, whether such-co-owners
or co-possessors do or do not share any profits made by the use of the property;

(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;

(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;

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(e) As the consideration for the sale of a goodwill of a business or other property by installments or
otherwise. (n)

Discussion:

Purpose of Article 1769 – provide rules for determining existence of partnership.

Requisites for existence of partnership

In general to show the existence of a partnership, all of its essential characteristics must be proved; in particular
it must be proved that:
a. There was an intention to create a partnership
b. There was a common fund obtained from contributions
c. There was a joint interest in the profits
THEREFORE:
a) Mere co-ownership or co-possession ( even with community of interest in profit sharing). Reason: Co-
ownership is created by law while partnership is created by contract.
b) Mere sharing if gross returns (even with joint ownership of the properties involved do not establish
partnership.

The legal effect of the receipt by a person of a share of the profits of a business:

Such receipt is prima facie evidence that he is a partner in the business. No such inference, however, shall be
drawn if such profits were received in payment:

(1) As a debt by installments or otherwise;

(2) As wages of an employee or rent to a landlord;

(3) As annuity to a window or representative of a deceased partner;

(4) As interest on a loan though the amount of payment may vary with the profits of the business; and

(5) As the consideration for the sale of goodwill of a business or other property by installment or otherwise. (Art.
1769.)

In all the above cases, the profits in the business are not shared as profits of a partner but in some other respects.

EXAMPLES: In the following cases, Y is not a partner in partnership X:

(1) Y, creditor of partnership X, is entrusted by the partners to manage the business and Y shall receive, in
addition to his compensation, a share in the net profits of the business in settlement of his credit;

(2) Y, an employee of partnership X, shall receive instead of a fixed salary, or being the owner of a building
rented by the partnership, Y shall receive as rent, a certain percentage on the monthly net profits of the business.

(3) Y, the window of a deceased partner in partner in partnership X, in consideration of the continuation of
the business without liquidation and satisfaction of the deceased's interest, shall receive an annuity for a period of
five (5) years based on a certain percentage of the net profits;

(4) Y, creditor of partnership X, agreed that the payment of interest shall be taken from the net profits to be
realized by the partnership; and

(5) Y sold property to partnership X, and he agreed that the purchase price shall be paid out of the net
profits of the business.

In any of the above cases, I shall not be entitled to receive payment where there are no profits; nor shall he be liable
to share any losses incurred by the partnership.

Does co-ownership or co-possession wherein the co-owner or co-possessor shares any profits made by the use of the
property of itself establish a partnership?

No. There is co-ownership whenever the ownership of an undivided thing or right belongs to different persons.
(Art. 484.) Although every partnership is founded on a community of interest, every community of interest does not
necessarily constitute a partnership (e.g., The heirs who inherited an apartment which is leased to third persons are not
partners but merely co-owners although they share in the profits from the lease of the property).

Does sharing of gross returns by persons who have a joint or common interest in the property from which the returns
are derived of itself establish a partnership?

No, since in a partnership, the partners share profits after satisfying all of the partnership's liabilities. (Arts. 1769,
1812, 1839.)

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Art. 1770. 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.

What are the effects of unlawful partnership?

They are:

(1) The contract is void ab initio and the partnership never existed in the eyes of the law (Art. 1409.);

(2) The profits shall be confiscated in favor of the government; and

(3) The instrument of tools and proceeds of the crime shall be forfeited in favor of the government. (Art. 1770.)

Art. 1771. 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. (1667a)

Art. 1772. 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. (n)

Art. 1773. 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.

State the formalities required for the creation of a partnership.

As a general rule, a partnership may be constituted in any form (Art. 1771.) except in the following cases:
(1) Where personal property is contributed and the capital is P 3, 000 or more. -

(a) The contract must appear in a public instrument; and

(b) It must be registered with the Securities and Exchange Commission. (Art. 1772.)

Note: However, failure to comply with the above requirements does not prevent the establishment of the
partnership as a distinct personality (Art. 1768.) or affect its liability and that of the partners to third persons (Art. 1772.)
because they are merely for administrative and licensing purposes.

(2) Where immovable property or real rights thereto are contributed, regardless of valve. -

(a) The contract must appear in a public instrument (Art. 1771.); and

(b) An inventory of the property, signed by the partners, must be attached to the public instrument (Art.
1773.)

Note: If the above requirements are not observed the contract of partnership is void. (Ibid.) They do not apply
where the immovable property is acquired (not contributed by the partners) by the partnership. (Agad vs. Mabato.
L-24173, June 28, 1968.)

(3) In case of limited partnership. -

(a) The partners must sign and swear to a certificate or articles of limited partnership which states the matters
prescribed by law; and

(b) They must file such certificate with the Securities and Exchange Commission. (Art. 1844.)

Note: If there is no substantial compliance with the above legal requirements, the partnership becomes a
general partnership.

Art. 1775. 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.

Effects if Articles are kept:

a) The association here is certainly not a partnership and therefore not a legal person, because anyone of the
members may contract in his name wit third persons and not with the name of the firm.

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b) Although not a juridical entity, it may be sued by third persons under the common name it uses otherwise
innocent third parties may be prejudiced.
c) However, it cannot sue as such because it has no legal personality, and therefore, cannot ordinarily be a
party to a civil action. Moreover the fact that it has no legal personality as a partnership cannot be invoked
by the partners for the purpose of evading compliance with obligations contracted by them, because they
who caused the nullity of the contract are prohibited from availing of its benefits.
d) Therefore, insofar as innocent third parties are concerned, the partners can be considered as members of a
partnership; but between themselves, or insofar as 3 rd persons are prejudiced, only the rules on co-
ownership must apply. THE SAME rules applies in partnership estoppels

Art. 1776. 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.

What are the classes of partnerships?

They are:

(1) As to its object:

(a) Universal partnership. - There are two Kinds.

1) Universal partnership of all present property. - one in which the partners contribute all the properties which
actually belong to each of them at the time of the constitution of the partnership to a common fund, with the
intention of dividing the same among themselves as well as the profits which they may acquire therewith (Art.
1778.); and

2) Universal partnership of all profits. - one which comprises all that the partners may acquire by their industry or
work during the existence of the partnership and the usufruct of movable or immovable property which each of the
partners may possess at the time of the celebration of the contract. (Art. 1780.) Articles of universal partnership
entered into without specification of its nature only constitute a universal partnership of profits (Art. 1781.)

Note: Persons who are prohibited from giving each other any donation or advantage cannot enter into universal
partnership of profits. (Art. 1782.)

(b) Particular partnership. - one which has for its object determinate things, their use or fruits, or a specific
undertaking, e.g., acquisition of a real property for the purpose of reselling it at a profit, or practice of a profession or
vocation. (Art. 1783.) So, the carrying on a business of a continuing nature is not essential to constitute a partnership.

(2) As to liability of the partners:

(a) General partnership. - one consisting of general partners who are liable pro rata and subsidiarily (Art. 1816.)
and sometimes solidarily (Arts. 1822-1824.) with their separate property for partnership debts; or

(b) Limited partnership. - one formed by two or more persons having as members one or more general partners
and one or more limited partners, who as such are not bound by the obligation of the partnership. (Art. 1843.)

(3) As to duration:

(a)Partnership at will. - one which no time is specified and is not formed for a particular undertaking or venture
and which may be terminated any time by mutual agreement of the partners or by the will of one alone (40 Am.
Jur. 139.); or
(b) Partnership with a fixed term. - one in which the term of period for which the partner is to exist is agreed upon
or one formed for a particular undertaking, and upon the expiration of that term or completion of the particular
enterprise, the partnership is dissolved, unless continued by the partners. (Art. 1785.)

(4) As to representation to others:

(a) Ordinary partnership. - one which actually exists among the partners and also as to third persons; or

(b) Partnership by estoppel. - one which in reality is not 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. (Art. 1825.)

(5) As to legality of its existence:

(a) De jure partnership. - one which has complied with all the requirements for its establishment (see Arts. 1772,
par. 2; 1773.); or

(b) De facto partnership. - one which has failed to comply with all the legal requirements for its establishment.
(Ibid.)

(6) As to publicity:

(a) Secret partnerships. - one wherein the existence of certain persons as partners are not made known to the
public by any of the partners; or

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(b) Open or notorious. - one whose existence is made known to the public by the members of the firm.

What are the classes of partners?

They are:

(1) As to contributions:

(a) Capital partner. - one who contributes capital. I.e., money or property, to the common fund (Art. 1767.); or

(b) Industrial partner. - one who contributes industry or labor. (Art. 1789, 1767.)

(2) As to liability:

General partner. - one whose liability to third

(a) Liquidation partner. - one who takes charge of the winding up of partnership affairs upon dissolution (Art.
1836.)

(b) Nominal partner or partner by estoppel. - one who is not really a partner, not being a party to the partnership
agreement, but is made liable as a partner for the protection of innocent third persons (Art. 1825.);

(c) Real partner. - one who is actually connected with the business as a partner (Art. 1767.)

(e) Ostensible partner. - one who is actually connected with the business as a partner in the business (Art. 1834,
par. 2.);

(f) Dormant partner. - one who does not take active part in the business and is not known to the public as a
partner; he is both a silent and secret partner (Ibid.); and

(e) Subpartner. - one who contracts with a partner with reference to the latter's share in the partnership. (Art.
1804) He is not really a partner.

Art. 1778. 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
which they may acquire therewith. (1673)

Art. 1779. 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. (1674a)

Art. 1780. 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. (1675)

Art. 1781. Articles of universal partnership, entered into without specification of its nature, only constitute a universal
partnership of profits. (1676)

Art. 1782. Persons who are prohibited from giving each other any donation or advantage cannot enter into universal
partnership. (1677)

Art. 1783. A particular partnership has for its object determinate things, their use or fruits, or specific undertaking, or the
exercise of a profession or vocation. (1678)

Universal Partnership
a) with all present property
b) with all profits ( the individual properties here continued to be owned by the partners, but the usufruct
thereof passes to the firm).
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Particular – here the object is determinate things, their use or fruits; a specific undertaking, or the exercise of a profession or
occupation (Art. 1783)

ALL PROFITS ALL PRESENT PROPERTY

a) Only the usufruct of the properties of the
partners becomes COMMON PROPERTY
(owned by them and the partnership); NAKED
OWNERSHIP is retained by each of the
partners.
b) All PROFITS acquired by the INDUSTRY or
WORK of the partners become COMMON
PROPERTY (regardless of whether or not said
profits were obtained through the usufruct
contributed.
a) All the property actually belonging to the
partners are contributed – and said
properties become common property
(owned by all partners and by the
partnership).
b) As a rule, aside from the contributed
properties only the PROFITS of said
contributed COMMON PROPERTY (not
other profits)
NOTE: Profits from other sources may become
COMMON, but only if there is a stipulation to
such effect.
Properties subsequently acquired by
inheritance, legacy or donation, cannot be
included in the stipulation BUT the fruits
thereof can be included in the stipulation.)

Future Property

Reason why future ( by inheritance, legacy, donation) property cannot be included in the stipulation regarding
universal partnership of all present property:
a) First, as a rule contract regarding successional rights cannot be made.
b) Secondly, a partnership demands the contributed things be determinate, known and certain.
c) Thirdly, a universal partnership of all present properties really implies donation and it is well known that generally
future property cannot be donated.

PROBLEMS ON ALL PRESENT PROPERTY

a. A and B entered into a universal partnership of all present property. No stipulation was made regarding
other properties. Subsequently, A received a parcel of land by inheritance from his father; and another parcel
of land from the Ateneo College as remuneration for A’s work as professor therein. Question: Are the two
parcels of land and their fruits to be enjoyed by the partnership?

Answer: No, because there was no stipulation regarding future properties or their
fruits.

b. Same as (a) except that in the contract, it was stipulated that all properties subsequently acquired would
belong to the partnership.

Answer: The land acquired as salary as well as its fruits will belong to the firm; but the land acquired later by
inheritance will not to the firm; but the land acquired later by inheritance will not belong to the partnership since
this cannot be stipulated upon (Art. 1780). The fruits of the inherited land will go to the firm because said fruits
may be considered as properties subsequently acquired, and there is no prohibition to stipulate on fruits, even if the
fruits be those of properties acquired later on by inheritance, legacy or donation.

PROBLEMS ON ALL PROFITS

a. In a universal partnership of all profits, A contributed the use of his car. At the end of the partnership, should
the car be returned to him?

ANS: Yes, because the naked ownership had always been with him and upon the end of the usufruct, full
ownership reverts to him. Remember that only its use had been previously contributed.

b. A and B entered into a universal partnership of profits. Subsequently, A won 1 st prize in the sweepstakes. Will
the money belong to the partnership?

ANS: No, because it was not acquired by industry or work.

c. A and B entered into a universal partnership of all profits. Subsequently A became a professor at the Ateneo.
Will A’s salary belong to the partnership?

ANS: Yes, even though no stipulation was made on this point because after all the salary was acquired by A’s
industry or work during the existence of the partnership (Art. 1780, par. 1). Such profit belongs therefore to the
firm as a matter of RIGHT. Of course had there been a stipulation that such salary would be excluded, the
stipulation would be valid.

d. A and B entered into a universal partners of all profits. Later A purchased a parcel of land, Will the fruits of
the said land belong to the partnership?
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ANS: As a rule, NO, because the usufruct (use and fruits) granted to the firm under Art. 1780, par. 2 refers only to that
of the property possessed by the partners at the time of the celebration of the contract. It follows that fruits of after
acquired property do not belong to the firm as a matter of right. However, it would be valid to stipulate that the
usufruct of after-acquired properties would belong to the partnership.

Obligations of the partners among themselves:

What are the relations created by a contract of partnership?

There are at least four distinct juridical relations, namely:

a) Relations among partners themselves;

b) Relations of the partners with the partnership;
c) Relations of the partnership with third persons with third persons with whom it contracts; and
d) Relations of the partners with such third persons.

Example: If A & B formed a partnership called X & Co. and it transacts business with "T", a third person, the
relations created will be as follows: relations between A & B on the one hand and X and Co., on the other hand;
relations between X & Co. and T; and relations between A & B on the one hand and T on the other hand.

Art. 1784. A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated. (1679)

Art. 1785. When a partnership for a fixed term or particular undertaking is continued after the termination of such term
or particular undertaking without any express agreement, 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.

A continuation of the business by the partners or such of them as habitually acted therein during the term, without any
settlement or liquidation of the partnership affairs, is prima facie evidence of a continuation of the partnership. (n)

When does a partnership begin?

Since partnership is a consensual contract, it begins from the moment of the execution of the contract. The
partners, however, may stipulate some other date for the commencement of the partnership (Art. 1784).
Hence, there can be a future partnership, which at the moment has no juridical existence yet.

Art. 1786. Every partner is a debtor of the partnership for whatever he may have promised to contribute thereto.

He shall also be bound for warranty in case of eviction with regard to specific and determinate things which he may
have contributed to the partnership, in the same cases and in the same manner as the vendor is bound with respect to the
vendee. He shall also be liable for the fruits thereof from the time they should

What are the obligations of the partner among themselves and to the partnership with respect to contribution of money
or property?

a) To contribute at the beginning of the partnership or at the stipulated time the money, property which he
promised to contribute;
b) To answer for eviction (as a vendor) in case the partnership is deprived of the determinate property
contributed;
c) To answer to the partnership for the fruits of the property the contribution of which he delayed, from the
date they should have been contributed up to the time of actual delivery without the need of any demand
(Art. 1786);
d) To preserve said property with the diligence of a good father of a family pending a delivery to the
partnership (Art. 1163);
e) To indemnify the partnership for nay damage (and also the legal interest of the promised contribution in
money) caused to it by retention of the same or by the delay in its contribution (Arts. 1788, 1170)

Art. 1787. When the capital or a part thereof which a partner is bound to contribute consists of goods, their appraisal
must be made in the manner prescribed in the contract of partnership, and in the absence of stipulation, it shall be made
by experts chosen by the partners, and according to current prices, the subsequent changes thereof being for account of
the partnership. (n)

Art. 1788. A partner who has undertaken to contribute a sum of money and fails to do so becomes a debtor for the
interest and damages from the time he should have complied with his obligation.

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The same rule applies to any amount he may have taken from the partnership coffers, and his liability shall
begin from the time he converted the amount to his own use. (1682)

Art. 1789. An industrial partner cannot engage in business for himself, unless the partnership expressly permits him to
do so; and if he should do so, the capitalist partners may either exclude him from the firm or avail themselves of the
benefits which he may have obtained in violation of this provision, with a right to damages in either case

Obligations of an Industrial Partner:

a) To contribute at the beginning of the partnership or at the stipulated time the industry which he promised
to contribute (Art. 1786);
b) Not to engage in any other business for himself (prohibition is absolute) unless the partnership expressly
permits him to do so; otherwise-
- The capitalist partners may exclude him from the firm; or
- They may avail themselves of the benefits which the industrial partner may have obtained from other
businesses, with a right to damages in either case. (Art. 1789)
Reason for the prohibition: The industrial partner is a debtor of the partnership for his work or services.
He must therefore devote his full time to the interest of the partnership.

Rule on capitalist partner investment in other business:

As a rule, he cannot engage for his own account, in any operation, which is of the same kind of business in
which the partnership is engaged otherwise -

a) He shall be liable to the partnership for any profits he obtained from his transactions; and
b) He shall personally bear all his losses (Art. 1808)

Reason for the prohibition: The capitalist partner is likely to prejudice the partnership by the competition he
will offer.

Exceptions are (a) when the business is not the same or similar to that engaged in by the partnership; or (b)
although it is of the same kind, if there is a stipulation to the contrary.

1. Rules in case managing partner collects a demandable debt from a person who also owes the partnership a
demandable debt:

a) The sum collected shall be applied to the two credits in proportion to their amounts;
b) It shall be fully applied to the partnership credit, if the receipt given is for the account of the same; and
c) The debtor however has the right to have the payment applied to his debt to the partner if it should be
more onerous to him. (Arts. 1792, 1252)

Reason: To prevent the furtherance of a managing partner's interest to the prejudice of the firm. Note that the
law speaks only of a managing partner.

2. Obligations of a Partner:

a) Money converted to personal use. - To pay to the partnership interest and damages for any sum of money
which he may have taken from the partnership coffers; said liability to begin from the time of conversion
(not demand) of the amount to his own use (Art. 1788)
b) Additional share to capital. - To contribute an additional share to the capital in case of imminent loss of
the business of the partnership to save the venture; otherwise, he (Except an industrial partner because
having contributed his entire industry there is nothing more he can do) shall be obliged to sell his interest
to the other partners. (Art. 1791) Reason for the sanction: The refusing partner reflects his lack of interest
in the continuance of the partnership;
c) Share on partnership credit - To bring to the partnership capital his share of a partnership credit to which
he received from a debtor who subsequently became insolvent when the other partners have not collected
theirs. (Art. 1793) Reason: All the partners must share the loss;
d) Indemnity for damages to partnership. - To indemnify the partnership for damages suffered by it
through his fault and he cannot compensate them with the profits or benefits he may have earned for the
partnership. (Art. 1794) Reason: A partner has an obligation to secure benefits for the partnership. Hence,
the profits he may have earned pertains as matter of right to the partnership;
e) Information affecting partnership. - To render on demand true and full information of all things affecting
the partnership to any partner or his legal representative. (Art. 1806) Reason: The relations between the
partners involve trust and confidence; and
f) Share in loss. - To share in the loss of the partnership except in the case of the industrial partner. (Art.
1797)

3. Rules Governing Management of Partnership:

a) Where the manager is appointed in the articles of partnership:

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- Extent of Power. - He may execute acts of administration (not ownership) despite the opposition of
his partners unless he acts in bad faith;
- Revocation of Power. - The power is irrevocable without just and lawful cause. (Art. 1800) He must
give his consent to his removal. Reason: Revocation will amount to change in the terms of the
contract of partnership. For just or lawful cause, the vote of the controlling partners (controlling
financial interest) is necessary to oust him.

b) Where manager is appointed orally or in an instrument other than the articles of partnership:

- Extent of Power. - The partner appointed as manager after constitution of the partnership may also
perform acts of administration;
- Revocation of Power. - The power may be revoked at anytime with or without just cause. Reason:
The appointment is mere delegation of power.

c) Where there are two or more managing partners whose respective duties are not specified.

- Extent of Power.- Each one may separately perform acts of administration;

- In case of opposition by any of the managers. - The decision of the majority of the managers (per
head) shall prevail. In case of tie, the matter shall be decided by the managing partners owning the
controlling interest (more than 50% of the investment) (Art. 1801);

- Revocation of Power. - Same as in letter (a) or (b) as the case may be.

d) Where two or more managing partners with stipulation that none of them shall act without the consent of the others.

- Extent of Power. - The concurrence of all is necessary for the validity of their acts; and the absence or
incapacity of any manager cannot be alleged as an excuse to dispense with this requirement.
- Exception. - When there is imminent danger of grave or irreparable injury to the partnership (Art.
1802);
- Revocation of Power. - Same as letter (a) and (b) as the case may be.

e) Where the manner of management has not been agreed upon:

- Extent of Power. - All the parties shall be considered as agents of the partnership whose acts shall
bind the partnership;
- None of the partners may make alterations in the immovable property of the partnership even if it
may be useful to the firm. In case of dispute, the partners may seek the intervention of the court.
- In case of Opposition by a partner. - The decision of the majority of the partners shall prevail. In case
of tie, the partners representing the controlling interest shall decide the matter. (Art. 1801)

4. Rights enjoyed by a partner:

a) To receive his share of the profits of the partnership (Arts. 1797, 1799);
b) To participate in the management of the firm, in the absence of an agreement to the contrary (Arts. 1803,
1810)
c) To associate another person (sub-partner) with him in his share (Art. 1804)
d) To have access to, inspect and copy, at any reasonable hour, any of the partnership books (Art. 1805);
e) To demand a formal account (even before dissolution) of the partnership affairs:

- If he is wrongfully excluded from the partnership business or possession of its property;

- If he has such right under the terms of any agreement;
- If a partner receives any benefit or profit which should pertain to the partnership (see Art. 1807) and
- Whenever other circumstances render it just and reasonable (Art. 1809);
f) To ask for the dissolution and winding up of the partnership by decree of the court (Art. 1831, infra.); and
g) To ask for the return of his contribution, provided that the partnership assets are in excess of all its
liabilities. (Art. 1839, Infra.)

Note: As a rule, a partner is not entitled to a formal account. Reasons: His rights to know partnership affairs are
amply protected (Art. 1805, 1806, supra.) and furthermore, a formal account requires considerable time and effort.

5. Give the rules for the distribution of profits and losses among partners.

They are:

(1) Distribution of profits:

(a) The partners share the profits according to their agreement subject to Article 1799 (see question No. 11,
infra.);
(b) If there is no such agreement:
1) The share of each capitalist partner shall be in proportion to his capital contribution. This rule is
based on the presumed will of the partners;
2) The industrial partner shall receive such share, which must be satisfied first before the capitalist
partners shall divide the profits, as may be just and equitable under the circumstances;

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3) The capitalist-industrial partner shall get a share in the profits, which must also be satisfied first, as an
industrial partner, and an additional share, in proportion to his contribution from the balance. (Art.
1797.)

EXAMPLE: A, B, and C formed a partnership, whereby each of them contributed P 20,000.00. They agreed
that should the partnership realize profits, the same shall be distributed in the following proportions:

A as managing partner …………………………… 40%

B ………………………………………………………… 30%
C ………………………………………………………… 30%

In this case, the partners shall share the profits in conformity with their agreement. If there is no
agreement with respect to the share of each partner, then, they shall share the profits equally.

Suppose, the contributions of the partners are as follows:

A ……………………………………………………….. P 30,000.00
B ……………………………………………………….. 20,000.00
C ………………………………………………………. 10,000.00

Total ………………………………………… P 60,000.00

In the absence of stipulation the share of each of the partners shall be in proportion to his contribution,
that is:

A …………………………………………………….. P 3/6
B ……………………………………………………. 2/6
C ……………………………………………………. 1/6

If D is an industrial partner he shall receive such share as may be just and equitable under the
circumstances. Assuming that the partnership makes a profit of P 17,000.00, the partners may determine
considering all the circumstances, that D, as industrial partner, is entitled to P 2,000.00. The balance of P 15,000.00
will be divided among A, B, and C in proportion to their respective capital contributions: P 7,500.00, P 5,000.00, and
P 2,500.00 respectively.

Now, if D, aside from his services, contributed P 12, 000.00, then, he will also have a share in the balance of
P 15,000.00 in proportion to his contribution, which is 3/15 (P 12,000.00 P 6,000.00) or P 3,000.00, while A, B, and C
will share P 6,000.00, P 4,000.00, and P 2,000.00, respectively.

(2) Distribution of losses:

(a) The losses shall be distributed according to their agreement subject to Article 1799 (see question No.11.
infra.);
(b) If there is no such agreement, but the contract provides for the share of the partners in the profits, the
share of each in the losses shall be in accordance with the profits-sharing ratio; but the industrial partner
shall not be liable for losses. The term "losses" implies that there are no profits.

EXAMPLE: In the same example, the partners will share in the losses in conformity with their agreement.
If they failed to agree as to the sharing of losses, the share of each partner in the losses shall be in the same
proportion stipulated with regards to the share of each in the profits, to wit:

A ……………………………………………………….. 40%
B ……………………………………………………….. 30%
C ………………………………………………………. 30%

If there is also no profit-sharing ratio stipulated, then the losses shall be divided in proportion to their
capital contributions. D, however, being an industrial partner, shall not be liable for losses but the same shall be
borne by A, B, and C, the capitalist partner, then he shall share in the losses in proportion to his contribution.

Note: The designation of profits and losses cannot be entrusted to one of the partners but the partners may
agree to entrust it to a third person. (Art. 1799.)

6. May a partner be excluded from any share in the profits or losses?

No. Any such stipulation is void. (Art. 1700.) Reason: The partnership must exist for the common benefit and
interest of the partners. (Art. 1770.)

But a stipulation exempting the industrial partner from the losses is naturally valid since the law itself excludes
him from losses. (Art. 1797.) Reasons.

(1) Unlike a capitalist partner who can withdraw his capital, an industrial partner cannot withdraw the work
already done by him; and
(2) Furthermore, in the event of loss, then an industrial partner has labored in vain and in a real sense, he has
already contributed his share in the loss.

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7. What are the obligations of the partnership to the partners?

They are:

(1) To refund amounts disbursed by a partner in behalf of the partnership plus the corresponding interest from
the time the expenses are made;
(2) To answer for the obligations he may have contracted in good faith in the interest of the partnership business;
and
(3) To answer for risks in consequence of its management. (Art. 1796.)

Note: A partner is a mere agent of the partnership for the purpose of the business in the absence of any
stipulation to the contrary. (Art. 1818.) Hence, he is not personally liable.

Section 2. - PROPERTY RIGHTS OF A PARTNER

1. What are the property rights of every partner?

They are:

(1) His rights in specific partnership property;

(2) His interest in the partnership; and
(3) His right to participate in the management. (Art. 1810.)

2. What is the nature of a partner's right in specific partnership property?

A partner is a co-owner with his partners of specific partnership property. The incidents of this rule are:

(1) A partner, subject to legal provision on partnership and to any agreement between the partners, has an equal
right to possess specific partnership property, but for partnership purposes only;
(2) His right in specific partnership property is not assignable. Reason: The extent of his beneficial interest in the
property cannot be determined until after liquidation of partnership affairs. However, the rights of all the
partners to the same property may be assigned by them;
(3) His right in said property is not subject to attachment or execution except on a claim against the partnership
and not to the partner; and
(4) The property is not subject to legal support due from a partner. (Art. 1811.) Reason: Same.

3. Distinguish partnership property from partnership capital.

The distinctions are:

(1) Partnership property is variable - its value may vary from day to day with changes in the market value of the
partnership assets, while partnership capital is constant - it remains unchanged as the amount fixed by
agreement of the partners, and is not affected by fluctuations in the value of partnership property; and
(2) Partnership property includes not only the original capital contributions of the partners, but all property
subsequently acquired on account of the partnership or with partnership funds, while partnership capital
represents the aggregate of the individual contributions made by the partners. (Babb & Martin, Business Law,
p.240.)

4. What does the partner's interest in the partnership consist of?

It consists of his share in the profits while the partnership is a going concern and in the surplus after its dissolution.
(Art. 1812.)

5. Is the partner's interest in the partnership assignable?

This interest may be assigned. Such assignment, however, does not make the assignee or transferee a partner.
Reason: No one can become a partner without the consent of the other partners. The right of the assignee (among others) is
to receive the profits accruing to the assigning partner. (Ibid.)

6. With respect to the partner's interest in the partnership, who enjoy preference - his creditors or the
partnership creditors?

The interest in the surplus is available for the satisfaction of the separate debts of the partners (Art. 1814.) subject to
the preferred rights of the partnership creditors as regards partnership property. (Art. 1824.) This means that they have to
be paid first from partnership property before the separate or private creditors of each partners of each partner. (see
question No. 15 [2, a), Chap.3, infra.)

Section 3. - OBLIGATIONS OF THE PARTNERS WITH REGARDS TO THIRD

PERSONS

1. Give the effects of the inclusion in the firm name of the name of a person who is not a partner.

They are:

(1) Such person does not acquire the rights of a partner (Art. 1767.); and
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(2) He shall be subject to the liability of a partner (Art. 1815.) in so far as third persons without notice are
concerned.

2. What is the nature of the liability of partners to third persons for partnership contracts?

The liability of all the partners, including industrial ones, is:

(1) Pro rata. - This must be understood to mean equally or jointly and not proportionately because the pro-rating
is based on the number of partners and not in the amount of their contribution subject to adjustment among
them (see question No. 13 [3], Chap.3.); and
(2) Subsidiary. - The partners become personally liable only after all the partnership assets have been exhausted.
(Art. 1816.)

EXAMPLE: A and B are capitalist partners, with C as an industrial partner. A and B contributed P 10,000.00
each to the capital of the partnership. A contractual liability of P 26,000.00 was incurred by the partnership in favor
of D.

Under Article 1816, D can sue the firm and all the partners including C, the industrial partner. The capital
assets of P 20,000.00 shall first be exhausted thereby leaving an unsatisfied liability of P 6,000.00. D. can remover
the amount from A, B, and C jointly or pro rata at P 2,000.00 each. After paying D, C, can recover for reimbursement
of P 1,000.00 each from A and B. Under Article 1797, he is exempted from the loss of P 6,000.00 as among
themselves, unless there is a stipulation to the contrary.

Any stipulation against the liability laid down above is enforceable only as among the partners but is void as to
third persons. (Art. 1817.)
Note: The exemption of the industrial partner to pay losses relates exclusively to the settlement of
partnership affairs among themselves. (Compania Maritima vs. Muñoz, 9 Phil. 326.)

3. What is the nature of the liability to third persons of the partners for non-contractual debts arising from their
individual acts.

All the partners are solidarily liable with the partnership for everything chargeable to the partnership in the
following cases:

(1) Where (a) by any wrongful act or omission of any partner (b) acting in the ordinary course of business or
with the authority of his co-partners, loss of injury is caused to any person, not being a partner in the
partnership, or penalty is incurred (Art. 1822; e.g., negligent operation of a vehicle by a partner which result
in a traffic accident);

(2) Where (a) one partner acting within the scope of his apparent authority receives money or property of a third
person, and (b) misapplies it; and

(3) Where (a) the partnership in the course of its business (b) receives money or property is misapplied by any
partner (d) while it is the custody of the partnership. (Art. 1823.)

4. What is the extent of the liability of a person admitted as a partner into an existing partnership?

(1) As to partnership debts contracted before his admission. - He is liable only up to the amount of his contribution or his
share in the partnership property unless there is a stipulation to the contrary; and

(2) As to partnership debts contracted after his admission. - He is liable with his separate property if partnership assets
are not sufficient. (Art. 1826.)

5. What acts of a partner will be binding on a partnership with respect to third persons?

They may be grouped into three, namely:

(1) Acts for apparently carrying on in the usual way the business of the partnership. - Unless the partner has in fact no
authority and the third person has knowledge of that fact;

(2) Acts not apparently for carrying on in the usual way the business of the partnership. - When authorized by the other
partners;

(3) Acts of strict dominion or ownership. -

(a) when authorized by the other partners;

(b) when the other partners have abandoned the business; or
(c) when effect by all of them; and

(4) Acts in contravention of a restriction on authority. - Unless the third person has knowledge of such restriction,
whether or not the acts are apparently carrying on in the usual way the business of the partnership. (Art. 1818.)

Note: "Usual way" means usual for the particular partnership or usual for similar partnerships. (Crane,
Law on Partnership, p. 190.)
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6. Give instances of acts of strict dominion or ownership.

They are.

(1) Assignment of partnership property in trust for creditors or on the assignee's promise to pay the debts of the
partnership;
(2) Disposal of the goodwill of the business;
(3) Any act which would make it impossible to carry the ordinary business of the partnership;
(4) Confession of judgement;
(5) Compromise concerning a partnership claim or liability;
(6) Submission or partnership claim or liability to arbitration; and
(7) Renunciation of a claim of the partnership. (Ibid.)

7. Enumerate the cases where notice to or knowledge of a partner constitutes notice to or knowledge of the
partnership.

They are:

(1) Notice to any partner of any matter relating to partnership affairs;

(2) Knowledge of the partner acting in the particular matter acquired while a partner;

(3) Knowledge of the partner acting in the particular matter then present to his mind; and

(4) Knowledge of any other partner who reasonably could and should have communication it to the acting
partner. (Art. 1821.)

But there is no notice to or knowledge of the partnership in the case of fraud on the partnership committed by or
with the consent of the partner. (Ibid.)

EXAMPLES:

(1) A, B, and C are partners in partnership X & Co. The service of the notice of a complaint, failed by D, on
A only, operates as a notice to X & Co. or to all the partners.

(2) A, acting for the partnership, bought a parcel of land form D. A acquired some knowledge that the land
is involved in a litigation in which E claims to be the owner. A did not convey the information to the partnership.
A's knowledge is knowledge of the partnership. If E recovers the land, D is not liable.

(3) The knowledge of A may have been acquired before he become a partner but such knowledge was then
present to his mind.

(4) If B (not the acting partner) is the one who received the information and it is reasonable it to A (the
acting partner), B's knowledge also operates as knowledge of the partnership. The knowledge of B must have been
acquired while a partner and not before he become a partner.

(5) If A, in the second example, deliberately did not inform the partnership regarding the claim of E for a
consideration paid or promised by D, the notice to or knowledge of A cannot be imputed to the partnership
because the law says "except in the case of fraud on the partnership committed by or with the consent of that
partner." (Art. 1821.)

8. How may a person become a partner by estoppel?

(1) By representing himself as a partner in an existing partnership or in a non-existing partnership ( i.e., with one or
more persons, not actual partners); or

(2) By consenting to another making such representation. (Art. 1825.)

9. Who will be liable to third persons who acted in good faith when a person is falsely represented as a partner
in an actual or apparent partnership?

They are:

(1) The partner by estoppel;

(2) Those who consented to such representation; and
(3) The partnership itself if all the actual partners consented to the representation. (Ibid.) This is a case of
partnership by estoppel.

Note: Estoppel does not create a partnership as between the alleged partners. A contract is essential to the
formation of a partnership. (Art. 1767.)

10. Give the rule on the liability of the partners for partnership obligations where a person is admitted as a
partner in an existing partnership.

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When a person is admitted as a partner into an existing partnership, he is liable for all obligations existing at the
time of his admission as though he was already a partner when such obligations were incurred. Such obligations shall be
satisfied only out of the partnership property, unless there is a stipulation to the contrary. (Art. 1826.)

Those who were already partners at the time when the obligations were incurred are liable with their separate
property. (Art. 1816.) For all the obligations accruing subsequent to the admission of the new partner, all the partners are
liable with their separate properties. (Ibid.)

EXAMPLES: A, B, and C are partners engaged in a drug store business. Their contribution is P 10,000.00 each. D is
admitted as a new partner with a contribution of P 4,000.00. At the time of his admission, the partnership has an
outstanding obligation to E in the amount of P 40,000.00.

In this case, D is also liable to E for this obligation of P 40,000.00. Thus, the assets of the partnership amounting to P
34,000.00 will be exhausted thereby leaving a balance of P 6,000.00 for which only A, B, and C, shall be liable jointly or pro
rata, out of their separate property. However, if the obligation was incurred by the partnership subsequent to the admission
of D, there would be no difference between old and new partners, as all of them shall be personally liable to E for P 1,500.00
each. D is entitled to a proportional reimbursement from A, B, and C the amount he has paid in excess of his share of the
liability as follows:

Shares of A, B and C (10/34 of P 6,000) - P 1,764.70 each

Share of D (4/34 of P 6,000) - P 705.88

So, D can recover the difference of P 794.12 (P 1,500 - P 705.88) from A, B, and C who are liable P 264.70 each.

Chapter 3. - DISSOLUTION AND WINDING UP

1. Define dissolution.

Dissolution is the change in the relation of the partners caused by any partner ceasing to be associated in the
carrying on of the business. (Art. 1828.) It is that point in time when the partners cease to carry on business together.

2. Is the partnership terminated on dissolution?

No, it continues until the winding up to partnership affairs is completed. (Art. 1829.) The principal significance of
dissolution is that thereafter no new partnership business should be undertaken, but affairs should be liquidated and
distribution made to those entitled to the partner's interest. (Crane, Law on Partnership, p.223.)

3. Define winding up and termination.

(1) Winding up is the process of settling the business or affairs of the partnership after dissolution ( Ibid., p.320.) after
which the existence of the partnership is terminated.

(2) Termination is that point in time when all the partnership affairs are wound up or completed, and the
partnership ceases to exist for all purposes.

4. What are the causes for the dissolution of a partnership?

They are:
(1) Without violation of partnership agreement:
(a) Termination of the agreed term of the particular undertaking;
(b) By the express will of any partner who must act in good faith (otherwise, the partner will be liable for
damages), when no definite term or particular undertaking is specified;
(c) By the express will of all partners except those:

1) who have assigned their interest; or

2) suffered them to be charged for their separation debts, and

(d) By expulsion of any partner. Reason: It has the effect of decreasing the number of partners. The partner
expelled in bad faith can claim damages;

(2) In violation of partnership agreement:

(a) By the express will of any partner at any time (with or without justifiable cause). Reasons: A partner cannot be
compelled to remain in the firm against his will;

(3) By any event making it unlawful for the partnership or members thereof to continue the business

(4) By loss of specific thing which a partner had promised to contribute before delivery. Reasons: There is no
contribution. If only the use of enjoyment of the thing is contributed, the partner having reserved the
ownership thereof, the loss of the same before or after delivery dissolves the partnership. Reason: The partner
bears the loss and, thereof, he is considered in default with respect to his contribution;

(5) By the death of any partner. Reason: It causes a decrease in the number of partners;

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(6) By the insolvency of any partner or the partnership. Reason: The business of a partnership requires ability to
meet financial obligation to creditors;

(7) By the civil interdiction of any partner. Reason: It results in his incapacity to enter into dispositions of property
inter vivos (i.e., during his lifetime); and

(8) By judicial decree in cases provided by law. (Art. 1830.)

Note: Civil interdiction deprives the offender during the time of his sentence or imprisonment of the right to
manage his property and to dispose of the same by any act to take effect during his lifetime. (see Art. 34, Revised
Penal Code.)

5. Give the cases when the court may decree a dissolution of the partnership.

In the following instances:

(1) On the application by or for a partnership:

(a) In case of a partner's insanity;
(b) When a partner becomes incapable of performing his part of the partnership contract;
(c) When a partner is guilty of conduct tending to effect prejudicially the business;
(d) In case a partner willfully or persistently commit a breach of the partnership agreement or such
misconduct which makes it no longer practicable to carry on the business with him.
(e) When the business can only be carried on at a loss; and
(f) Other circumstances making dissolution equitable (like fraud in the render accounting or to allow
inspection of partnership's books, etc.)

(2) On the application by a purchaser of a partner's interest (under Arts. 1813, 1814, supra.)
(a) After the termination of the specified term or particular undertaking; or
(b) At any time if the firm was a partnership at will when the interest was assigned or the charging order was
issued. (Art. 1831.)

6. What is the effect of dissolution on the authority of partners to act for the partnership?

(1) General rule. - Diossolution terminates all authority of any partner to act for the partnership.
(2) Exceptions:
(a) When necessary to wind up partnership affair; and
(b) When necessary to complete transactions begun but not then finished. (Art. 1832.)

7. Give the effects in case new contracts are entered into by a partner with third persons after dissolution.

(1) As among the partners themselves. - The other partners are not bound (although they may be liable to third persons
-

(a) when the dissolution is not by the act, insolvency, or death of a partner (e.g., expiration of the term);
(b) when the dissolution is by the act of any partner (e.g., resignation) and the partner acting for the partnership
had knowledge of the dissolution; and
(c) when the dissolution is by the death or insolvency of a partner and the partner acting for the partnership had
knowledge or notice of the death or dissolution. (see Art. 1833.)

EXAMPLES:

(1) A, B, and C were partners. A informed B that the former was resigning from the partnership. The
partnership was thus dissolved by the act of A. C had no knowledge of the dissolution. If partnership liability is
incurred by a contract entered into by C, A and B are bound to contribute their share of the liability as if the
partnership had not been dissolved

(2) If the contract was entered into by B despite his knowledge of the dissolution, A and C ca recover from
B. In the end, only B will assume the entire liability.

Suppose B learned of the resignation of A only through a letter from C. In this case B had merely notice
(as distinguished from knowledge) of the dissolution. Hence, A and C can called upon to contribute their share in
the liability.

(3) If A had died or had become insolvent, knowledge or notice on the part of B will justify non-liability on
the part of the other partners.

(2) With respect to third persons. - The partnership is generally bound by the new contract. (Art. 1834, infra.) In
such case, the innocent partners can recover from the acting partner.

EXAMPLE: A, B, and C were partners in X & Co. The term of existence of the partnership as fixed in the
articles of partnership expired yesterday. Therefore, it was dissolved. Here, the dissolution was caused not by the
act, insolvency, or death of a partner.

If today A enters into a new transaction begun but not yet finished) with D, he (A) alone assumes
whatever liability may arise under the contract because his authority to act for the partnership X &co., as to bind B
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and C, terminated as of yesterday when the partnership was dissolved. If the partnership is liable to D under
Article 1834, B and C are entitled to indemnity from A.

8. What acts or transactions will bind a partnership even after dissolution?

They are:

(1) Acts appropriate for winding up;

(2) Acts appropriate for completing unfinished at dissolution; and
(3) Transactions which would bind the partnership if dissolution had not taken place provided the third person-
(a) Had extended credit to the partnership prior to dissolution;
(b) Had not extended credit but had known of the partnership prior to dissolution and having no knowledge or
notice of dissolution, the fact of dissolution had not been advertised in the newspaper of general circulation in
the place at which the partnership was regularly carried on. (Art. 1834)

9. In what cases is a partnership not bound by any act of a partner after dissolution?

In the following cases:

(1) When the partnership is dissolved because it is unlawful to carry on the business unless the act is appropriate for
winding up partnership affairs;
(2) Where the partners has become insolvent; or
(3) Where the partner has no authority to wind up partnership affairs except as otherwise provided by law.

10. What are the two ways of winding up a dissolved partnership?

They are:

(1) Judicially - under the control and direction of the proper court upon cause shown by any partner, his legal
representative or his assignee; or
(2) Extrajudicially - by the partner themselves without intervention of the court. (Art. 1836)

11. What are the rights of each partner in case of dissolution without violation of partnership agreement?

Unless otherwise agreed -

(1) To have the partnership properties applied to discharge the liabilities of partnership; and
(2) To have the surplus, if any, applied, to pay in cash the net amount owing to the respective partners, (Art. 1837)

12. What are the rights of the innocent partners in case of dissolution in violation of partnership agreement?

They are:

(1) to have partnership property applied for the payment of its liabilities;
(2) To receive in cash their share of the surplus;
(3) To be indemnified for damages caused by the partner guilty of wrongful dissolution;
(4) To continue the business in the same name during the agreed term of the partnership by themselves or jointly with
others; and
(5) To possess partnership property should they decide to continue the business.

13. What are the rights of the partner who wrongfully caused the dissolution?

They are:

(1) If the business is not continued by the other partners. -

(a) To have partnership property applied to discharge its liabilities; and

(b) To receive in cash his share of the surplus less damages caused by his wrongful dissolution.
(2) If the business is continued. -

(a) To have the value of his interest in the partnership (but the value of the goodwill of the business is not
considered) at the time of dissolution ascertained and paid in cash or secured by bond approved by the court;
and
(b) To be released from the existing and future liabilities of the partnership.

14. What are the rights of the injured partner where the partnership is rescinded on the ground of fraud?

They are:

(1) Right of a lien or retention of the surplus of partnership property after satisfying partnership liabilities for any sum
of money contributed or paid by him;
(2) Right to subrogation in the place of partnership creditors after payment of partnership liabilities;
(3) Right of indemnification by the guilty partner against all debts and liabilities of the partnership; and
(4) Such other rights to which he is entitled under other provisions of law. (Art. 1838)

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15. State the rules for the distribution of partnership assets after dissolution:

1. Assets of the partnership. - They are:

(a) Partnership property (including goodwill); and

(b) Contribution of the partners necessary for the payment of all liabilities in accordance with Article 1797

2. Order of application of the assets. - The partnership asset shall be applied to the satisfaction of the liabilities of the
partnership in the following order:
(a) First, those owing to the partnership's creditors;
(b) Second, those owing to partners other than for capital and profits such as loans given by the partners or advances
for business expenses;
(c) Third, those owing for the return of the capital contributed by the partners; and
(d) Lastly, the share of the profits, if any, due to each partner.

3. Right of a partner where assets are insufficient. - If the assets enumerated in No. 1, any partner of his legal
representative (to the extent of the amount which he has paid in excess of his share of the liability), or any assignee
for the benefit of creditors or any person appointed by the court, shall have the right to enforce the contributions of
the partners provided in Article 1797.

4. Liability of deceased partner's individual property. - The individual property of a deceased partner shall be liable
for his share of the contribution necessary to satisfy the liabilities of the partnership incurred while he was a
partner. ( Arts. 1816, 1835, par. 3)

5. Priority of payment of partnership creditors/partner's creditors.- When partnership property and the individual
properties of the partners are in possession of the court for distribution, partnership creditors from the individual
properties of the partners.

6. Distribution of property of insolvent partner. - If a partner is insolvent, his individual property shall be distributed
as follows:

a) First, to those owing to separate creditors; and

b) Then to those owing to partnership creditors; and
c) Lastly, to those owing to partners by way of contribution. (Art. 1839)

LIMITED PARTNERSHIP:

1. Define a Limited Partnership:

A limited partnership is one formed by two or more persons in accordance with the provisions of the law, having as
members one or more general partners and one or more limited partners. (Art. 1843)

2. Give the characteristics of a limited partnership:

1) A limited partnership is formed by compliance with the statutory requirements;

2) One or more general partners control the business and are personally liable to creditors;
3) One or more limited partners contribute to the capital and share in the profits but do not participate in the
management of the business and are not personally liable for partnership obligations; and
4) The partnership debts are paid out of the common fund and the individual properties of the general partners.

Note: The liability of a limited partner is an exception to the general rule that all partners including industrial
partner are liable pro-rata with all their property for partnership debts. (Art. 1816)

3. What is the purpose of the law in authorizing the formation of limited partnership.

The purpose is to bring into trade and commerce funds of those not inclined to engage in that business, who are
disposed to furnish capital upon such limited liability with a view to the share of profits which might be expected to
result to them from its use.

4. State the essential requirements for the formation of a limited partnership.

(1) The certificate or articles of limited partnership which states the matters enumerated in Article 1844 must be
signed and sworn to; and
(2) Such certificate must be filed for record in the Securities and Exchange Commission (Art. 1844)

Note: A strict compliance with the legal requirements is not necessary. It is sufficient that there is substantial
compliance in good faith. If there is no substantial compliance, the partnership becomes general partnership.

5. What must be contributed by a limited partner?

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The contribution of a limited partner may be cash or property but not services (Art. 1845); otherwise, he shall be
considered an industrial partner, in which case, he shall not be exempted from personal liability.

6. In general, what are the rights, powers and liabilities of a general partner in a limited partnership?

A general partner has all the rights and powers and is subject to all restrictions of a partner in a partnership without
limited partners. However, acts of strict dominion or ownership (e.g., admitting a new partner; continuing the business
on death, etc. of a general partner; acts in contravention of the certificate, etc.) are beyond the scope of the authority
without the written consent or at least ratification of all the limited partners. (Art. 1850)

7. Enumerate the rights of a limited partner.

1) To require that the partnership books be kept at the principal place of business of the partnership (Art. 1805);
2) To inspect and copy at a reasonable hour partnership books or any of them;
3) To demand true and full information of all things affecting the partnership (Art. 1806);
4) To demand a formal account of partnership affairs whenever circumstances render it just reasonable (Art. 1809);
5) To ask for dissolution and winding up by decree of court (Art. 1857)
6) To receive a share of the profits or other compensation by way of income (Art. 1856) and
7) To receive the return of his contribution provided the partnership assets are in excess of all its liabilities (Art. 1857)

Note: The rights of a limited partners are necessarily lesser than those of a general partner.

8. State the liabilities that a partner may incur in favor of the partnership.

1) He is liable for any unpaid contribution:

(a) The difference between the contribution as actually made and that stated in the certificate as having been
made; and
(b) The amount he agreed to make at a future time stated in the certificate.

2) He holds as trustee:

(a) Specific property stated in the certificate as contributed by him but which he had not contributed or had been
wrongfully returned; and
(b) Money or other property wrongfully paid or conveyed to him on account of his contribution. (Art. 1858)

9. May the above liabilities of a limited partner be waived or comrpomised?

Yes provided that the waiver or compromise-

1) is made with the consent of all the parties; and
2) does not prejudice the partnership creditors who extended credit or whose claims arise before the cancellation
or amendment of the certificate.
10. May a person be both a general and a limited partner in the same partnership?

Yes, provided that the fact is stated in the certificate signed and sworn to and recorded in the SEC.

1) He shall have all the rights, powers and liabilities of a general partner; hence he liable with his separate property to
third person;
2) With respect to his contribution, he would have the right of a limited partner in so far as the other partners are
concerned (Art. 1853)

11. Give the requisites for the return of contribution of a limited partner

1) All liabilities of the partnership have been paid, or if they have not yet been paid, the assets of the partnership are
sufficient to pay such liabilities to limited partners on account of their contribution and to the general partners are
not considered;
2) The consent of all the members has been obtained except when the return may be rightfully demanded; and
3) The certificate is cancelled or so amended as to set forth the withdrawal or reduction of the contributions. (Art.
1857)

12. When is a return of contribution of a limited partner a matter of right?

The requisites in No. 13 (1) & (2) have been duly complied with

1) On the dissolution of the partnership;

2) Upon the arrival of the date specified in the certificate for the return; or
3) After the expiration of the 6 months' notice in writing given by him to the other partners if no time is fixed in the
certificate for the return of the contribution or for the dissolution of the partnership.

13. Who is preferred limited partner?

A preferred limited partner is one given preference over other limited partners as to -

1) Return of contribution;
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2) Compensation by way of income;
3) Any other matter by an agreement stated in the certificate of limited partnership (Art. 1855)

14. What is a substituted limited partner?

A substituted limited partner is a person admitted to all the rights of a limited partner who has died or has assigned his
interest in a partnership (Art. 1859).

15. Give the requisites in order that the assignee may become a substituted limited partner?

1) All the members must consent to the assignee becoming a substituted limited partner or the limited partner, being
empowered by the certificate must give the assignee the right to become a limited partner;
2) The certificate must be amended in accordance with Article 1865;
3) The certificate as amended must be registered in the SEC.

16. Give the instances that will show that a limited partner is a mere contributor or practically a stranger in the limited
partnership; They are

1) The surname of the limited partner shall not appear in the partnership name unless it is also a surname of a general
partner or prior to the time when the limited partner became such, the business had been carried on under a name
in which his surname appeared (Art. 1846);
2) A limited partner cannot participate in the management of the partnership business (Art. 1848);
3) He may grant loans to and transact other business with the partnership (Art. 1854);
4) He can demand under certain conditions, the return of his contribution (Art. 1857);
5) He is not (unless he is also a general partner) a proper party to a suit by or against the limited partnership unless
the suit is to enforce a limited partner's right against or liability to the partnership (Art. 1866); and
6) The retirement, death, insolvency, insanity or civil interdiction of a limited partnership as long as there remains a
limited partner (Art. 1860)

17. After the dissolution, how shall the liabilities of a limited partnership be settled:

In the following order:

1) Those due to creditors, including limited partners, except those on account of their contributions in the order of
priority as provided by law (Arts. 1854, 1856, 1857 (1))
2) Those due to limited partners in respect to their share of the profits and other compensation by way of income on
their contribution;
3) Those due to limited partners for the return of the capital contribution;
4) Those due to general partners in respect to profits; and
5) Those due to general partners for the return of the capital contributed. (Art. 1863)

Note: In the absence of any statement in the certificate as to the share of the profits which each partner shall receive by
reason of his contribution (Art. 1844, par. 1 (I) ) and subject to any subsequent agreement, limited partners share in the
partnership assets in respect to their claims for capital and profits in proportion to the respective amounts of such
claims. (Art. 1863)

18. When shall the certificate of limited partnership be cancelled or amended?

1) The certificate shall be cancelled:

a) When the partnership is dissolved; or

b) All the limited partners cease to be such (Art. 1846)

Reason: A limited partnership cannot exist without any limited partner.

2) In all other cases (e.g., change in name of partnership, addition or substitution of a limited partner, etc.) , only an
amendment of the certificate is required.

19. State the requirements for the amendment or cancellation of a certificate.

1) The amendment must be in writing;

2) It must be signed and sworn to by all the members including the new members and the assigning limited partner in
case of substitution or addition of a limited or general partner; and
3) The certificate, as amended must be filed for record in the SEC (Art. 1865)
4) The cancellation of the certificate has been duly amended, the amended certificate shall thereafter be for all
purposes the certificate of the partnership. (Art. 1844)

Additional Notes for Partnership:

Effects if articles are kept secret under Article 1775:

1. The association here is certainly not a partnership and therefore not a legal person because anyone of the members
may contract in his own name with third persons and name in the name of the firm.
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2. Although, not a juridical entity, it may be sued by third persons under the common name, it uses, otherwise said
innocent third parties may be prejudiced.
3. However, it cannot sue as such, because it has no legal personality, and therefore, cannot ordinarily be a party to a
civil action. Moreover the fact that it has no legal personality as a partnership cannot be invoked by the partners
for the purpose of evading compliance with obligations contracted by them because they who caused the nullity of
a contract are prohibited from availing of its benefits.
4. Therefore, insofar as innocent third parties are concerned, the partners can be considered as members of a
partnership; but as between themselves, or insofar as 3 rd persons are prejudiced, only the rules on ownership must
apply. The same rule applies in the case of partnership by estoppel.

Classification of Partnerships

According to manner of creation

a. orally constituted
b. constituted in a private instrument
c. constituted in public instrument
d. registered in the Office of the Securities and Exchange Commission

According to object:
Universal
c) with all present property
d) with all profits ( the individual properties here continued to be owned by the partners, but the usufruct
thereof passes to the firm).

Particular – here the object is determinate things, their use or fruits; a specific undertaking, or the exercise of a
profession or occupation (Art. 1783)

ALL PROFITS ALL PRESENT PROPERTY

c) Only the usufruct of the properties of the
partners becomes COMMON PROPERTY
(owned by them and the partnership);
NAKED OWNERSHIP is retained by each
of the partners.
d) All PROFITS acquired by the INDUSTRY
or WORK of the partners become
COMMON PROPERTY (regardless of
whether or not said profits were obtained
through the usufruct contributed.
c) All the property actually belonging to
the partners are contributed – and said
properties become common property
(owned by all partners and by the
partnership).
d) As a rule, aside from the contributed
properties only the PROFITS of said
contributed COMMON PROPERTY
(not other profits)
NOTE: Profits from other sources may
become COMMON, but only if there is a
stipulation to such effect.
Properties subsequently acquired
by inheritance, legacy or donation, cannot
be included in the stipulation BUT the
fruits thereof can be included in the
stipulation.)

PROBLEMS ON ALL PRESENT PROPERTY

a. A and B entered into a universal partnership of all present property. No stipulation was made regarding
other properties. Subsequently, A received a parcel of land by inheritance from his father; and another parcel
of land from the Ateneo College as remuneration for A’s work as professor therein. Question: Are the two
parcels of land and their fruits to be enjoyed by the partnership?

Answer: No, because there was no stipulation regarding future properties or their fruits.

b. Same as (a) except that in the contract, it was stipulated that all properties subsequently acquired would
belong to the partnership.

Answer: The land acquired as salary as well as its fruits will belong to the firm; but the land acquired later by
inheritance will not to the firm; but the land acquired later by inheritance will not belong to the partnership since
this cannot be stipulated upon (Art. 1780). The fruits of the inherited land will go to the firm because said fruits
may be considered as properties subsequently acquired, and there is no prohibition to stipulate on fruits, even if the
fruits be those of properties acquired later on by inheritance, legacy or donation.

PROBLEMS ON ALL PROFITS

e. In a universal partnership of all profits, A contributed the use of his car. At the end of the partnership, should
the car be returned to him?

ANS: Yes, because the naked ownership had always been with him and upon the end of the usufruct, full
ownership reverts to him. Remember that only its use had been previously contributed.

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f. A and B entered into a universal partnership of profits. Subsequently, A won 1 st prize in the sweepstakes. Will
the money belong to the partnership?

ANS: No, because it was not acquired by industry or work.

g. A and B entered into a universal partnership of all profits. Subsequently A became a professor at the Ateneo.
Will A’s salary belong to the partnership?

ANS: Yes, even though no stipulation was made on this point because after all the salary was acquired by A’s
industry or work during the existence of the partnership (Art. 1780, par. 1). Such profit belongs therefore to the
firm as a matter of RIGHT. Of course had there been a stipulation that such salary would be excluded, the
stipulation would be valid.

h. A and B entered into a universal partners of all profits. Later A purchased a parcel of land, Will the fruits of
the said land belong to the partnership?

ANS: As a rule, NO, because the usufruct (use and fruits) granted to the firm under Art. 1780, par. 2 refers only to that
of the property possessed by the partners at the time of the celebration of the contract. It follows that fruits of after
acquired property do not belong to the firm as a matter of right. However, it would be valid to stipulate that the
usufruct of after-acquired properties would belong to the partnership.

PRESUMPTION IN FAVOR OF PARTNERSHIP OF PROFITS

Reason: Less obligation is imposed in the universal partnership because their REAL and PERSONAL PROPERTIES
are retained by them in naked ownership.

Some obligations of a partner.

a. To give contribution (Arts. 1786, 1788)

b. Not to convert firm money or property for his own use (Art. 1788)
c. Not to engage in unfair competition with his own firm (Art. 1808)
d. To account for and hold as trustee unauthorized personal profits (Art. 1807)
e. Pay for damages caused by his fault (Art. 1794)
f. Duty to credit to the firm payment made by a debtor who owes him and the firm (Art. 1792)
g. To share with the other partners the share of the partnership credit which he has received from an insolvent firm
debtor (Art. 1743 CC)

SOME RIGHTS OF A PARTNER

a. rights in the specific partnership property ( example-rights in a car contributed to the firm)
b. interest in the partnership (share in the profits and surplus) Art. 1812
c. right to participation in the management (Art. 1810) This right is not given to the limited partner.
d. Right to associate with another person in his share (Art. 1804)
e. Right to inspect and copy partnership books (Art. 1805)
f. Right to demand a formal account (Art. 1809)
g. Right to ask for the dissolution of the firm at the proper time (Art, 1830-1831)

Three important duties of a partner:

a. duty to contribute what he had promised (Art. 1786)

b. duty to deliver the fruits of what have been delivered
c. duty to warrant

When contribution consists of goods:

(Art. 1787)
Appraisal of value is needed to determine how much has been contributed.

How appraisal is made:

1. Firstly, as prescribed by the contract.

2. Secondly, in default of the first, by experts chosen by the partners and at current prices.

After goods are contributed to the partnership, the latter bears the risks.

Rules of failure to contribute and for conversion (Art. 1788)

Cases covered:
a. when money promised is not given on time
b. when partnership money is converted to the personal use of the partner.

Coverage of Liability – covers also INTEREST AND DAMAGES

a) Interest at the agreed rate: if none at the legal rate of 12% per annum
b) Damages that may be suffered by the partnership

Note: No need for Demand to put partner in default.

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Reason: in case of the contribution, because time is of the essence: a partnership is formed precisely to make use of
the contributions and this use should start from its formation, unless a different period has been set, otherwise the firm is
necessarily deprived of the benefits thereof. Thus the injury is constant.

In case of conversion, because the firm is deprived of benefits of the money, from the very moment of conversion.

PRESUMPTION AS TO THE AMOUNT OF CONTRIBUTION

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

DISTINCTION BETWEEN A CAPITALIST AND AN INDUSTRIAL PARTNER

a) As to contribution
1. The capitalist partner contributes money or property
2. The industrial partner contributes his industry ( mental or physical)

b) As to prohibition to engage in other business:

1. The capitalist partner cannot generally engage in the same or similar enterprise as that if his
firm. ( the test is the possibility of unfair competition) (Art. 1808)
2. The industrial partner cannot engage in any business for himself. (Reason: all his industry is
supposes to be contributed to the firm) Art. 1789)

c) As to profits:

1. The capitalist partner shares in the profits according to their agreement thereon, if none, pro-
rata to his contribution (Art. 1797)
2. The industrial partner receives a just and equitable share (Art. 1797)

d) As to losses:

1. Capitalists
a. first, the stipulation as to losses
b. if none, the agreement as to profits
c. if none, pro-rata to contribution

2. The industrial partner is exempted as to losses (as between the partners). But is liable to
strangers, without prejudice to reimbursement from the capitalist partners. (Art. 1816)

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