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Article 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.
It is both:
1. A contract (Article 1768) and;
2. A business organization.
a. It is a juridical entity which has a personality separate and distinct from that of each of the partners. (Art. 1768). It
begins from the moment of the execution of the contract, unless it is otherwise stipulated (Art. 1784).
CHARACTERISTICS OF A CONTRACT OF PARTNERSHIP
1. Consensual – it is perfected by mere consent
2. Principal – it does not depend upon any other contract for its validity or existence.
3. Bilateral – it is entered into by two or more persons whose rights and obligations are reciprocal.
4. Nominate – it has a special name given to it by law.
5. Preparatory - it is a means by which the other contracts will be entered into as the partnership pursues its business.
6. Onerous – The partners contribute money, property or industry to a common fund.
ESSENTIAL REQUISITES OF PARTNERSHIP
1. There must be a valid contract.
a. Article 1305. A contract is a meeting of minds between two persons whereby one binds himself, with respect to
the other, to give something or to render some service.
b. Delectus Personae – No one can become a member of the partnership association without the consent of all the
other associates.
2. There must be a mutual contribution of money, property or industry to a common fund.
3. It must have a lawful object or purpose.
4. The partnership must be established for the common benefit or interest of the partners which is to obtain profits and to
divide the profits among the partners.
a. However, if a partnership is formed for the practice of a profession, its primary purpose is not to obtain profits but
to render service to the public.
FORM OF PARTNERSHIP CONTRACT
1. Where immovable property or real rights are contributed to the partnership (regardless of the amount thereof)
a. The partnership contract must be in a public instrument;
b. An inventory of the said property must be made signed by the parties and attached to the public instrument.
i. Effect if the above requirements are not complied with
1. The partnership contract is void.
2. The partnership will not have any juridical personality
2. Where the capital of the partnership is 3,000 or more, in money or property
a. The partnership contract must be in a public instrument;
b. Registered with the Securities and Exchange Commission
i. Effect if the above requirements are not complied with
1. The partnership contract is valid
2. The liability of the partnership and the members thereof to third persons are not affected
3. If the partnership is a limited partnership, a certificate signed under oath by the partners and recorded with the Securities
and Exchange Commission is required.
i. Effect if requirements are not complied with
1. The partnership will be considered as general partnership
WHO MAY BECOME PARTNERS
1. Any natural person who is capacitated may become a partner.
a. The following persons cannot give their consent to a contract of partnership:
i. Unemancipated minors (emancipation takes place by the attainment of majority)
ii. Insane or Demented Persons
iii. Deaf-mutes who do not know how to write
iv. Persons who are suffering from civil interdiction (mental incapacity)
v. Incompetents who are under guardianship
2. A partnership may enter into another partnership with individuals or other partnerships as there is no prohibition thereto.
However, a corporation is prohibited from doing such.
RULES TO DETERMINE WHETHER A PARTNESHIP EXISTS – Article 1769
1. Persons who are not partners as to each other are not partners as to third persons except when a person represents
himself or consents to another representing him to anyone, as a partner in an existing partnership or with one or more
persons not actual partners (partners by estoppel-Article 1825).
2. Co-ownership or co-possession does not 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 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 a prima facie evidence that he is a partner in the
business.
a. EXCEPTIONS: No such inference shall be drawn if such profits were received in payment: (DRAWInG)
i. Debt by installment or otherwise
ii. Rent to a landlord
iii. Annuity to a widow or representative of a deceased partner
iv. Wages of an employee
v. Interest on loan, though the amount of payment vary with the profits of the business
vi. Consideration for the sale of Goodwill of a business or other property by installment or otherwise.
KINDS OF PARTNERSHIP
1. AS TO OBJECT
a. Universal Partnership – it may either be a universal partnership of all present property or a universal partnership
of profits (Article 1777)
i. Universal Partnership of all Property – partnership in which all the partners contribute all the property
which actually belonged to them to the common fund, with the intention of dividing the same among
themselves, as well as the profits which they acquire therewith. (Article 1778)
1. Property which belong to the common fund
a. Property belonging to the partners at the time of the constitution of the partnership
(present property).
b. Profits that may be acquired from the present property
c. Property acquired by each partner after the formulation of the partnership but only if
stipulated. (Article 1779) This property shall include:
i. The property itself except that the stipulation shall not include property acquired
by inheritance, legacy, or donation.
ii. The profits and fruits therefrom including those from property acquired by
inheritance, legacy or donation.
ii. Universal Partnership of Profits – this comprises all that the partners may acquire by their work or
industry during the existence of the partnership. (Article 1780)
1. Profits/Property which shall belong to the partnership
a. Profits obtained by the partners by their work or industry during the existence of the
partnership. Accordingly, profits acquired by the partners without the exertion of physical
or intellectual efforts, such as those acquired by chance or lucrative title is excluded.
b. The usufruct of the property belonging to each partner at the time of the constitution of
the partnership.
c. The profits and fruits from the properties aforementioned (items “a” and “b”)
d. Profits and fruits, if stipulated, of property acquired by each partner after the constitution
of the partnership.
RULES IN CASE UNIVERSAL PARTNERSHIP IS WITHOUT ANY SPECIFICATION
1. Articles of universal partnership entered into without specification of its nature, only constitute
a universal partnership of profits. (Article 1781)
PROHIBITION TO ENTER INTO A UNIVERSAL PARTNERSHIP – Article 1782
1. Donations between spouses during the marriage except moderate gifts on the occasion of a
family rejoicing. These prohibitions apply to persons living as husband and wife without the
benefit of marriage. (Article 87, Family Code)
2. Those made between persons who were guilty of adultery or concubinage at the time of
donation. (Article 739)
3. Those made between two persons who found guilty of the same criminal offense, in
consideration thereof. (Article 739)
4. Those made to a public officer or his wife, descendants or ascendants by reason of his office.
b. Particular Partnership – a particular partnership has for its object determinate things, their use or fruits, or for a
specific undertaking, or the exercise of a profession. (Article 1783)
2. AS TO LIABILITY
a. General Partnership – partnership where all the partners are general partners who are liable to the extent of their
separate property after the partnership assets have been exhausted.
b. Limited Partnership – a partnership where there is at least one general partner and at least one limited partner.
3. AS TO DURATION
a. Partnership for a fixed term – one for which a period for its duration is fixed by the partners.
b. Partnership for a particular undertaking – one which is organized for a certain undertaking which, when
attained, will cause the termination of the partnership.
c. Partnership at will – one where no period is fixed by the parties for its duration; hence, may be terminated at will
by the partners.
i. If a partnership for a fixed term or a particular undertaking is continued after the expiration of the said
term or the attainment of the said undertaking without any express agreement, the partnership becomes a
partnership at will. The continuation of the business in such a case has the following effects:
1. The rights and duties of the partners remain the same as they were at such termination, so far as
is consistent with a partnership at will
2. The absence of settlement or liquidation of partnership affairs is a prima facie evidence of the
continuation of the partnership.
4. AS TO REPRESENTATION TO OTHERS
a. Ordinary Partnership – one which actually exists among the partners as well as to third persons
b. Partnership by Estoppel – one which in reality is not a partnership but is considered as one with respect to those
who, by reason of their conduct or admission, are precluded from denying its existence. (Article 1825) A
partnership by estoppels may arise through any of the following means:
i. When a person represents himself as a partner in an existing partnership
1. If all the partners consent to such misrepresentation, a “partnership by estoppels” is created
between the actual persons who made a representation. Here, a partnership liability results.
Thus, the assets of the partnership shall be used to pay the liability and after their exhaustion,
both the actual partners and the person who made the misrepresentation shall be liable with their
separate properties.
2. If not all the partners consented to the misrepresentation, no partnership liability results. A
partnership by estoppels is created among the actual partners who consented to the
misrepresentation and the person who made the representation, each one of whom shall be
liable jointly or pro-rata with their separate properties.
ii. When a person represents himself as a partner in a non-existing partnership
1. No partnership liability arises but the person who made the representation an all persons who
consented to it are liable jointly or pro-rata.
KINDS OF PARTNERS
1. AS TO LIABILITY
a. General partner – one who is liable for partnership debts to the extent of his separate property after all the assets
of the partnership have been exhausted.
b. Limited partner – one who is liable for partnership debts to the extent of his capital contribution only
c. General-limited partner – one who has all the rights and powers and is subject to all the restrictions of a general
partner, except that, in respect to his contribution, he shall have the rights against the other members which he
would have had if he were not also a general partner. (Article 1853) He shall be liable pro-rata to partnership
creditors to the extent of his separate assets after the partnership assets have been exhausted, but he can
demand reimbursement of the amount he paid from his co-partners.
2. AS TO CONTRIBUTION
a. Capitalist partner – one who contributes money or property to the common fund.
b. Industrial partner – one who contributes his services or industry to the partnership. Such industry may be
physical or intellectual industry.
c. Capitalist-industrial partner – one who contributes not only money or property but also his services to the
partnership.
3. OTHER CLASSIFICATIONS
a. Managing partner – one who manages the business or the affairs of the partnership
b. Liquidating partner – one who takes charge of the winding up of the affairs of the partnership after it is dissolved.
c. Nominal partner – one who is not actually a partner but who may become liable as such to third persons.
d. Ostensible partner – one who is active and known to the public as a partner, such as by allowing his name to be
included in the firm name.
e. Secret partner – one whose connection with the partnership is kept from the public
f. Silent partner – one who has no voice in the management of the business
g. Dormant partner – a partner who does not participate in the management of the business and not known to the
public as a partner.
RULES ON DIVISION OF PROFIT AND LOSS (Article 1797)
1. If all are capitalist partners
a. Profits and losses shall be divided accordingly to their agreement.
b. If only the sharing of the partners in the profits has been agreed upon, the share of each partner in the losses
shall be in the same proportion as the share of each in the profits.
c. In the absence of both, the share of each partner in the profits and losses shall be in proportion to his capital
contribution.
2. If aside from the capitalist partners, there is also an industrial partner (or there are industrial partner)
a. Profits
i. The profits shall be divided according to their agreement
ii. In the absence of any agreement thereon, the industrial partner shall first receive a just and equitable
share of the profits, and thereafter, each capitalist partner shall share in the profits in proportion to his
capital contribution.
b. Losses
i. The industrial partner shall not share in the losses as follows:
1. According to their agreement
2. In the absence of any agreement thereon, each capitalist partner shall share in the losses in the
same proportion as the share of each in the profits.
3. In the absence of both, each capitalist partner shall share in the losses in proportion to his capital
contribution.
3. If aside from capitalist partners, there is also a capitalist-industrial partner
a. Profits
i. The profits shall be divided according to their agreement
ii. In the absence of any agreement thereon, profits shall be divided as follows:
1. The capitalist-industrial partner shall first receive a just and equitable share of the profits in his
capacity as industrial partner
2. Thereafter, each capitalist partner, including the capitalist-industrial partner in his capacity as a
capitalist partner, shall share in the profits in proportion to his capital contribution.
b. Losses
i. Losses shall be divided among the partners, including the capitalist-industrial partner in his capacity as
capitalist partner according to their agreement
ii. In the absence of any agreement thereon, losses shall be divided among the partners including the
capitalist-industrial partner in his capacity as capitalist partner, according to the ratio of their capital
contribution.
iii. In both of the above cases, the capitalist-industrial partner shall not share in the losses in his capacity as
industrial partner.
DESIGNATION OF SHARE IN THE PROFITS AND LOSSES BY A THIRD PERSON OR BY A PARTNER
1. If entrusted by the partners to a third person
a. The same shall be binding upon the partners and may be impugned only when it is manifestly inequitable.
However, even if such designation by a third person is manifestly inequitable, it can no longer be impugned:
i. by a partner who has begun to execute it; or
ii. by any partner if three months had already lapsed from the time he obtained knowledge thereof
b. If entrusted to one of the partners
i. The designation is void because it cannot be entrusted to one of the partners (Article 1798). Accordingly,
the profits and losses shall be divided among the partners as if there was no stipulation thereon.
RULES OF MANAGEMENT

 When a partner has been appointed manager in the articles of partnership


o Scope of Authority
 The managing partner may execute all acts of administration despite the opposition of his partners unless
he acts in bad faith
o Revocation of appointment as managing partner
 With just or lawful cause – his appointment can be revoked by the vote of the partners owning the
controlling interest.
 Without just or lawful cause – his appointment can be revoked only with the consent of all the partners
including the managing partner because such revocation would be a novation of the terms thereof.
 When a partner has been appointed manager after the partnership has been constituted
o Scope of Authority
 He may execute all acts of administration but in case of opposition by the other partners, the partners
owning the controlling interest may resort to voting for his removal as manager.
o Revocation of his appointment as managing partner
 He may be removed with or without just or lawful cause by the vote of the partners owning the controlling
interest. (Article 1800) This is so because such partner is only an agent whose authority may be revoked
at any time by his principal which is the partnership
 When two or more partners have been appointed as managers
o When there is a specification of their respective duties
 Scope of Authority
 Each managing partner shall perform only the duties specified in his appointment
o When there is no specification of their respective duties or there is no stipulation that one shall not act without the
consent of the others.
 Scope of Authority
 Each one may separately execute all acts of administration
 Rule in case of opposition of the other managers
 The decision of the majority of the managing partners shall prevail
 In case of a tie, the decision of the managing partner/s owning the controlling interest shall prevail
o When there is a stipulation that none of the managing partners shall act without the consent of the others
 Vote required
 The concurrence of all of them shall be necessary for the validity of the acts
 Rule in case of absence or disability of one of the managing partners
 The absence or disability of one managing partner cannot be alleged, i.e, the other managing
partners are not authorized to act for the partnership unless there is imminent danger of grave or
irreparable injury to the partnership.
 When the manner of management has not been agreed upon
o All of the partners shall be considered agents of the partnership, i.e, all of them are managers
 However, none of them may, without the consent of the others, make any important alteration in the
immovable property of the partnership, even if it may be useful to the partnership. But if the refusal to give
consent by the other partners is manifestly prejudicial to the interest of the partnership, the court’s
intervention may be sought.
 Whatever any one of them may do alone shall bind the partnership
 Rule in case of opposition of the other partners
 The decision of the majority shall prevail
 In case of a tie, the decision of the partners owning the controlling interest shall prevail.
RIGHTS OF PARTNERS TO ENGAGE IN BUSINESS
1. Industrial partner
a. General Rule and Exception
i. An industrial partner cannot engage in business for himself unless the partnership expressly permits him
to do so. (Article 1789) This prohibition applies even if the business is of a kind different from the
partnership business.
b. Reason for the Prohibition
i. The partnership is the owner of the services of the industrial partner, which is his contribution to the
common fund of the partnership. (Article 1789)
c. Effect if the industrial partner engages in business for himself without the express permission of the partnership
i. The capitalist partners may either:
1. Exclude him from the partnership, with a right to damages, or
2. Avail themselves of the benefits obtained from the business he engaged in, with a right to
damages (Article 1789)
2. Capitalist partner
a. Kind of business a capitalist partner may engage in
i. A capitalist partner may engage in business for his own account in the following:
1. The business will engage in is of a kind different from the partnership business
2. The business he will engage in is of the same kind as the partnership business, but there is a
stipulation allowing him to engage in that business.
b. Reason for the prohibition to engage in the same kind of business
i. The capitalist partner will be unfairly competing with the partnership business by reason of the information
he has obtained from the partnership business
c. Effect if a capitalist partner engages in the same kind of business without a stipulation allowing him to engage in
that business
i. The capitalist partner shall bring to the common fund any profits accruing to him from his transaction, and
ii. He shall personally bear all the losses (Article 1808)
RULES ON SHARING OF PARTNERSHIP LIABILITIES TO THIRD PERSONS
1. Nature of Liability
a. Pro rata – the liability of the partnership shall be equally divided among the partners.
b. Subsidiary – each partner shall be liable with his separate property after all assets of the partnership have been
exhausted.
2. Partners liable
a. All general partners whether
i. Capitalist Partner, or
ii. Industrial Partner
3. Status of stipulation exempting a partner from pro rata and subsidiary liability after the exhaustion of partnership assets
a. Void as to third persons
b. Valid among the partners (Article 1817)
QUESTIONS TO ANSWER:
MODIFIED TRUE OR FALSE
1. Partnership is a contract where one or more persons bind themselves to contribute money, property or industry to a
common fund with the intention of dividing the profits among themselves.
2. Real, Principal, Preparatory, Nominate, Bilateral and Onerous are the characteristics of a contract of partnership.
3. The partnership contract is valid 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.
4. 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. The partnership
contract is valid.
5. If the partnership has the minimum capital mentioned in No. 4, but the contract is not in a public instrument or the same is
not recorded with the SEC, the partnership is still valid.
ESSAY
1. X, Y and Z formed a partnership to which they contributed a total capital of P30,000.00. The partnership is not registered
with the Securities and Exchange Commission. Does the partnership have a juridical personality?