Chapter 1: NATURE OF A PARTNERSHIP

A partnership is a contract between two or more persons who bind themselves to contribute money,
property or industry to a common fund, with the intention of dividing the profits among
themselves.

CHARACTERISTICS OF A PARTNERSHIP
1. Essentially a contract. A partnership is a contract, which may be entered into by any competent
person upon an oral or written agreement.
2. Voluntary Association. Since partnership is a contract, the contracting parties should voluntarily
enter it into.
3. Mutual agency. Each partner is an agent of the partnership. Therefore, a partner, acting within
the scope of the operations of the business, may bind the partnership and make it liable to third
parties.
4. Limited life. A partnership contract is dependent upon the willingness of the parties to continue
the partnership. Consequently, if any partner withdraws from the partnership or a new partner is
admitted, the partnership is dissolved and a new one formed.
5. Unlimited liability. Each partner, except for the limited partner, is individually liable for all the
debts of the business. This means that if the assets of the business are not enough to pay for its
liabilities, then the assets of the partners, other than those already contributed to the partnership,
may be used to satisfy such liabilities after paying his personal liabilities.
6. Co-ownership of contributed assets. All assets invested in the business become the assets of
the business entity jointly owned by the partners. A partner gives up his right as the sole owner of
the asset he contributed to the partnership.
7. Separate legal personality. A partnership is considered a juridical person, separate and distinct
from its owners. It is given personality by law, which enables it to acquire and dispose properties
and to incur and liquidate liability in its own name, just like any natural person. Its assets and
liabilities should be treated as separate and distinct from those of the owners.
8. Participation in profits and losses. All partners are entitled to share in the profits of the
partnership. Losses should also be borne by all partners with the exception of the industrial partner.

ADVANTAGES OF A PARTNERSHIP
1. A partnership is easier to organize than a corporation.
2. A partnership provides for the combination of capital and human resources, whereas a single
proprietorship is limited to that of one person only.
3. A partnership retains the personal character of the partners. This makes it a suitable form of
business organization for the practice of a profession. Many professionals like certified public
accountants and lawyers organize themselves into partnerships in the practice of their profession.

DISADVANTAGES OF A PARTNERSHIP
1 The character of mutual agency of a partnership maybe considered as a disadvantage. This makes
the partnership liable for the unscrupulous and wrongful acts of a partner.
2. Uncertainties regarding its limited life may hamper the establishment of long-term goals.
Furthermore, profitable operations may be disrupted or stopped due to the withdrawal, incapacity
or death of a partner.
3. Due to its character of unlimited liability, the business risk of each investor is not limited to his
capital contribution. (Unless such investor is a limited partner) but extends even to assets not
contributed to the partnership.

KINDS OF PARTNERSHIP
1. AS TO OBJECT
A. Universal Partnership.
1. Universal partnership of all present property — one 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.
2 Universal partnership of 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.
B. Particular Partnership — one which has for its objects determinate things, their use or fruits,
or a specific undertaking, or the exercise of a profession or vocation.
2. AS TO LIABILITY

A. General Partnership — is one wherein all the partners are general partners who are
liable for all partnership debts.
 B. Limited Partnership — is one where there is at least one general partner and at least
one limited partner, with the limited partner not being liable for partnership debts except to the
extent of his contribution
3. AS TO DURATION
A. Partnership at will — or one in 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 any one partner alone.
B. Partnership with a fixed term - one in which the term for which the partnership is to
exist is agreed upon or one formed for a particular undertaking, and upon expiration of the term or
completion of the particular enterprise, the partnership is dissolved, unless continued by the
partners.
4. AS TO PURPOSE
A. Professional partnership - a partnership formed for the exercise of a profession such
as a law or accounting firm.
B. Commercial partnership - a partnership formed for business or commercial
undertakings such as the buying and selling of goods or the manufacturing and selling of goods.
5. AS TO LEGALITY OF ITS EXISTENCE
A. De jure partnership - one which has complied with all the legal requirements for its
establishment.
B. De facto partnership - one which has failed to comply with all the legal requirements
for its establishment.

KINDS OF PARTNERS
1. AS TO LIABILITY
A. General Partner - is one who is liable for the liabilities of the partnership up to the extent
of his personal assets or those not contributed to the partnership when all the partnership
assets shall have been exhausted.
B. Limited Partner — is one who is liable for partnership liabilities up to the extent of his
capital contribution only.
2. AS TO CONTRIBUTION
A. Capitalist partner --is one who contributes money or property into the partnership.
B. Industrial partner — is one who contributes his work, labor or industry to the
partnership.
 C. Capitalist-Industrial partner — is one who contributes either money or property and
industry to the partnership.
3. AS TO PARTICIPATION IN MANAGEMENT
A. Managing partner — is one who manages the affairs of the partnership.
B. Silent partner — is one who is not actively involved in the conduct of the business of
the partnership.

PARTNERSHIP FORMATION
A partnership is formed by an oral or written agreement. Although an oral agreement is sufficient
for its formation, whenever the capital of the partnership is P 3,000 or more, in money or in
property, a written contract called the Articles of Co-Partnership must be registered with the
Securities and Exchange Commission.
The articles of co-partnership which governs the formation, operation and dissolution of the
partnership contains the following information:
1. The name of the partnership
2. The names, addresses of the partners
3. The classes of partners stating whether they are general or limited partners
4. The principal place of office and the purpose or purposes of the partnership.
5. The effective date of the contract and the duration of the partnership.
6. The capital of the partnership, indicating the contributions
7. The method of maintaining the accounting records
8. Duties and rights of each partner
9. The conditions under which the partners may withdraw cash and other assets of the partnership
for personal use
10. The salary to be given each partner and the manner of distribution of profits and losses.
11. Responsibility for signing checks and contracts.
12. Provisions for the withdrawal of a partner and procedure OF dissolution of the partnership.
The purpose of registration with the Securities and Exchange Commission is necessary for the
issuance of license to engage in business. Failure to register does not prevent the formation of the
partnership or affect its liability and that of the partners to third persons.
ACCOUNTING FOR PARTNERSHIPS
The accounting principles and procedures for assets, liabilities, revenue and expenses are the same
whether the business is organized as a sole proprietorship, partnership or corporation.
The principal distinction lies in accounting for capital investments, withdrawals, and distribution
of profit and loss, dissolution and liquidation.

PARTNERS' CAPITAL AND DRAWING ACCOUNTS Only one person owns a sole
proprietorship. Therefore, only a single capital and drawing account is maintained in recording the
changes in equity of the owner. Two or more persons jointly own a partnership. Therefore, there
should be as much capital and drawing accounts, as there are partners.
The partners' capital and drawing accounts are used in the same manner as that of a sole
proprietorship. Each partner's capital account is credited for the original investment, and any
additional investment made subsequently throughout the life of the partnership, and any permanent
increases in capital due to net income from business operations. It is debited for any permanent
decrease in capital due to withdrawal of capital by the partner or due to net loss from operations.
Each partner's drawing account is debited for his personal withdrawal of cash or other assets and
his share in partnership losses. It is credited for his share in partnership profit.
The following "T" accounts summarizes the rules on debit and credit for the partners' capital and
drawing accounts:
PARTNER'S CAPITAL
DEBIT CREDIT
1. PERMANENT WITHDRAWAL OF 1. ORIGINAL INVESTMENT
CAPITAL
2. SHARE IN PARTNERSHIP LOSSES 2. ADDITIONAL INVESTMENT
3. DEBIT BALANCE IN DRAWING 3. SHARE IN PARTNERSHIP PROFITS
ACCOUNT
CLOSED TO THE CAPITAL ACCOUNT 4. CREDIT BALANCE OF DRAWING
ACCOUNT
CLOSED TO THE CAPITAL ACCOUNT

PARTNER'S DRAWING
DEBIT CREDIT
1. SHARE IN PARTNERSHIP LOSSES 1. SHARE IN PARTNERSHIP PROFITS
(may be directly debited to the capital account) (may be credited to the capital account)
2. TEMPORARY WITHDRAWAL OF
CAPITAL TO BE CHARGED AGAINST
SHARE OF FUTURE PROFITS
PARTNERS' LOAN ACCOUNT
A partner may also lend money to the partnership when it is in need of additional funds. Since the
partner's intention is to lend money to the Partnership and not to make additional investments, it
should be recorded as a liability of the partnership. In the event the partnership is dissolved and
liquidated, his loan should be paid first before any payment is made to satisfy the capital
contribution of the partners. However, his loan to the partnership is also distinguished from other
liabilities and should be paid only after the outside creditors have been paid.
A partner may also borrow money from the partnership. Since the intention of the partner is to
borrow and not withdraw money from the partnership, it should be recorded as a receivable of the
partnership and not as a withdrawal of capital. Upon liquidation of the partnership, a receivable
from a partner should be charged against his capital balance if he is unable to pay the loan from
his own resources.
NAME: Date:
PROFESSOR: Score:
1. A partnership wherein all the partners are general partners who are liable for all the
partnership debts.
2. A partner who contributes money or property into the partnership
3. 3. The formal written partnership agreement registered with the Securities and Exchange
Commission.
4. A partner liable for partnership liabilities up to the extent of his capital contribution only
5. A partnership formed for the exercise of a profession such as a law or accounting firm.
6. A partner who contributes his work, labor or industry to the partnership.
7. A partnership which has complied with all the legal requirements for its establishment.
8. Each partner, except for the limited partner, is individually liable for all the debts of the
business.
9. Each partner is an agent of the partnership.
10. A contract between two or more persons who bind themselves to contribute money,
property or industry to a common fund with the intention of dividing the profits among
themselves.