15

Partnerships:
Formation,
Operation, and
Changes
in Membership

Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin 15-1
 Overview
• Accounting for partnerships requires
recognition of several important factors
– From an accounting viewpoint, the
partnership is a separate business entity
– Accrual accounting, cash basis accounting,
or modified cash basis of accounting are
allowed

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 Nature of Partnership Entity
• Legal regulation
– Each state regulates the partnerships that
are formed in it
– Each state tends to begin with a model act
and then modifies it to fit that state’s
business culture and history
– Most states have now adopted the Uniform
Partnership Act of 1997 (UPA 1997) as the
model act

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 Nature of Partnership Entity
• Definition of a partnership
– Association of two or more persons – The “persons”
may be individuals, corporations or other partnerships
– To carry on as co-owners – Each partner has the
apparent authority, unless restricted by the partnership
agreement, to act as an agent of the partnership for
transactions in the ordinary course of business
– Business for profit – The partnership must attempt to
make a profit; therefore, not-for-profit entities, such as
fraternal groups, may not organize as partnerships

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 Nature of Partnership Entity
• Definition of a partnership
– Partnership is defined in Article 1767 of the Civil Code
of the Philippines as “a contract whereby two or more
persons binds themselves together to contribute
money, property or industry to a common fund with the
intention of dividing profits among themselves.”

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 Nature of Partnership Entity
• Formation of a partnership
– Easy to form
– The agreement to form a partnership may
be informal or formal
– Each partner must agree to the formation
agreement, and partners are strongly
advised to have a formal written agreement
to avoid potential problems later

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 Nature of Partnership Entity
CHARACTERISTICS OF A PARTNERSHIP
1. Mutual Agency - any partner may act as
agent of the partnership in conducting its
affairs
2. Unlimited Liability - the personal assets
(assets not contributed to the partnership) of
any partner may be used to satisfy the
partnership creditors’ claims upon
liquidation, if partnership asset are not
enough to settle the liabilities to outsiders. 15-7
Nature of Partnership Entity
CHARACTERISTICS OF A PARTNERSHIP
3. Limited life –  a partnership may dissolve at
any time by action of the partners or operation
of law.
4. Legal entity –  a partnership has legal
personality separate and distinct from that of
each of the partners.
5. Co-ownership of contributed assets – 
 Property contributed to the partnership are
owned by the partnership by virtue of its
separate legal personality.
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Nature of Partnership Entity
CHARACTERISTICS OF A PARTNERSHIP
6. Income tax – partnership, except general
professional partnerships (i.e., those
organized for the exerciseof professions like
CPAs, lawyers, engineer, etc.) are subject to
the 30% income tax.

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 Advantages
1. It is easy and inexpensive to organize, as it isformed by a simple
contract between two ormore persons.
2. The unlimited liability of the partners makes itreliable from the point
of view of the creditors.
 3. The combined personal credit of the partnersoffers better
opportunity for obtainingadditional capital than does a
sole proprietorship.
 4. The participation in the business by more thanone person makes it
possible for a closersupervision of all the partnership activities.
 5. The direct gain to the partners is an incentiveto give close attention
to the business.
 6. The personal element in the characters of the partners is retained.

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 Disadvantages
1. The personal liability of a partner for fromdeters many from investing
capital in a partnership.

 2. A partner may be subject to personal liabilityfor the wrongful acts or

omissions of his/herassociates.

 3. It is less stable because it can easily bedissolved.

 4. There is divided authority among the partners.

 5. There is constant likelihood of dissension anddisagreement when

each of the partners has the same authority in the management of the
firm.

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 Kinds of Partners
1. As to Activity
a. Trading partnership – one whose main activity is the manufacture
and sale or the purchaseand sale of goods,
b. Non-trading partnership – one which is organized for the purposed
of
rendering services.
2. As to Object
a. Universal partnership
i. Universal partnership of all present property – All assets
contributed to the partnership and subsequent acquisitions become
common partnership assets
  ii. Universal partnership of all profit – Partnership assets consist of
assets acquired duringthe life of the partnership and only the usufruct
or use of assets contributed at the time of partnership formation. The
original movable or immovable property contributed do not become
common partnership assets. 15-12
 Kinds of Partners
Cont.
2. As to Object
 b. Particular partnership  – one which has for its object determinate
things, their use or fruits or aspecific undertaking or the exercise of a
profession or vocation.

3. As to liability of Partners
a. General Co-partnership - one consisting of general partners who
are liable prorata and sometimes solidarily with their separate property
for partnership liabilities.
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 obligations of the
partnership.

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 Kinds of Partners
Cont.
4. As to duration
 a. Partnership at will - one for w/c no term is specified and is not
formed for a particular undertaking or venture and which may be
terminated anytime by mutual agreement of the partners or the will of
one alone.
b. Partnership with a fixed term - one in which the term or period for
w/c the partnership is to exist is agreed upon. It may also refer to a
partnership formed for a particular undertaking and upon the expiration
of that term or completion of the particular undertaking the partnership
is dissolved; unless continued by the partners.

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 Kinds of Partners
Cont.
5. As to presentation to others
 a. Ordinary Partnership - one w/c actually exists among the partners
and also as to third person.
b. Partnership by Estoppel - one which in reality is not a partnership
but is considered as one only in relation to those who, by their conduct
or omission are precluded to deny or disproved the partnership's
existence.
6. As to Legality of existence
a. De jure Partnership - one w/c has complied with all the requirement
for its establishment.
b. De facto Partnership - one which failed to comply with one or more
of the legal requirements for its establishment.

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 Kinds of Partners
Cont.
7. As to Publicity
 a. Secret Partnership - one wherein the existence of certain persons
as partners is not made known to the public by any of the partbners.
b. Open Partnership - one wherein the existence of certain persons as
partners is made known to the public by the members of the firms.

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 Classes of Partners
1. As to Contribution
 a. Capitalist Partner - one who contributes capital in cash (money) or
property.
b. Industrial Partner - one who contributes industry, labor, skill, talent
or service.
c. Capitalist-industrial Partner - one who contributes cash, property
and industry.
2. As to Liability
a. General Partner - one whose liability to 3rd persons extends to his
separate (private) property.
b. Limited Partner - one whose liability to 3rd persons is limited only to
the extent of his capital contribution to the partnership.

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 Classes of Partners
3. As to Management
 a. Managing Partner - one who manages actively the business of the
partnership.
b. Silent Partner - one who does not participate in the management of
the partnership affairs.
4. Other Classifications
a. Liquidating Partner - one who take charge of the winding up of
partnership affairs upon dissolution.
b. Nominal Partner - 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.
c. Ostensible Partner - one who takes active part in the management
of the firm and is known to the public as a partner in the business.

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 Classes of Partners
4. Other Classifications
d. Secret Partner - one who takes active part in the management of
the business but whose connection with the partnership is concealed
or unknown to the public.
e. Dormant Partner - one who does not take active part in the
management of the business and is not known to the public as a
partner; he is both a silent and a secret partner.

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 Partnership Contract
A partnership is created by an oral or a written agreement.

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