Partnership

PARTNERSHIP

THREE BASIC LEGAL FORMS OF BUSINESS

Single Proprietorship

Partnership

Corporation

SINGLE PROPRIETORSHIP

The oldest, simplest, and most common legal form of business.

A single person has the controlling interest and is responsible for the firm’s policies, owns all its assets, and is personally liable for its debts.

SINGLE PROPRIETORSHIP-ADVANTAGES

Ease of formation, control, and the manner in which it is taxed.

Few legal and organizational requirements associated with setting up a proprietorship – organizational costs are very low.

SINGLE PROPRIETORSHIP-ADVANTAGES

Owner has total control of the business

Earnings of the business are taxed at individual income tax rates which are lower than corporate tax rates

SINGLE PROPRIETORSHIP-DISADVANTAGES

Unlimited personal liability

Limited access to funds

Limited lifetime

PARTNERSHIP - ADVANTAGES

Low cost and ease of formation

Ability to raise a larger amount of capital

Greater creditworthiness

PARTNERSHIP - DISADVANTGES

Unlimited liability Limited lifetime Taxed in the same manner as a corporation

CORPORATION Limited liability

Unlimited life

Transferability of ownership

PARTNERSHIP DEFINED

Contract whereby two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing profits among themselves (Art. 1767)

CHARACTERISTICS Consensual Bilateral/multilateral Nominate Principal Onerous Preparatory

ELEMENTS Contribution of money, property or industry

to a common fund Object must be lawful Intention of dividing the profit among the

partners Desire to form an active union New personality must arise, distinct from

each partner.

PARTNERSHIP V. CORPORATION

DISTINGUISHING FACTOR

PARTNER-SHIP

CORPORA-TION

How created Voluntary agreement

Operation of law

How long it exists No time limit except upon agreement of parties.

Not more than 50 years.



PARTNER-SHIP

CORPORA-TION

Liability to strangers

May be liable with their private property beyond the contribution to the firm.

Liable only for payment of their subscribed capital stock.



PARTNER-SHIP

CORPORA-TION

Transferability of interest

No person can become a partner without the consent of all other partners.“delectus personarum” or the principle of mutual trust and confidence.

Transfer of interest makes the transferee a stockholder, even without the consent of the others.



PARTNER-SHIP

CORPORA-TION

Ability to bind the firm

Generally, partners acting on behalf of the partnership are agents thereof; consequently, they can bind both the firm and the partners.

Generally, the stockholders cannot bind the corporation since they are not agents thereof.



PARTNER-SHIP

CORPORA-TION

Mismanagement A partner can sue a partner who mismanages.

A stockholder cannot sue a member of the board of directors who mismanages: the action must be in the name of the corporation.



PARTNER-SHIP

CORPORA-TION

Nationality A partnership is a national of the country it was created.

A corporation is a national of the country under whose laws it was incorporated, except for wartime purposes.



PARTNER-SHIP

CORPORA-TION

Attainment of legal personality

The firm becomes a juridical person from the time the contract begins.

The firm becomes a juridical person from the time it is registered with SEC and all requisites have been complied with.



PARTNER-SHIP

CORPORA-TION

Dissolution Death, retirement, insolvency, civil interdiction, or insanity of a partner dissolves the firm.

Such causes do not dissolve a corporation.

PARTNERSHIP V. CO-OWNERSHIP


PARTNER-SHIP

CO-OWNERSHIP

CREATION Created by contract only (express or implied)

Created by contract, law, and other things



PARTNER-SHIP

CO-OWNERSHIP

JURIDICAL Has legal or juridical personality

Has no juridical personality (hence, it cannot sue or be sued as such).



PARTNER-SHIP

CO-OWNERSHIP

PURPOSE For profit Collective enjoyment; (hence, not necessarily for profit)



PARTNER-SHIP

CO-OWNERSHIP

AGENCY OR REPRESENTATION

As a rule, there is mutual representation

As a rule, there is no mutual representation (although it is enough for one co-owner to bring an action for ejectment against a stranger.



PARTNER-SHIP

CO-OWNERSHIP

TRANSFER OF INTEREST

Cannot substitute another as partner in this place, without unanimous consent.

Can dispose of his share without the consent of the others.



PARTNER-SHIP

CO-OWNERSHIP

LENGTH OF EXISTENCE IF CREATED BY CONTRACT

No term limit is set by the law.

Must not be for more than 10 years (although agreement, after termination may be renewed) (hence, if more than 10 years the excess is void)



PARTNER-SHIP

CO-OWNERSHIP

PROFITS May be stipulated upon

Profits must always depend on proportionate shares (any stipulation to the contrary is VOID)



PARTNER-SHIP

CO-OWNERSHIP

DISSOLUTION Dissolved by death or incapacity of a partner

Not dissolved by the death or incapacity of co-owner.



PARTNER-SHIP

CO-OWNERSHIP

FORM May be made in any form except when real property is contributed (Here public instrument is required).

No public instrument needed even if real property is the object of the co-ownership.

CAPACITY TO BECOME PARTNER

A person capacitated to enter into contractual relations may become a partner.


A unemancipated minor cannot become a partner unless his parent or guardian consents. Without such consent, the partnership contract is voidable, unless other partners are in the same situation, in which case the contract is unenforceable.


A partnership being a juridical person by itself can, it is believed, form another partnership, either with private individuals or with other partnerships, there being no prohibition on the matter.


The majority view is that a corporation cannot become a partner on grounds of public policy, otherwise people other than its officers may be liable to bind it.

SEPARATE JURIDICAL PERSONALITY

ART. 1768

The partnership has a

JURIDICAL PERSONALITY

SEPARATE AND DISTINCT

from that of each of the partners.


CONSEQUENCES:

The partnership can:

a)Acquire and possess property of all kinds;

b)Incur obligations


CONSEQUENCES:

The partnership can:

c)Bring civil or criminal actions; and

d)Can be adjudged INSOLVENT even if the individual members be each financially solvent


Hongkong & Shanghai Bank v Jurado & Co, 2 Phil 671

Unless he is personally sued, a partner has no right to make a separate appearance in court, if the partnership being sued is already represented.

TESTS TO DETERMINE EXISTENCE OF PARTNERSHIP

ART. 1769

1)Persons who are not partners as to each other are not partners as to third persons (exception: Partners by estoppel, Art. 1825)


ART. 1769

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;


ART. 1769

3)The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived;


ART. 1769

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;


ART. 1769

NO INFERENCE OF PARTNERSHIP IN THE FOLLOWING CASES:

When profits were received in payment:


ART. 1769


a)As a debt by installments or otherwise;

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


ART. 1769


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;


ART. 1769


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


Fortis v. Gutierrez Hermanos, 6 Phil, 100

Fortis was a bookkeeper in a partnership named “Gutierrez Hermanos”, with a yearly salary amounting to 5% of the net profits for each year. Fortis however had no vote at all in the management of the business.

Was he a partner?


Fortis v. Gutierrez Hermanos, 6 Phil, 100

No. Fortis was a mere employee as their contract is a contract of employment.


Bastida v. Menzi and Co, 58 Phil. 188

Bastida worked for Menzi and Co., as procurer of contracts for fertilizers to be manufactured by the firm, and as supervisor of the mixing of the fertilizers. However he had no voice in the management of the business except in his task of supervising the mixing of said fertilizers. For his services, he was entitled to 35% of the net profits in the fertilizer business.

Was a partner?


Bastida v. Menzi and Co, 58 Phil. 188

Not a partner, but a mere employee with no power to vote.


Lyons vs. Rosenstock, 56 Phil 632

Elser and Lyons are engaged in real estate. They co-owned a parcel of land. Elser, with the consent of Lyons, mortgaged the property to raise money for the development of the San Juan Estate. Lyons expressed his desire not to be part of the development project. The business prospered. Lyons demands for a share in the mortgage and in the business claiming he is a partner.

Is Lyons a partner of Elser?


Lyons vs. Rosenstock, 56 Phil 632

No. Lyons himself did not want to participate in the development project. No partnership was formed. The mortgage of the property is immaterial to the issue of partnership existence.

LAWFUL OBJECT

ART. 1770

A partnership must have a lawful object or purpose….

Otherwise, it will be VOID.

LAWFUL OBJECT

ART. 1770

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.

LAWFUL OBJECT

ART. 1770

Partnership is still VOID, if the subject matter is outside the commerce of man or is impossible thing or service.

LAWFUL OBJECT

ARBES VS. POLISTICO, 53 Phil 489

“Turnuhan Polistico and Co,” is a private organization engaged in conducting a lottery among its partners-members every weekend. Contributions are made every week, except for certain , the contributions were distributed to the lottery winners. The court declared the partnership unlawful.

May the partners retrieve their capital and profits?

LAWFUL OBJECT

ARBES VS. POLISTICO, 53 Phil 489

The partners can get their capital and but not the profits. The law authorizes only the confiscation of profits and not capital. Capital may be recovered, unless it constitutes “instruments and effects of the crime.”

FORMALITIES OF PARTNERSHIP CONTRACT

ART. 1771

GENERAL RULE: Any form (for validity and enforceability, regardless of the value of the contribution)

Partnership contract is not one of those covered by Statute of Frauds.


ART. 1771

EXCEPTION: Where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary.


ARTS. 1771 and 1773

WHERE REAL PROPERTIES OR REAL RIGHTS ARE CONTRIBUTED:A PUBLIC INSTRUMENT is needed.An INVENTORY of the immovables.A inventory must be SIGNED by the parties and ATTACHED to the public instrument.


ART. 1771

EFFECT IF NOT COMPLIED

Partnership is VOID.


TO BIND THIRD PERSONS

Where immovable property had been contributed and the inventory properly made, to bind third persons, the contract of partnership must be registered with the Registry of Property where the immovable is located (Borja vs. Addison, et.al., 49 Phil. 895).


AGAD VS. MABATO, 23 SCRA 1223

A partnership was entered into between Agad and Mabato “to operate a fishpond.” Neither partner contributed a fishpond or a real right to any fishpond. Their contributions were in cash only in the sum of P1,000 each. While the partnership contract was done in a public instrument, no inventory of the fishpond was attached in the said instrument.



Is there a valid contract of partnership?



The contract is VALID, despite the lack of the inventory. The purpose of the partnership was not “to engage in the fishpond business” but to “operate a fishpond.” Neither said fishpond nor real right thereto was contributed to the partnership, or become part of the capital thereof, even if a fishpond or a real right thereto could become part of its assets. (Dean Ernesto L. Pineda, Partnership, Agency & Trusts, 2006 Edition, pp. 33-34)


ART. 1772

WHERE THE CAPITAL OF THE PARTNERSHIP IS P3,000.00 OR MORE, IN MONEY OR PROPERTY:

a)The partnership contract must be in a public instrument; and

b)Registered with the Securities and Exchange Commission


ART. 1772

EFFECT OF NON-COMPLIANCE:

a)The partnership contract is still VALID. Accordingly, the partnership still acquires juridical personality (Art. 1768, 1772)

b)The liability of the partnership and the members thereof to third persons are NOT AFFECTED.


ART. 1772

MANUEL VS. CRUZ, CA-GR No. 42050-R, July 14, 1975

Paragraph 1 of Art. 1772 of the New Civil code is not intended as a pre-requisite for the acquisition of juridical personality by the partnership, but merely a condition for the issuance of licenses to engage in business of trade (citing Capistrano, Civil Code of the Philippines, Vol. IV, p.260).

ACQUISITION/CONVEYANCE OF IMMOVABLE PROPERTY

ART. 1774

Any immovable property or an interest therein may be acquired in the partnership name. Title so acquired can be conveyed only in the partnership name.


ART. 1774

Refers to immovable propertyThe word “title” means real estate.


ART. 1774

RULE ON CONVEYANCE OF REAL PROPERTY IN PARTNERSHIP NAME:

Title so acquired can be conveyed only in the partnership name.


ART. 1774

Title so acquired can be conveyed only in the partnership name.

IMPLICATION: An immovable property in the name of the partnership can only be conveyed in the name of the partnership. Otherwise, the conveyance is void.

ASSOCIATIONS AND SOCIETIES WHOSE ARTICLES ARE KEPT SECRET

ART. 1775 is applicable to:

Associations and societies whose articles are kept secret among the

members, wherein any one of the members may contract in

his own name with third persons

ASSOCIATIONS AND SOCIETIES WHOSE ARTICLES ARE KEPT SECRET

ART. 1775 is applicable to:

These associations and societies shall have: NO JURIDICAL PERSONALITY; and shall be governed by the provisions relating to

CO-OWNERSHIP.

CLASSIFICATION OF PARTNERSHIP

As to object –

(1) Universal Partnership

a. of all present property, or

b. of all profits

(2) Particular Partnership


As to liability of partners–

(1) General Partnership – one where all

the partners are general partners.

(2) Limited Partnership – one where

there is one or more general

partners, and one or more limited

partners.


As to manner of creation –

(1) orally constituted;

(2) constituted in a private instrument;

(3) constituted in a public instrument;

(4) registered in the Office of the SEC;


As to legality–

(1) lawful or legal

(2) illegal or unlawful


As to duration–

(1) for a specific period or till the

purpose is accomplished;

(2) partnership at will.


As to representation to others-

(1) ordinary partnership

(2) partnership by estoppel.


As to liability of partners–

(1) General Partnership – one where all

the partners are general partners.

(2) Limited Partnership – one where

there is one or more general

partners, and one or more limited

partners.

UNIVERSAL PARTNERSHIP

TWO TYPES:

Partnership of all present property;Partnership of all profits

UNIVERSAL PARTNERSHIP OF ALL PRESENT PROPERTY

RULE ON CONTRIBUTION:

ALL THE PROPERTY actually belonging to the partners are CONTRIBUTED – and said properties become COMMON PROPERTY (owned by all the partners and by the partnership)



Aside from the contributed properties, the PROFITS of said contributed COMMON PROPERTY are likewise contributed.



PROFITS FROM OTHER SOURCES – may become COMMON, but only if there is a stipulation to such effect.



FUTURE PROPERTIES:

Properties subsequently acquired by inheritance, legacy, or donation (ILD) cannot be included in the stipulation, BUT the fruits thereof can be included in the stipulation


HYPOTHETICAL CASES (Paras, Civil Code Book V):

1. 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 University of Bohol as remuneration for A’s work as professor.



Are the two parcels of land and their fruits to be enjoyed by the partnership?



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


HYPOTHETICAL CASES (Paras, Civil Code Book V):2. A and B entered into a universal partnership of all present property. Subsequently, A received a parcel of land by inheritance from his father; and another parcel of land from University of Bohol as remuneration for A’s work as professor. It was stipulated that all properties subsequently acquired would belong to the partnership.



2. Are the two parcels of land and their fruits to be enjoyed by the partnership?.



ANS:

For land acquired as salary – YES

For land acquired as inheritance – NO

Fruits of inherited land - YES

UNIVERSAL PARTNERSHIP OF PROFITS

DEFINED (Art 1780).

Comprises all that the partners may acquire by their industry or work during the existence of the partnership.


Art 1780

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.


Art 1780

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.


Art 1780

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)


HYPOTHETICAL PROBLEMS (Paras, Civil Code, Book V)

1) In a universal partnership of 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.



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



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



3) A and B entered into a universal partnership of profits. Subsequently, A became a professor at the UB College of Law. 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.



4) A and B entered into a universal partnership of profits. Later A purchased a parcel of land. Will the fruits of said land belong to the partnership?



ANS: 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 partner at the time of the celebration of the contract. After-acquired properties do not belong to the firm as a matter of right.

PRESUMPTION IN FAVOR OF PARTNERSHIP OF PROFITS

ART. 1781

Articles of universal partnership, entered into without specification of its nature, only constitute a UNIVERSAL PARTNERSHIP OF PROFITS.

PERSONS WHO CANNOT FORM A UNIVERSAL PARTNERSHIP

ART. 1782

1)Husband and wife (Art. 133)

2)Those guilty of adultery or concubinage (Art. 739)

3)Those guilty of the same criminal offense, if the partnership was entered into in consideration of the same.

PARTICULAR PARTNERSHIP

ART. 1783

It has for its object determinate things, their use or fruits, or specific undertaking, or the exercise of a profession or vocation.

Husband and wife may enter into a particular partnership.

Partnership

Documents

Transcript of Partnership