READING MATERIAL

PARTNERSHIP
Definition
Partnership is a contract of two or more persons binding 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.
Profession is a group of men pursuing a learned art as a common calling in the spirit of
public service – no less a public service because it may incidentally be a means of livelihood.
Elements
1. Consensual – perfected by mere consent.
2. Nominate – has a special name of designation in our law.
3. Bilateral – entered by two or more persons.
4. Onerous – each of the parties aspires to obtain for himself a benefit through giving of
something.
5. Commutative – actions of a partner is equivalent of that of the others.
6. Principal – independent contract.
7. Preparatory – a means to an end.
8. Lawful – must have lawful object of purpose.
9. Communal – for common benefit or interest of the partners.
Characteristics

 It has juridical personality separate and distinct from that of each of the partners.
 Articles or agreement must be known to third persons. Failure of this result to partnership
having no juridical personality.
Rules to determine its existence
In general, to establish the existence of a partnership, all of its essential features or characteristics
must be present. In case of doubt, the following will apply:
1. Except for partners by estoppel, 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.
3. Sharing of gross returns does not of itself establish a partnership.
General rule –
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.
Exception –
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 an annuity to a widow or representative of a deceased partner.
4. As interest on a loan, though the amounts of payment vary with the profits of the business.
5. As the consideration for the sale of a goodwill of a business or other property by
installments or otherwise.

Requirements for the creation of a partnership

a. Formal
Where the capital of the partnership is P3,000.00 or more, in money or property –
1. The contract must appear in a public instrument.
Public instrument is one which is acknowledged before a notary public or any official authorized
to administer oath, by the person who executed the same.
2. It must be recorded or registered with the Securities and Exchange Commission.
NOTE: Failure to comply with the above requirements does not prevent the formation of the
partnership or affect its liability and that of the partners to third persons.
b. Legal
General rule –
No special form is required for the validity or existence of the contract of partnership.
Exception –
When immovable property is contributed, failure to comply with the following requirements will
render the partnership contract void:
1. The contract must be in a public instrument.
2. An inventory of the property contributed (a) must be made, (b) signed by the parties, and
(c) attached to the public instrument.

When a partnership begins

General rule – A partnership begins from the moment of the execution of the contract.

Features of Partnership:
Following are the few features of a partnership:
1.Agreement between Partners: It is an association of two or more individuals, and a partnership
arises from an agreement or a contract. The agreement (accord) becomes the basis of the
association between the partners. Such an agreement is in the written form. An oral agreement is
evenhandedly legitimate. In order to avoid controversies, it is always good, if the partners have a
copy of the written agreement.
2. Two or More Persons: In order to manifest a partnership, there should be at least two (2)
persons possessing a common goal. To put it in other words, the minimal number of partners in an
enterprise can be two (2). However, there is a constraint on their maximum number of people.
3. Sharing of Profit: Another significant component of the partnership is, the accord between
partners has to share gains and losses of a trading concern. However, the definition held in the
Partnership Act elucidates – partnership as an association between people who have consented to
share the gains of a business, the sharing of loss is implicit. Hence, sharing of gains and losses is
vital.
4.Business Motive: It is important for a firm to carry some kind of business and should have a
profit gaining motive.
5. Mutual Business: The partners are the owners as well as the agent of their firm.  Any act
performed by one partner can affect other partners and the firm. It can be concluded that this point
act as a test of partnership for all the partners.
6. Unlimited Liability:  Every partner in a partnership has unlimited liability.

Kinds of partners
Capitalist partner – contributes money or property to the common fund.
Industrial partner – contributes his industry or personal service.
General partner – liability to third persons extends to his separate property.
Limited partner – liability to third persons is limited to his capital contribution.

 Also known as special partner.

 Does not participate in the management of the business.
Managing partner – manages the affairs or business of the partnership.

 May be appointed either in the articles or after constitution of the partnership.

 Known as a general or real partner.
Silent partner – does not take any active part in the business although he may be known to be a
partner.
Secret partner – takes active part in the business but is not known to be a partner by outside
parties nor held out as a partner by the other partners.
Dormant partner – does not take active part in the business and is not known or held out as
partner.
Partner by estoppel – not really a partner, but is liable as a partner for the protection of innocent
third persons.

 Known as partner by implication or nominal partner.

Liquidating partner – takes charge of the winding up of partnership affairs upon dissolution.

Types of Partnerships
A partnership is divided into different types depending on the state and where the business
operates. Here are some general aspects of the three most common types of partnerships.
  General Partnership
A general partnership comprises of two or more owners to run a business. In this partnership, each
partner represents the firm with equal right. All partners can participate in management activities,
decision making, and have the right to control the business. Similarly, profits, debts, and liabilities
are equally shared and divided equally. 
In other words, the general partnership definition can be stated as those partnerships where rights
and responsibilities are shared equally in terms of management and decision making.  Each
partner should take full responsibility for the debts and liability incurred by the other partner. If one
partner is sued, all the other partners are considered accountable. The creditor or court will hold
the partner’s personal assets. Therefore, most of the partners do not opt for this partnership.

 Limited Partnership
In this partnership, includes both the general and limited partners. The general partner has
unlimited liability, manages the business, and the other limited partners. Limited partners have
limited control over the business (limited to his investment). They are not associated with the
everyday operations of the firm.
In most of the cases, the limited partners only invest and take a profit share. They do not have any
interest in participating in management or decision making. This non-involvement means they do
not have the right to compensate the partnership losses from their income tax return.

 Limited Liability Partnership

In Limited Liability Partnership (LLP), all the partners have limited liability. Each partner is guarded
against other partners legal and financial mistakes. A limited liability partnership is almost similar to
a Limited Liability Company (LLC) but different from a limited partnership or a general partnership. 

 Partnership at Will
Partnership at Will can be defined as when there is no clause mentioned about the expiration of a
partnership firm. The two conditions that have to be fulfilled by a firm to become a Partnership at
Will are:

 The partnership agreement should have not any fixed expiration date.
 No particular determination of the partnership should be mentioned.  
Therefore, if the duration and determination are mentioned in the agreement, then it is not a
partnership at will. Also, initially, if the firm had a fixed expiration date, but the operation of the firm
continues beyond the mentioned date that it will be considered as a partnership at will.

ADVANTAGES AND DISADVANTAGES

Advantages of a business partnership

The business partnership offers a lot of advantages to those who choose to use it.

1. Less formal with fewer legal obligations

One of the main advantages of a partnership business is the lack of formality compared with
managing a limited company. The accounting process is generally simpler for partnerships than for
limited companies.

2. Easy to get started

The partners can agree to create the partnership verbally or in writing.

3. Sharing the burden

Compared to operating on your own as a sole trader, by working in a business partnership you can
benefit from companionship and mutual support. Starting and managing a business alone can feel
stressful and daunting, particularly if you’ve not done it before. In a partnership, you’re in it
together.

4. Access to knowledge, skills, experience and contacts

Each partner will bring their own knowledge, skills, experience and contacts to the business,
potentially giving it a better chance of success than any of the partners trading individually.
Partners can share out tasks, with each specialising in areas they’re best at and enjoy most. So if
one partner has a financial background, they could focus on maintaining the company books, while
another may have previously worked extensively in sales and therefore take ownership of that side
of the business. As a sole trader, by contrast, you’d have to do all of this yourself (or manage
someone you employ to do some of it).

5. Better decision-making
Compared with operating on your own, in a partnership the business benefits from the unique
perspective brought by each partner. In business, very often two heads really are better than one,
with the combined conclusion of debating a situation far better than what each partner could have
achieved individually.

6. Privacy
Compared to a corporation, the affairs of a partnership business can be kept confidential by the
partners. By contrast, in a corporation certain documents are available for public inspection and a
company’s shareholders can choose to inspect various registers and other documents the
company is required to keep.

7. Ownership and control are combined

In a corporation, ownership and day to day management of the business is split between
shareholders and directors (although they’re often the same people). That can mean that directors
are constrained by shareholder preferences in pursuing what they see as the best interests of the
business.
By contrast, in a business partnership, the partners both own and control the business. As long as
the partners can agree how to operate and drive forward the partnership, they’re free to pursue
that without interference from any shareholders. This can make a partnership business potentially
more flexible than a limited company, with the ability to adapt more quickly to changing
circumstances.

8. More partners, more capital

The more partners there are, the more money there may be available from their combined
resources to invest into the business, which can help to fuel growth, compared to a sole proprietor.
Together, their borrowing capacity is also likely to be greater.
DISADVANTAGES OF A PARTNERSHIP

1. The business has no independent legal status/ No separate legal personality

A business partnership has no independent legal existence distinct from the partners. By default,
unless a partnership agreement with alternative provisions is put in place, it will be dissolved upon
the resignation or death of one of the partners.

2. Unlimited liability
The business does not have a separate legal personality, the partners are personally liable for
debts and losses incurred. So if the business runs into trouble your personal assets may be at risk
of being seized by creditors, which would generally not be the case if the business was a limited
company. The partners are jointly and severally liable. As one partner can bind the partnership,
you can effectively find yourself paying for the actions of the other partners. If your partners are
unable to settle debts, you’ll be responsible for doing so.

3. Limited access to capital

While a combination of partners is likely to be able to contribute more capital than a sole trader, a
partnership will often still find it more difficult to raise money than a corporation.
Banks may prefer the greater accounting transparency, separate legal personality and sense of
permanence that a corporation provides. To the extent that a partnership business is seen as
higher risk, a bank will either be unwilling to lend or will only do so on less generous terms.

4. Potential for differences and conflict

By going into business as a general partnership rather than a sole trader, you lose your autonomy.
You probably won’t always get your own way, and each partner will need to demonstrate flexibility
and the ability to compromise.There will be the potential for differences, large or small, with other
partners. These might relate to:
 The strategic direction in which the business should go (or how to get there)
 How to handle any number of discrete business issues that may arise
 Different views on how partners should be rewarded when they put different amounts of
time, skills and level of investment into the business
 Ambition. Some may want to dedicate every waking moment to growing and developing the
business, while others may want a quieter life
Differences might not be evident immediately. Over time, partners’ preferences, personal situations
and expectations may change so the fact they are aligned at the start is far from a guarantee that
cracks won’t appear later. Disagreements and disputes can not only harm the business but also
damage the relationship between the individuals involved. Conflict can be a major distraction,
absorbing the partners’ time, energy and money.

5. Slower, more difficult decision making

Compared to running a business as a sole trader, decision-making can be slower as you’ll need to
consult and discuss matters with your partners. Where you disagree, time will be spent negotiating
to build agreement or consensus. Sometimes this might mean opportunities are missed. More
often, it will frustrate a partner who has been used to making all the decisions for their business.

6. Profits must be shared

At a basic level, while a sole trader retains all the profits of their business, those of a partnership
are shared amongst the partners. Profits are shared equally, although that can be amended
depending on the partnership agreement.