Week 1: General Provisions of the The Law on Partnership found in the Civil Code of

Partnership Law (Art 1767 to 1783, RA 386) the Philippines (Art. 1767-1867) is not something
original to the Philippine Legal System. Our Laws
You had your first encounter with partnerships as
on Partnership were mostly taken, with or
a type of business organization in ACCT 1026, or
without modifications, from the old Civil Code
in your FAR course in your very first semester
which is Spanish Law in origin and from two
here in the BS Accountancy/BS Management
American statutes, namely: the Uniform
Accounting Program. In that course, you were
Partnership Act and the Uniform Limited
introduced to the life of a partnership (Formation,
Partnership Act. Thus, it has to be made clear
Operations, Dissolution, Liquidation), and how to
that when we study and understand our Law on
account for each part of a partnership’s life.
Partnership, reference has to be made with these
You will discover that the rules you have learned Spanish as well as American laws. 
in ACCT 1026 are derived from the Civil Code,
Definition of Partnership
particularly Articles 1767 to 1867, which provides
for the Law on Partnership. It’s understandable The definition of partnership (Article 1767)
that at this point, you might have a limited contains two paragraphs:
knowledge about Partnerships, because the
 By the contract of partnership two or more
situations presented in ACCT 1026 were also
persons bind themselves to contribute
limited. In this course, as many scenarios as can
money, property, or industry to a common
be possibly covered (considering the time we
fund, with the intention of dividing the
have) related to Partnerships will be taken up.
profits among themselves.
Therefore, although limited, you already possess
 Two or more persons may also form a
knowledge on Partnerships. That little knowledge
will now be the foundation upon which we will partnership for the exercise of a
build further knowledge on Partnerships. It would profession.
be of a great advantage if you would be able to These two paragraphs define the two types of
recall basic principles in obligations and contracts partnerships: Ordinary Business Partnerships
in as much as partnership is a contract and (OBP), and General Professional Partnerships
parties including the partnership obligations are (GPP). These two types differ on the purpose of
govern by contract law. forming a partnership.
In this semester also, particularly in TAXN 1016, The first paragraph describes Ordinary Business
you will learn about how partnerships are taxed. Partnerships (OBP). These partnerships are
Therefore, it is important that Article 1767 must formed to generate profits. Examples of Ordinary
be learned by heart, as this will be the key to Business Partnerships are as follows:
understanding Taxation for Partnerships.
 Google: Sergey Brin and Larry Page took
This lesson will cover the General Provisions a small search engine over a decade ago
(Articles 1767 to 1783) of the Partnership Law. and turned it into the leading search
Included in this would be discussions on the engine in the entire world. Including
characteristics of a partnership, its kinds, and several billion dollars in sales, having a
many more. combined ownership of 16% of their
---------- company gives them a total net worth of
46 Billion dollars.
Brief Background:
 Twitter: Founded by Evan Williams, Biz
The Law on Partnership did not come out of Stone, and Jack Dorsey, Twitter is an
nowhere. The practice of partnership and excellent example of successful business
subsequent formulation of the law goes way back partnerships. In less than 3 years, these
in ancient history. The earliest form of conducting individuals managed to grow Twitter from
business was the single entrepreneur ownership the sound a bird makes to an incredible
plan whereby one individual owned the business, industry where over 63% of the brands in
had sole control of the same, reaped all the the world signing on to use it. From the
profits, and suffered all the losses. Under this surface of the earth to the bottom of the
system, the growth of an individual business was oceans and even in orbit, Tweets are
limited, owing especially to the limitation of being sent and received across the planet.
capital and sometimes also to the limitation of
skill or knowledge. To permit combinations of  Microsoft: Bill Gates and Paul Allen
capital, or capital and experience, and to secure represent another powerful business
economy by eliminating some of the overhead partnership that helped to revolutionize
costs of individual enterprises, the partnership computing. With a wide range of products,
plan of business association was developed. The services, and patents, Microsoft is one of
partnership may be traced back to ancient the most valuable companies in the world.
history. (De Leon, 2013 The Law on Partnerships  Apple: Steve Job and Steve Wozniak
and Private Corporations, citing T.S. Kerr, worked together to bring the Apple line of
Business Law: Principles and Cases, 2nd ed.)
 products to consumers around the world. only ISO 9002-certified professional
Starting small and going through a services firm in the country.
number of challenging hurtles, both
 Punongbayan and Araullo (P&A Grant
Steve’s are examples of what can be
Thornton): Benjamin Punongbayan was a
accomplished with a bold and innovate
senior partner at SGV & Co. when he left
idea.
the firm in 1988 to form P&A with Jose
 Hewlett-Packard (HP): Bill Hewlett and Araullo, a banker. The clientele of P&A
Dave Packard helped lend their name to Grant Thornton consists of privately
this iconic company. Following the owned enterprises, listed companies, and
tradition of being founded in a small public sector organizations. These
garage, Hewlett Packard has since organizations go to the well-known firm
expanded and now produces hardware for its “global scale, quality, industry
and software for agencies and individuals insight, and deep technical expertise.”
alike.
 
 McDonald’s: Started by Richard and
The legal profession is another profession that
Maurice McDonald in 1940, McDonald’s
forms partnerships to exercise their profession.
was first a barbeque stand. Later
Notable examples are ACCRA Law, Divina
transitioning to hamburgers in 1948,
Law, Quisumbing Torres, and SyCip Salazar
McDonald’s has seen exploded onto a
Hernandez and Gatmaitan.
global stage.
This distinction between OBPs and GPPs will be
 Ben & Jerry’s: Ben Cohen and Jerry
important in your study of how Partnerships are
Greenfield managed to make annual sales
taxed, which you will learn in your TAXN 1016
of greater than 4 million dollars after less
course.
than 5 years in operation. Since 1978,
Ben & Jerry’s has grown incredibly to  
include an annual profit of $326 million in
2000. With a strong emphasis on Characteristics of Partnership
charitable giving and moral business From the definition of partnership as provided by
operations, Ben & Jerry continue to Article 1767, we can extract the characteristics of
pioneer both flavor types and ethical partnerships which are basically also found in
business practices. contracts, which are:

 Warner Brothers: Founded in Culver City  Consensual – You have learned about
California by Sam, Jack, Albert, and Harry contracts in your first law course (LAWS
Warner, the Warner Brothers company 1013), and you have also learned that a
took some time to find its niche. Starting contract is a meeting of minds of the
with direct distribution of media, the contracting parties. A partnership, aside
brothers soon switched to production from being a type of business
when they found how much more lucrative organization, is also a contract. A
it was. Now they are linked with some of partnership is perfected by mere consent.
the most iconic movies of our time. This is because of the principle of delectus
personae (literally, “choice of the person”)
The second paragraph describes a General or delectus personarum (plural) wherein
Professional Partnership (GPP). Notice that the each partner is entitled to exercise their
word “profit” is not found in the second choice and preference of partners.
paragraph. This is because in this type of
partnership, the primary reason for forming the  Principal – Principal contracts, as you
partnership is the exercise of have learned last school year, are those
a common profession. Profits will only be that can stand by itself, without
incidental. dependence on other contracts for validity
or existence.
Our profession, CPA, is one that usually forms
GPPs to practice the profession. Some notable  Bilateral – Bilateral contracts are those
examples are: wherein all parties are required to give or
do something. A partner will contribute
 SyCip, Gorres, Velayo, and company money, property or industry, and in
(SGV & Co.): The largest accounting firm return, he expects to receive the share of
in the Philippines is founded in 1946 by profits from partnership operations. Also,
Washington SyCip, Alfredo Velayo, and the persons entering the partnership have
Vicente Jose, and merged with Henry, rights and obligations that are reciprocal
Hunter, Bayne and company (which was to each other.
sold to Arsenio Reyes and Ramon Gorres)
in the 1950s. It now employs 3,000  Nominate – Nominate contracts are
professionals, mostly CPAs, and is the those that have a name. This contract has
a name, “Partnership”.
  Preparatory – Preparatory contracts are parties and attached to the public
those that used as a means of entering instrument.
another contract. If a partnership is hired
2. If the capital of the partnership is Php
to audit the financial statements of
3,000 or more (either money, property, or
another company, that is another contract
both) – the partnership contract must be
(an audit engagement) which the
in a public instrument and must be
partnership would not have been able to
registered with the Securities and
enter into without forming a partnership
Exchange Commission (SEC).
first.
3. If the partnership is a limited partnership,
 Onerous – The contract of partnership is
a certificate signed under oath by the
an onerous one because the parties have
partners and recorded with SEC is
to give up something, which is generally
required.
the money, property, or industry that they
will contribute.  
  Kinds of partnership
Essential requisites of partnership

 There must be a valid contract. For the

contract of partnership to be valid, the
essential elements of a contract (consent,
object, and cause) must be present.

 There must be a mutual contribution

of money property, or industry to a
common fund. There is no limit on the
monetary contribution; the property to be
contributed may be tangible (may be real
or personal) or intangible. Industry may
be physical or intellectual.

 It must have a lawful object or

purpose. As you already know, a contract
must have the essential elements present
for it to be valid. If any one of these
essential elements is missing, the contract
is void. The object of the contract of
partnership must be lawful. Otherwise, it
is void.

 The partnership must be established

for the common benefit or interest of
the partners. The purpose of an OBP is
for the generation of profit, and the
partnership must be established for that
purpose, and all partners must share in
the profit generated. Any stipulation that
excludes a partner from profit sharing is
void. For GPPs, the primary purpose is the
exercise of a common profession. A
lawyer, physician, CPA, and engineer
cannot together form a GPP, because only
Kinds of partners
one of them will be able to practice his
profession, which is in his interest, but not a. As to liability
of the other three.
1. General – liable even beyond his
  contributions to the partnership
(i.e. separate properties)
Form of a partnership contract
2. Limited – liable only up to the
Generally, a partnership contract can be in any
extent of his capital contributions 
form (oral or written), EXCEPT in the following
cases: b. As to contribution
1. If real property is contributed – the 1. Capitalist – one who contributes
partnership contract must be in a public money and/or property only
instrument; an inventory of the said
property must be made, signed by the
 2. Industrialist – one who contributes b. As wages of an employee or rent to
industry only a landlord.

3. Capitalist-industrialist – one who c. As an annuity to a widow or

contributes money and/or representative of a deceased
property, and industry partner.

c.  Others d. As interest on a loan, though the

amount of payment vary with the
1. Managing – one who manages the
profits of the business.
affairs of the partnership
e. As the consideration for the sale of
2. Liquidating – one who takes charge
a goodwill of a business or other
of liquidating the partnership
property by installments or
3. Nominal – not actually a partner, otherwise.
but may be liable as such to third
Week 2: Rights and Obligations of Partners
persons
(Art 1784 to 1827, RA 386)
4. Ostensible – known to the public as
A. Among themselves (Arts. 1784 –
a partner because he allowed his
1809)
name to be used as part of the
partnership name. 1. To contribute capital

5. Secret – actually a partner, but Obligations with respect to contribution of

that fact is hidden to the public property:

6. Silent – also an actual partner, but 1. to contribute at the beginning of the

does not participate in the partnership or at the stipulated time
management of the business (only the money, property or industry which
receives his share in the profits and he may have promised to contribute
losses) (Art. 1786)

7. Dormant – does not participate in 2. To answer for eviction in

the management of the business, case the partnership is deprived of the
and his being a partner is also determinate property contributed (Art.
hidden from public knowledge. 1786)

1. 3. To answer to the
partnership for the fruits of the
 
property the contribution of which he
Rules in determining the existence of a delayed, from the date they should
partnership (Article 1769) have been contributed up to the time of
actual delivery (Art. 1786)
1. Except as provided by Article 1825,
persons who are not partners as to each 4. To preserve said property with the
other are not partners as to third persons. diligence of a good father of a family
pending delivery to partnership (Art.
2. Co-ownership or co-possession does not of 1163)
itself establish a partnership, whether
such co-ownership or co-possessors do or 5. To indemnify partnership for
do not share any profits made by the use any damage caused to it by the
of the property. retention of the same or by the delay in
its contribution (Arts. 1788, 1170)
3. The sharing of gross returns does not of
itself establish a partnership, whether or  
not the persons sharing them have a joint
What happens when a partner fails to contribute
or common right or interest in any
property promised?
property from which the returns are
derived.  That partner becomes a
debtor of the partnership (Art. 1169)
4. The receipt by a person of a share of the
profits of a business is prima facie  Other partners cannot
evidence that he is a partner in the rescind partnership contract by reason
business, but no such inference shall be of default in contributions. Their
drawn if such profits were received in remedy instead would be specific
payment: performance with damages from the
partner who defaults. (Art. 1788)
a. As debt by installments or
otherwise.  
 Consequences if industrial partner engages in any
business: (Art. 1789)
Obligations with respect to contribution of
money:  He can be removed from
the partnership, with damages
a. To contribute on the date fixed the
amount he has undertaken to  The capitalist partners can
contribute to the partnership. avail of the benefit he (industrial partner)
obtained from the other business, with
b. To reimburse any amount he may have
damages
taken from the partnership (and
converted to his own use)

c. To pay for the agreed or legal interest, Consequences if capitalist partner engages in any
if he fails to pay his contribution on business that competes with them: (Art. 1808)
time or in case he takes any amount
from the common fund and converts it  He may be required to
to his own use contribute the profits he derived from the
other business into the common fund.
d. To indemnify the partnership for the
damages caused to it by delay in the  In case of losses, he shall
contribution or conversion of any sum personally bear it.
for his personal benefits  He can be removed from
  the partnership.

2. To maintain the trust and confidence  

given unto him by his partners (fiduciary Obligations with respect to contribution of
duty) capital (Art. 1790)
As mentioned in Lesson #1, a partnership is built  Partners must contribute equally, unless
on trust, and therefore each partner must otherwise stipulated.
observe the utmost good faith, fairness, and
integrity in his dealings with the other partners.  Partners must contribute
Each partner cannot: additional capital in the following cases:

a. directly or indirectly use partnership o There is an imminent

assets for his own benefit; loss of the business of the
partnership
b. carry on a business of the partnership
for his private advantage; o The majority of the capitalist
partners are of the opinion that an
c. take any profit secretly;
additional contribution to the
d. obtain for himself anything common fund would save the
that he should have obtained for the business
partnership (e.g. business opportunity)
In case a partner deliberately refuses to
e. carry on another business in contribute additional capital, an obligation to sell
competition with the partnership; he his interest to the other partner arises.
cannot avail himself of knowledge or
information which may be properly
regarded as the property of the Who bears the risk of loss of things contributed?
partnership (Art. 1795)

 
Contribution Who bears the risk?
Rules in engaging in other businesses
Specific and Partner
 Industrial partners cannot
determinate things
engage in any business, unless
which are not fungible
expressly permitted by the partnership where only the use is
(Art. 1789) contributed
 Capitalist partners cannot engage in
other businesses that are in the same Specific and Partnership
line of business as theirs (Art. 1808) determinate things the
ownership of which is
transferred to the
partnership

Fungible things Partnership

 B. Property rights of a partner (Arts. 1810 –
Things contributed to Partnership
1814)
be sold
1. His rights in specific
Things brought and Partnership partnership property
appraised in the
inventory 2. His interest in the
partnership
Rules for distribution of profits and losses: 
3. His right to participate in the
With agreement: As agreed management.
Without agreement (silent): Nature of partner's right in specific partnership
property
1. Capitalist partners share in the profits
in proportion with their respective  a partner has an equal right to possession
capital contributions. Industrialist which is not assignable and such right is
partners are given a just and equitable limited to the share of what remains after
share. partnership debts have been paid.
2. If profit sharing is stipulated, apply the Nature of partner's right in the partnership
same for losses.
 a share in the profits and surplus
3. If there is no profit sharing stipulated,
 
a. Losses are
distributed according to capital  C. To third persons (Arts. 1815 – 1827)
contributions 1. Every partnership shall
b. Industrialist partners are not liable operate under a firm name. Persons who
for losses include their names in the partnership
name even if they are not members shall
 A stipulation which excludes one or more be liable as a partner
partners from any share in the profits and losses
is void. 2. All partners shall be liable for contractual
obligations of the partnership with their
Obligation of managing partners who property, after all partnership assets
collects debt from person who also owed the have been exhausted:
partnership (in cases where there are at least 2
debts, one where the collecting partner is creditor a. Pro rata
and the other, where the partnership is the b. Subsidiary
creditor; where both debts are demandable; and
where the partner who collects is authorized to 3. Admission or representation
manage and actually manages the partnership) made by any partner concerning
partnership affairs within scope of his
 Apply sum collected to 2 authority is evidence against the
credits in proportion to their amounts partnership
 If he received it for the account of 4. Notice to partner of any
partnership, the whole sum shall be matter relating to partnership affairs
applied to partnership credit operates as notice to partnership, except
  in case of fraud:

Obligation of partner who receives share of a. Knowledge, of partner acting

partnership credit in the particular matter,
acquired while a partner
 to bring to the partnership
capital what he has received even b. Knowledge of the partner
though he may have given receipt for acting in the particular matter
his share only, provided: then present to his mind

o A partner has c. Knowledge of any other

received in whole or in part, partner who reasonably could
his share of the partnership and should have
credit communicated it to the acting
partner
o The other partners
5. Partners and the partnership are
have not collected their
solidarily liable to 3rd persons for the
shares
partner's tort or breach of trust
o The partnership
6. Liability of incoming partner is limited to:
debtor has become insolvent
 a. His share in the partnership
can recover if:
property for existing
obligations 1. Conveyance was
not in the usual way
b. His separate property for Conveyance in
of business, or
subsequent obligations partnership name
2. Buyer had
7. Creditors of partnership preferred in knowledge of lack of
partnership property & may attach authority
partner's share in partnership assets
Conveyance does not
8. Every partner is an agent of the pass title but only
partnership equitable interest,
Title in partnership unless:
Power of Partner as Agent of the Partnership
name, 1. Conveyance was
Conveyance in not in the usual way
Every partner is an of business, or
agent and may partner's name
execute acts with 2. Buyer had
Acts for carrying on in binding effect even if knowledge of lack of
the usual way the he has no authority. authority
business of the
partnership Except: when Conveyance passes
3rd person has title but partnership
knowledge of lack of Title in name of 1/ can recover if:
authority more partners,
·      Act w/c is not 1. Conveyance was
Conveyance in name if
not in the usual way
apparently for the partner/partners in
carrying of business of business, or
whose name title
in the usual way stands 2. Buyer had
·      Acts of strict knowledge of lack of
dominion or authority
ownership: Title in name of
·      Assign 1/more/all
partnership partners or 3rd
property in trust for person in trust for
creditors partnership, Conveyance will only
·      Dispose of good- Conveyance executed pass equitable interest
will of business in partnership
·      Do an act w/c name if in name of
would make it Does not bind partners
impossible to carry partnership unless
on ordinary authorized by other Title in name of all
business of partners partners, Conveyance will pass
partnership title
Conveyance in name
·      Confess a
of all partners
judgement
·      Enter into
compromise ssignment of Interest in Partnership
concerning a
partnership claim or Assignment is subject to three (3) conditions:
liability
·      Submit 1. made in good faith
partnership claim or
2. for fair consideration
liability to
arbitration 3. after a fair and complete disclosure
·      Renounce claim of all important information as to its
of partnership value
Partnership not liable
Rights of an Assignee:
Acts in contravention to 3rd persons having
of a restriction on actual or presumptive 1. Get whatever assignor-
authority knowledge of the partner would have obtained
restrictions
2. Avail usual remedies in case
of fraud in the management
Effects of Conveyance of Real Property Belonging
to Partnership 3. Ask for annulment of
contract of assignment if he was
Title in partnership Conveyance passes induced to join through any of the
name, title but partnership vices of consent
 4. Demand an accounting (only in
case of dissolution)

Responsibility of the Partnership to the

Partners

1. To refund the amounts disbursed

by partner in behalf of the partnership +
corresponding interest from the time the
expenses are made (loans and advances
made by a partner to the partnership
aside from capital contribution)

2. To answer for obligations partners

may have contracted in good faiyth in the
interest of the partnership business

3. To answer for risks in consequence of its

management