Formation

Birth of Partnership - The birth and life of a partnership at will is predicated on the

mutual desire and consent of the partners. The right to choose with whom a person wishes

to associate himself is the very foundation and essence of that partnership.

Membership - A partnership is an arrangement between two or more people to oversee

business operations and share its profits and liabilities.

Object of Partnership - to determine the benefits of running the business together. In

simple words, a business approaches another business to explain why they should work

together and how the partnership will benefit both parties.

Nature of Contributions:

Money – there is no contribution of money until they have been cashed. - paid

Property – may be real (land) or personal(furniture) , tangible(nahahawakan - cars,

appliances) or intangible(d nahahawakan - patents, trademarks).

Industry – a limited partner in a limited partnership cannot contribute mere industry or

service. Kasi yung limited partnership ito daw po yung para sa mga taong ayaw ng

unlimited liability.

Formal Requisites:

1) Consensual – perfected by mere consent.

2) Nominate – it has a special name or designation.

3) Bilateral – both parties are bound reciprocally.

4) Onerous – both expect to benefit through the giving of something.

5) Principal – does not depend on another contract for its validity.

6) Preparatory – it is entered as a means to an end, the realization of profits.

Registration - For purposes of convenience in dealing with government offices and

financial institutions, registration of partnership having a capital of less than Php 3,000 is

recommended.

Rules in determining the existence of Partnership:

❖ The formal registration of a partnership

❖ The contribution by the parties of money, property, knowledge, skills or other

assets used in the business

❖ A joint property interest in the property of the business

❖ A mutual right of control or management of the enterprise

❖ The expectation of profit

❖ The right of each party to participate in the profits.

Classes of Partnership

General Partnership - partners liable pro rata (fair) and subsidiarily, sometimes solidarily

with their separate property for partnership debts.

Limited Partnership - has one or more general partners and one or more limited partners,

the limited partner not being personally liable for the obligations of the partnership.

Universal Partnership - refers to all the present property or to all the profits.

Particular Partnership -is a partnership formed for a single transaction or enterprise as

distinguished from one organized for carrying on a general business.

Universal Partnership of Present Property - partners contribute all their present

property to the partnership with the intention of dividing the profits among themselves.

Universal Partnership of all Profits- the partners retain their ownership over their

present and future property, what passes to the partnership are the profits and or income

and the usufruct or use of the same.

Professional Partnership - Business formed by two or more professionals who provide

professional services to the public. In professional partnerships all owners manage and

operate the business.

Partnership by Estoppel – one who is not really a partner, but is liable as a partner for the

protection of innocent third persons.

Kinds of Partners

Silent - also known as silent investors — invest in companies without being involved in daily

operations. They invest their money in your business, but they don't attend meetings or

make decisions. They don't oversee finances or review strategies.

Dormant -A partner who takes no share in the active business of a company or

partnership, but is entitled to a share of the profits, and subject to a share in losses.

Capitalist - one who contributes money or property to a common fund.

- can engage in other business but not the same as the partnership.

- unless there is a stipulation to the contrary. General Rule: a capitalist partner is not

bound to contribute more than what he agreed to contribute.

Industrial - one who contributes only his industry or personal service.

- cannot engage in other business, rule is absolute.

- to prevent conflict between industrial partners and partners.

- to ensure faithful compliance by said partner with his obligation.

General - consists of general partners who are liable pro rata and subsidiarily and

sometimes solidarily with their separate property for partnership debts.

– one whose liability to third persons to third persons extends to his separate property.

Limited - one formed by 2 or more persons having as members one or more general

partners and one or more limited partners, the latter not being personally liable for the

obligations of the partnership

- one whose liability to third persons is limited to his capital contribution, also known as a

special partner, does not participate in the management of the business.

Contract of Partnership in Comparison with Corporation - Corporations are separate

from their owners, but in partnerships, owners share the business's risks and benefits. In

a partnership, two or more individuals who wish to do business together form a company.

Joint Venture - a combination of two or more parties that seek the development of a

single enterprise or project for profit, sharing the risks associated with its development.

The parties to the joint venture must be at least a combination of two natural persons or

entities.

Trusts - A partnership of discretionary trusts is simply a partnership in which each

partner is a discretionary trust (actually, each partner is a trustee of a discretionary

trust). This is to be contrasted with a normal partnership of individuals.

Agency - a contractual relationship between two or more private entities (usually

businesses) in which one entity provides the other with services. The provider typically

retains overall responsibility for the management and operation of the program, while the

clients share in its benefits.

Rules of Management - Partners in a general partnership all have equal footing and the

authority to participate in the management of the business unless there is an agreement

that states otherwise. Typically, each partner is granted one equal vote when there is a

decision to be made.

Obligations of the Partners

1. To the Partnership

❖ As to his contribution - Article 1786. Every partner is a debtor of the partnership

for whatever he may have promised to contribute. He shall also be bound for

warranty incase of eviction with regards to specific and determinate things which

he may have contributed to the partnership in the same cases and in the same

manner as the vendor is bound with respect to the vendee. He shall also be liable

for the fruits from the time they should have been delivered, without the need of

any demand.
Obligation with respect to contribution of property

● To contribute at the beginning of the partnership or at the stipulated time which

he may have promised to contribute

● To answer for eviction incase the partnership is deprived of the determinate

property contributed

● To answer to the partnership for the fruits of the property the contribution of

which he delayed, from the date they should have been contributed up to the time

of actual delivery.

● To preserve said property with diligence of a good father of a family pending

delivery to the partnership

● To indemnify the partnership for any damage caused to it by the retention of the

same or by the delay in its contribution.

The money or property contributed by a partner becomes the property of the

partnership. It cannot be withdrawn or disposed of without the consent of the

others.

❖ As to Losses - Article 1791. If there is no agreement to the contrary, in case of

an imminent loss of the business of the partnership, any partner who refuses to

contribute an additional share to the capital except an industrial partner, to save

the venture, shall be obliged to sell his interest to the other partners. As a

general rule, a capitalist partner is not bound to contribute more than what he

agreed to contribute. However, if there is an imminent loss of the business and

there is no agreement to the contrary, he is under the obligation to contribute

additional shares to save the venture. If he refuses, he shall be obliged to sell his

interest to other partners. ( Industrial partner is not included because the

property and labor contributed cannot be withdrawn).

Requisites for applications of rules

1. There is an imminent loss of the business

 2. Majority of the partners opinion is that if the capitalist will add to his contribution,

it will save the venture.

3. The capitalist refuses to do so not because of his financial inability

4. There is no agreement that incase of loss, the partnership will not be obliged to

contribute.

❖ As to Partnership Credits - Article 1792. If a partner authorized to manage

collects a demandable sum, which was owed to him in his own name, from a person

who owed the partnership another sum also demandable, the sum thus collected

shall be applied to the two credits in proportion to their amounts, even though he

may have given a receipt for his own credit only; but should he have given it for the

account of the partnership credit, the amount shall be fully applied to the latter.

The provisions of this article are understood to be without prejudice to the right

granted to the debtor by article 1252, but only if the personal credit of the

partner should be more onerous to him.

Obligation of managing partner who collects debt - A person may be separately indebted

to the partnership and to the managing partner at the same time. Any sum received by the

managing partner shall be applied to the two credits in proportion to their amounts.

Exception: where the managing partner received the sum for the account of the

partnership in which case, the whole sum shall be applied to the partnership credit only.

Requisites for applications of rules

● There are at least 2 debts, one where the collecting partner is the creditor and the

other where the partnership is the creditor.

● Both debts are demandable

● The partner who collects is authorized to manage and actually manages partnership.

❖ As to Damages - Article 1794. Every partner is responsible to the partnership

for damages suffered by it through his fault, and he cannot compensate them with

the profits and benefits which he may have earned for the partnership by his

industry. However, the courts may equitably lessen this responsibility if through
 the partner’s extraordinary efforts in other activities of the partnership, unusual

profits have been realized.

Obligation of partner for damages to partnership - Any person guilty of negligence or

fault in the fulfillment of his obligation shall be liable for damages. The partner;s fault

must be determined in accordance with the nature of the obligation and the circumstances

of the person, the time, and the place.

Exception: If unusual profits are realized through the extraordinary efforts of the

partner at fault, the court authorized by the law to equitably mitigate or lessen his

liability for damages. Even in this case the partner at fault is not allowed to compensate

the damages suffered by profits earned.

2. To the Partners

❖ Render Accounting - Article 1807. Every partner must account to the partnership

for any benefit, and hold as trustee for it any profits derived by him without the

consent of the other partners from any transaction connected with the formation,

conduct, or liquidation of the partnership or from any use by him of its property.

Partner accountable as fiduciary:

● Duty to act for common benefit - it is an obligation of the partner to act for the

common benefit of all in all business transactions.

● Duty to account for secret and similar profits - a person who accepts secret

commission with a third person dealing with the partnership is bound to share such

profit with his co-partners.

● Duty to account for earnings occurring even after termination of partnership -

when a partner wrongfully snatch the seed of opportunity from the granary of his

firm, he cannot excuse himself to share profit/fruits with the others even after

terminating the partnership.

● Duty to make full disclosure of information affecting partnership - requires a

partner to inform all other partners of all material facts.

 ❖ Capitalist Partners - Article 1808. The capitalist partners cannot engage for their

own account in any operation which is of the kind of business in which the

partnership is engaged, unless there is a stipulation to the contrary. Any capitalist

partner violating this prohibition shall bring to the common funds any profits

accruing to him from his transactions, and shall personally bear all the losses.

Right of capitalist partner to engage in business

● The capitalist partner is only prohibited from engaging in his own account in any

operation which is the same to the business in which the partnership is engaged.

● The law does not prohibit partners to engage in business on his own behalf during

the period that he is a member of a partnership but permits him to carry on

business activity not connected or competing with the partnership, as long as the

partnership agreement does not prohibit such activity.

3. To Third Persons

➔ General Liability - Article 1816. All partners, including industrial ones, shall be

liable pro rata with all their property and after all the partnership assets have been

exhausted, for the contracts which may be entered into in the name and for the

account of the partnership, under its signature and by a person authorized to act

for the partnership. However, any partner may enter into a separate obligation to

perform a partnership contract.

Liability for contractual obligations of the partnership

● Partnership liability - a partner has the right to make all the partners liable for

contracts he makes for the partnership in the name and for the account of the

partnership.

● Individual liability - a partner may assume a separate contract in his name with the

third party to perform a partnership contract. The partner is personally bound by

his contract even if only the partnership is shown to have derived benefits from it.
 ➔ Partners as Agents of Partnership - Article 1818. Every partner is an agent of

the partnership for the purpose of its business, and the act of every partner,

including the execution in the partnership name of any instrument, for apparently

carrying on in the usual way the business of the partnership of which he is a

member binds the partnership, unless the partner so acting has in fact no authority

to act for the partnership in the particular matter, and the person with whom he is

dealing has knowledge of the fact that he has no such authority. An act of a

partner which is not apparently for the carrying on of business of the partnership

in the usual way does not bind the partnership unless authorized by the other

partners.

Except when authorized by the other partners or unless they have abandoned the

business, one or more but less than all the partners have no authority to:

● Assign the partnership property in trust for creditors or on the assignee’s promise

to pay the debts of the partnership

● Dispose of the good-will of the business

● Do any other act which would make it impossible to carry on the ordinary business

of a partnership

● Confess a judgment

● Enter into a compromise concerning a partnership claim or liability

● Submit a partnership claim or liability to arbitration

● Renounce a claim of the partnership. No act of a partner in contravention of a

restriction on authority shall bind the partnership to persons having knowledge of

the restriction

Power of partner as agent of partnership

● Among themselves - The partner is implied to do all things necessary to carry out

the business transactions.

● As to third persons - the relation of partners to third person is founded on the

doctrine of mutual agency.

 ➔ Effects - each partner may create contracts, act in tortious manner, or otherwise

obligate the entire partnership for that partner's individual acts.

➔ Doctrine of Apparent Authority - the power of an agent to act on behalf of a

principal, even though not expressly or impliedly granted. This power arises only if a

third party reasonably infers, from the principal's conduct, that the principal

granted such power to the agent.

➔ Stipulation to Limit Liability - Article 1817. Any stipulation against the liability

laid down in the preceding article shall be void, except as among the partners

Stipulation against liability - a stipulation among the partners contrary to the pro rata

and subsidiary liability expressly imposed by art. 1816 is void and has no effect insofar as

it affects the rights of third persons. It is valid and enforceable only among the partners.

4. Transaction under the Partnership Name - Article 1815. Every partnership shall

operate under a firm name, which may or may not include the name of one or more of the

partners. Those who, not being members of the partnership, include their names in the

firm name, shall be subject to the liability of a partner.

Importance of having a firm name - to define your business and to create an identity

among the competitors and also help to impress the investors. A business name is the

foundation of the trademark design, which has a significant value.

5. Conveyance of Partnership Properties - Article 1819. Where title to real property is

in the partnership name, any partner may convey title to such property by a conveyance

executed in the partnership name; but the partnership may recover such property unless

the partner’s act binds the partnership under the provisions of the first paragraph of

article 1818, or unless such property has been conveyed by the grantee or a person

claiming through such grantee to a holder for value without knowledge that the partner, in

making the conveyance, has exceeded his authority. Where title to real property is in the

name of the partnership, a conveyance executed by a partner, in his own name, passes the

equitable interest of the partnership, provided the act is one within the authority of the

partner under the provisions of the first paragraph of article 1818. Where title to real
property is in the name of one or more but not all the partners, and the record does not

disclose the right of the partnership, the partners in whose name the title stands may

convey title to such property, but the partnership may recover such property if the

partners’ act does not bind the partnership under the provisions of the first paragraph of

article 1818, unless the purchaser or his assignee, is a holder for value, without knowledge.

Where the title to real property is in the name of one or more or all the partners, or in a

third person in trust for the partnership, a conveyance executed by a partner in the

partnership name, or in his own name, passes the equitable interest of the partnership,

provided the act is one within the authority of the partner under the provisions of the

first paragraph of article 1818. Where the title to real property is in the names of all the

partners a conveyance executed by all the partners passes all their rights in such

property.

Conveyance of real property belonging to partnership

● Prima facie ownership of real property - The ownership of a property is indicated

by the certificate title.

● Legal effects of conveyance - legal property belong to the partnership depending

on whose name it is registered and conveyed.

Real property may be registered in the name of:

● Partnership

● One or more but not all the partners

● One or more or all the partners, or in a third person in trust for the partnership

● All the partners

6. Admission and Representation of Partners - Article 1820. An admission or

representation made by any partner concerning partnership affairs within the scope of his

authority in accordance with this Title is evidence against the partnership.

Admission by partner - Admission of one of the partners is admission of all.

Two (2) kinds of admission:

1) During the existence of the partnership-

Requisites:

a) It concerns partnership affairs

b)Scope of authority

c)The existence of the partnership must be proven other than the admission itself.

2) At the time of dissolution

Requisite: Must pertain to the winding upIf all the requisites are present with respect to

the two kinds, then the admission is binding to the partnership

7. Notice to Partners - Article 1821. Notice to any partner of any matter relating to

partnership affairs, and the knowledge of the partner acting in the particular matter,

acquired while a partner or then present to his mind, and the knowledge of any other

partner who reasonably could and should have communicated it to the acting partner,

operate as notice to or knowledge of the partnership, except in the case of a fraud on the

partnership, committed by or with the consent of that partner.

NOTICE TO ONE, NOTICE TO ALL

Three cases of knowledge of a partner

1. Knowledge of the partner acting in the particular matter acquired while a partner

2. Knowledge of the partner acting in the particular matter then present to his mind

3. Knowledge of any other partner who reasonably could have communicated it to the

acting partner.

8. Liability of New Partner - Article 1826. A person admitted as a partner into an

existing partnership is liable for all the obligations of the partnership arising before his

admission as though he had been a partner when such obligations were incurred, except

that this liability shall be satisfied only out of partnership property, unless there is a

stipulation to the contrary.

Liability of incoming partner for existing obligations

● Limited to his share in partnership property for existing obligations - he is liable

for all obligations existing at the time of his admission. His liability is limited to his

share unless there is a stipulation to the contrary.

 ● Extends to his separate property for subsequent obligations - Those who were

already partners at the time when the obligations were incurred are liable with

their separate property.

Reason for rule making the new partner liable

Admission of New partner dissolves the old partnership. The dissolution of which is

essential for the creation of a new partnership with the new partner as part of the same.

Together with the acceptance of the new partner, all partnership properties and existing

liabilities are carried to the new partnership.Unfortunately, partnership creditors prior to

the creation of the new partnership, lose preferential rights as partnership creditors,

hence, it is prejudicial on their part. That is why in Art. 1826, the new partner was

established to be liable even to creditors prior to his admission as partner, so that equality

among creditors would be established. Old creditors are now recognized as the creditors

of the new firm.