Chapter 1: Partnership- Basic Concepts and Considerations

1.1 Definition of partnership

1.2 Characteristics of partnership
1.3 Classification and kinds of partners
1.4 Advantages and disadvantages
1.5 Kinds of partners
1.6 Differences between a partnership and a corporation
1.7 Other legal concerns in partnership

Learning outcomes of the Lesson

At the end of the unit, the students must have:
1. The students were able to correctly compare the different forms of partnerships. (PLO 4; PI 1)
2. The students were able to correctly compare the different types of partners. (PLO 4; PI 1)
3. The students were able to accurately distinguish the advantages and disadvantages of
partnership (PLO 4; PI 1)

1.1 PARTNERSHIP – has a juridical personality with two or more persons bind
themselves to contribute money, property, or industry to a common fund, with the
intention of dividing the profit among themselves (Civil code of the Philippines,
Art. 1767)

1.2 CHARACTERISTICS OF A PARTNERSHIP

Mutual Contribution – There cannot be a partnership without
contribution of money, property or industry to a common fund.

Division of profits or Loses – The essence of partnership is that each

partner must share in the profits or losses of the venture.

Co-Ownership of Contributed Assets- All assets contributed into the

partnership are owned by the partnership by virtue of its separate and
district juridical personality if one partner contributes an asset to the
business, all partners jointly own it in a special sense.

Mutual Agency – Any partner can bind the other partners to a contract if
he is acting within his express or implied authority.

Limited Life- A partnership has a limited life. It may be dissolved by the

admission, death, insolvency, and incapacity, withdrawal of a partner or
expiration of the term specified in the partnership agreement.

Unlimited liability – All partners (except limited partners), including

industrial partners, are personally liable for all debts incurred by the
partnership. If the partnership cannot settle its obligations, creditor’s
claims will be satisfied from the personal assets of the partners without
prejudice to the rights of the separate creditors of the partners.
 Income taxes – partnerships, except general professional partnerships,
are subject to tax rate of 30% of taxable income.

Partners’ Equity Accounts – Accounting for partnerships are much like

accounting for sole proprietorships. The difference lies in the number of
partners’ equity accounts. Each partner has a capital account and a
withdrawal account that serves similar functions as the related accounts
for sole proprietorships.

1.3 CLASSIFICATIONS OF PARTNERSHIPS

1. According to OBJECT:
a. Universal partnership of all present property. All contributions
become part of the partnership fund.
b. Universal partnership of profits. All that the partners
may
acquire by their industry or work during the existence of the
partnership and the use of whatever the partners contributed at
the time of the institution of the contract belong to the partnership.
c. Particular partnership. The object of the partnership is
determinate – its use or fruit, specific undertaking, or the exercise
of a profession or vocation.

2. According to LIABILITY:
a. General. All partners are liable to the extent of their separate
properties.
b. Limited. The limited partners are liable only to the extent of their
personal contributions. In a limited partnership, the law states that
there shall be at least one general partner.

3. According to DURATION:
a. Partnership with a fixed term or for a particular undertaking.
b. Partnership at will. One in which no term is specified and is not
formed for any particular undertaking.
c.
4. According to PURPOSE:
a. Commercial or trading partnership.
b. Professional or non-trading partnership.

5. According to LEGALITY OF EXISTENCE:

a. De jure partnership
b. De facto partnership
1.4 ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP

From Proprietorship From Corporation

Advantages
*Brings greater financial capability to *Easier and less expensive to
the business organize.
*Combines special skills, expertise *More personal and informal
and experience of the partners.
*Offers relative freedom and
flexibility of action in decision-
making.
Disadvantages
*Easily dissolved and thus unstable compared to a corporation.
*Mutual agency and unlimited liability may create personal obligations to partners.
*Less effective than a corporation in raising large amounts of capital.

1.5 KINDS OF PARTNERS

1. General partner. One who is liable to the extent of his separate

property after all the assets of the partnership are exhausted.

2. Limited partner. One who is liable only to the extent of his capital
contribution.
3. Capitalist partner. One who contributes his knowledge or
personal service to the partnership.

4. Industrial partner. One who contributes money or property to the

common fund of the partnership.

5. Managing partner. One whom the partners have appointed as manager

of the partnership.

6. Liquidating partner. one who is designated to wind up or settle the

affairs of the partnership and is not known as a partner.

7. Dormant partner. one who does not take active part in the business of
the partnership and is not known as a partner.
 8. Silent partner. one who not take active part in the business of the
partnership though may be known as a partner.

9. Secret partner. one who takes active part in the business but is not
known to be a partner by outside parties.

10. Nominate partner or partner by estoppel. One who is actually not a

partner but who represents himself as one.

1.6 PARTNERSHIP DISTINGUISHED FROM CORPORATION

Category Partnership Corporation
Manner of creation By mere agreement By operation of law
Number of persons Two or more persons 5–15incorporators (persons)
Commencement From the execution of the From the issuance of certificate of
of juridical articles of incorporation
personality partnership by SEC.
Every partner is an agent
Management if the partners did not Vested on Board of
appoint a Directors/Trustees
managing partner.
Liable up to their personal
Liable only up to their
Extent of Liability assets except
for limited partners interest or investment.
Has right of succession,
has the capacity of continued
Right of succession No right of succession existence regardless of death,
withdrawal, insolvency or
incapacity of its
directors/stockholders.
Any period stipulated Not to exceed 50 years but
Terms of Existence by the partners subject to extension.

1.7 PARTNERSHIP, HOW FORMED; REGISTRATION REQUIREMENT:

Partnerships are required to be registered with the Securities and Exchange

Commission [SEC]. Registration is done by filing the Articles of Partnership with
the SEC. The Articles of Partnership set forth all the terms and conditions
mutually agreed by the partners thereto.

More specifically, the documents required are as follows:

[1] Proposed Articles of Partnership;

[2] Name Verification Slip;
[3] Bank Certificate of Deposit;
[4] Alien Certificate of Registration, Special Investors Resident Visa or proof of
 other types of visa [in case of foreigner];
[5] Proof of Inward Remittance [in case of non-resident aliens].

It bears noting that corporations are not allowed by law to become partners
in a partnership.

IMPORTANT ISSUES INCLUDED IN THE WRITTEN PARTNERSHIP CONTRACT

1. The partnership's nature and rationale – these terms guarantee that

the partners involved in the agreement will not turn away from the
significant intentions of their business.

2. Each partner's capital contributions – this provision ensures that no

person or entity could dispute one or more partner's capital contribution to
the business being established. The contributions indicated also involve
contributions that are not monetary in nature like time, services or goods.

3. Allocations with regards to profits and losses – some partnership may

have equal allocation in profits and losses but others also have other
terms of provision.

4. Authority given for each partner – determining the partner/partners who

will have the task of regularly running the partnership, how the decisions
for the partnership will be completed and how the duties and obligations.

5. Guidelines in admitting new partners – how the partners would vote in

order to allow in new partners in the business.

6. What to do in case one of the partners dies – coming up with a

resolution on what happens to the partnership once one of the partners
dies. Some partnerships normally resolve to automatically dissolve and
liquidate the partnership. However, it would still depend on every one of
the partners' decision.
7. Buying one of the partners' share – the contract must outline several
circumstances like illegal activity, death or divorce wherein anyone of the
partners could buy out another partner's share. They must also include
the terms and conditions in executing the shares buyout.

8. The signature authority to be used in the partnership's bank

accounts – whose signature among the partners would be used or would
all the partners signatures be required.

9. Ways and means of resolving conflicts in the partnership and business

– legal solutions and actions in order to resolve disputes in the partnership.