Partnership

ARTICLES 1767-1867, NCC

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 Definition:
BY THE CONTRACT OF 1) TWO OR MORE 2) TO CONTRIBUTE
PARTNERSHIP: PERSONS BIND MONEY, PROPERTY, OR
THEMSELVES INDUSTRY TO A
COMMON FUND

Article
1767
3) WITH THE INTENTION NOTE: TWO OR MORE
OF DIVIDING THE PERSONS MAY ALSO
PROFITS AMONG FORM A PARTNERSHIP
THEMSELVES. FOR THE EXERCISE OF A
PROFESSION
Characteristic elements

1.
2. Nominate 3. Bilateral 4. Onerous
Consensual

5.
7.
Commutativ 6. Principal
Preparatory
e
1. There must be a valid contract

2. The parties must have legal personality to enter into the

contract

3. There must be a mutual contribution of money, property, Essential

or industry to a common fund
Features
4. The object must be lawful

5. The primary purpose must be to obtain profits and to

divide the same among themselves.
Essential 1. VALID CONTRACT
a) Fundamentally contractual

Features b) Generally, no particular form (See, however, Arts. 1771

and 1772; Statute of Frauds)
Essential Features
2. LEGAL
CAPACIT
Y TO
Consent
ENTER
INTO A
CONTRA
Object
CT
Cause
Essential Features
3. MUTUAL
CONTRIBUTION
OF:

Property – real or
Money – legal personal; corporeal Industry – active
tender or incorporeal; cooperation
goodwill
4. LAWFUL OBJECT

Otherwise, no partnership can Essential

arise Features
Generally, any purpose as long as
object is lawful
 Essential Features
5. PRIMARY PURPOSE – OBTAIN PROFITS

• joint interest in the profits

• principal, not necessarily exclusive aim

• not necessarily in equal shares

 1. Persons who are not partners as to each other are not
partners as third persons (Exception: Art. 1825 – partnership
by estoppel)

Rules in
Determining the 2. Co-ownership or co-possession does not of itself establish
Existence of a partnership, whether such co-owners or co-possessors do
Partnership or 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.
 4. The receipt by a person of a share of the profits
of a business is a prima facie evidence that he is a
partner, but no such inference if such payment was

Rules in received in payment:

a. as a debt in installments or otherwise
Determining b. as wages of an employee or rent to a landlord
the Existence c. as an annuity to a widow or representative of a
of Partnership deceased partner
d. as an interest on a loan, though the amount of
(Art. 1769) payment varies with the profits of the business
e. as the consideration for the sale of a goodwill
of a business or other property by installments
or otherwise
 1. The partners share in the profits and losses
(Arts. 1767, 1797, 1798). This community
of interest in profits is not incidental to the
ordinary agency

Typical 2. They have equal rights in the management

and conduct of the partnership (Art. 1803)
incidents of a 3. Every partner is an agent of the partnership,
partnership and entitled to bind the other partners by his
acts, for the purposes of its business (Art.
1818). He may also be liable for the
partnership obligations
 4. All partners are personally liable for the debts
of the partnership with their separate property
(Arts. 1816, 1822-1824), except that limited
partners are not bound beyond the amount of
Typical their investment (Art. 1843);
incidents of a 5. A fiduciary relation exists between the
partnership partners (Art. 1807); and
6. On dissolution, the partnership is not
terminated, but continues until the winding up
of partnership is completed (Art. 1828)
 Two essential
Unlawful elements:
partnership • Lawful object or
(Art. 1770) purpose
• Established for the
common benefit or
interest of the partners
 Consequences:
• Contract is void ab initio
• Profits confiscated in favor of the
Unlawful government
partnership • Instruments, tools and proceeds of the
crime shall also be forfeited
• Contributions of the partners shall not
be confiscated unless they fall under 3
• Innocent third parties are protected
(unless knowledge can be presumed)
 • Any immovable property or an interest therein may
be acquired in the partnership name.

Art. 1774 • Title so acquired can be conveyed only in the

partnership name
• Reason: Partnership has juridical personality
separate from that of the partners
 Associations and societies:
• whose articles are kept secret among the
members; and
• wherein any one of the members may contract
in his own name with third persons:
Art. 1775
 shall have no juridical personality
 shall be governed by the provisions
relating to co-ownership
Arts. 1776-1783: Classification of
Partnership

1. As to the extent of its subject matter

a. Universal partnership – either all the present property or to all profits (Art. 1777-
1779)
b. Particular partnership

2. As to liability of the partners

a) General partnership (Arts. 1816, 1822-1824)
b) Limited partnership (Art. 1843)
 3. As to its duration

Arts. 1776- a. Partnership at will (Art. 1785)

b. Partnership with a fixed term
1783:
Classification 4. As to legality of its existence
of Partnership a. De jure (Art. 1772, par. 2; Art. 1773)
b. De facto
Arts. 1776-1783: Classification of
Partnership

5. As to representation to others
a. Real partnership
b. Partnership by estoppel

6. As to purpose
a. Commercial or trading (Art. 1767)
b. Professional
Partnership vs. Co-ownership
  Co-ownership Partnership
Creation Generally created by law Always created by a contract,
either express or implied (Art.
1767)
Juridical personality None Separate and distinct from that of
each partner (Art. 1768)
Purpose Common enjoyment of a thing or Realization and sharing of profits
right, which does not necessarily
involving the sharing or profits
Duration An agreement to keep the thing No limitation
undivided for more than 10 years
is not allowed
Partnership vs. Co-ownership
Disposal of interests Free to do so A partner may not dispose of
his individual interest in the
partnership so as to make the
assignee a partner unless
agreed upon by all of the
partners
Power to act with third persons A co-owner cannot represent the In the absence of any stipulation
co-ownership to the contrary (Art. 1803), a
partner may bind the partnership
Effect of death Does not necessarily dissolve the Results in the dissolution of
partnership partnership
  Partnership Voluntary Association
Juridical personality Yes None
Purpose For pecuniary profit Not for pecuniary profit
Contribution of members Yes – money, property, or Fees are collected; no
services contribution of capital
Liability of members Partnership as a rule is the one Members are individually
liable in the first place for liable for the debts of the
debts of the firm association, authorized by
them or subsequently ratified
by them

Partnership vs. Voluntary Association

  Partnership Corporation
Manner of creation Mere agreement of the parties By law or by operation of law
Number of incorporators/partners At least two persons At least 5 (except OPC)
Commencement of juridical personality From the moment of the execution of the From the date of issuance of certificate of
contract incorporation by the SEC
Powers A partnership may exercise any power A corporation can exercise only the powers
authorized by the partners provided it is not expressly granted by law or implied from those
contrary to law, morals, good customs, public granted or incident to its existence.
order, or public policy

Management When the management is not agreed upon, The power to do business and manage its affairs
every partner is an agent of the partnership is vested in the BOD
Effect of mismanagement A partner can sue a co-partner who mismanages The suit against a member of the BOD who
mismanages must be in the name of the
corporation

Partnership vs. Corporation

 Right of succession No right of succession There is right of
succession
Extent of liability to The partners (except The stockholders are liable
third persons limited partners) are liable only to the extent of the
personally and subsidiarily shares subscribed by them
(sometimes solidarily) for
partnership debts to third
persons
Transferability of A partner cannot transfer A stockholder, generally,
interest his interest to another so as has the right to transfer his
to make the latter a partner shares without the prior
Partnership vs. without the consent of all consent of the other
stockholders
Corporation Term of existence For any period of time
stipulated by the partners
Default is perpetual

Firm name A limited partnership is Any firm name provided it

required by law to add the is not the same as or similar
word “Ltd.” to its name to any registered firm name

Dissolution Anytime by the will of any Can be dissolved only with

or all of the partners the consent of the State

Governing law Civil Code Revised Corporation code

 Both have juridical personality separate and distinct
from the individuals composing them;

Both can act only through agents;

Similarities:
Partnership and Both composed of an aggregate of individuals
(except OPC);
Corporation
Like a stock corporation, a partnership distributes its
profits to those who contribute capital to the
business

Both are taxable as corporations (except GPP

   Partnership Conjugal partnership of gains

Parties Two or more partners belong to Spouses – man and woman

either sex

Governing law As a rule, governed by the Law (Family Code)

stipulation of the parties

Partnership vs.
JuriJdical personality Yes None

Commencement From the moment of execution of From the date of the celebration of
Conjugal the contract unless otherwise
stipulated
the marriage, any stipulation to the
contrary is void

Partnership of Purpose To obtain profits To regulate the property relations of

Gains the spouses during the marriage

Distribution of profits According to the agreement of the Equal share

parties or in proportion to their
respective capital contributions

Management Management is shared equally Administration belongs to both but

unless one or more of them are the husband’s decision prevails
appointed
Obligations of the
Partners
Art. 1784 – Commencement and Term
• It exists from the moment of the celebration
of the contract by the partners, UNLESS
otherwise stipulated
• Thus, its registration in the SEC is not
essential to the give it a juridical personality
Obligations of the
Partners
Art. 1785 – Partnership for a fixed term;
continuation of partnership beyond the
term

• express (there is a definite period); implied

(as when a particular transaction is
undertaken)
• Terms may be extended expressly or
impliedly
 Art. 1786 – Obligations of the partners among themselves and
to the partnership with respect to contribution of party
1. To contribute money, property, or industry

Obligation 2. To answer for eviction in case the partnership is deprived

of the determinate property contributed
of the 3. To answer to the partnership for the fruits of the property

Partners the contribution of which he delayed

4. To preserve said property with the diligence of a good
father of a family
5. To indemnify the partnership for any damage cause to it by
the retention of the same or by the delay in its contribution
 Art. 1787 – Appraisal of goods

Obligation of In accordance with the

the Partners stipulation of the partners

If none, by experts chosen by

the partners, according to
current prices
Obligation of the Partners
Art. 1788 – Obligations with respect to contribution of money and money converted to
personal use
Obligations with respect to the partnership capital
1. To contribute on the date due the amount he has undertaken to contribute
2. To reimburse any amount he may have taken from the partnership coffers and converted
to his own use
3. To pay the agreed or legal interest
4. To indemnify the partnership for the damages caused to it
Obligation of the Partners

Art. 1789 – obligations of industrial partner

• Unless the contrary is stipulated, he becomes a debtor of the partnership for his work or
services from the moment the partnership relation begins
• Thus, an industrial partner cannot engage in business for himself, unless the partnership
expressly permits him to do so (See also Art. 1808)
Obligation of the Partners

Remedies: The capitalist partners have the right either –

1. To exclude him from the firm, with damages; or

2. To avail themselves of the benefits which he may have obtained, with damages.
Obligation Art. 1790 – contribution to partnership capital

of the • The partners shall contribute equal shares to the capital of

Partners the partnership

• UNLESS there is a stipulation to the contrary
 Article 1791 – obligations to contribute additional capital (for capitalist
partners only)
Requisites:
1. There is imminent loss of the business of the partnership;

Obligation 2. The majority of the capitalist partners are of the opinion that an
additional contribution to the common fund would save the

of the 3.
business;
The capitalist partner refuses deliberately (not because of his

Partners financial inability to do so), to contribute an additional share to the

capital; and
4. There is no agreement that even in case of an imminent loss of the
business the partners are not obliged to continue
IF ALL the requisites are present, the capitalist partner shall be obliged to
sell his interest to the other partners.
Obligation of the Partners
Art. 1792 – obligations of managing partner who collects debt
Requisites:
1. There exists at least 2 debts, one where the collecting partner is creditor, and the
other, where the partnership is the creditor;
2. Both debts are demandable; and
3. The partner who collects is the managing partner
Obligation of the Partners
- Any sum received by the managing partner 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)
- Should he have given a receipt for the partnership credit, the amount received shall
be fully applied to the partnership credit.
Obligations of the Partners
Example: A and B are partners, A is the MP. C is indebted to A of 2k; C also owes
the partnership the amount of 4k. If A collects 1,500k and issues a receipt for his
own credit – 500 will go to him and 1,000 to the partnership
 
Note: The debtor is given the right to prefer payment of the credit of the partner if it
should be more onerous to him. Example – credit of A bears 20% interest per annum,
while that of the partnership is 15%, the debtor can apply his payment to the credit
of A in case he so desires.
Obligation Art. 1793 – Obligation of partner who receives share of
partnership credit
of the • There is only one credit – in favor of the partnership
Partners •Any partner
Obligation of the Partners
Requisites:
1. A partner has received, in whole or in part, his share of the partnership;
2. The other partners have not collected their shares; and
3. The debtor has become insolvent
- in this case, the partner is obliged to bring to the partnership capital what he received
even though he may have given receipt for his share only
Obligations of the Partners
Example: D owes partnership X and Co. P6,000.00. A, a partner, received a share of
2k ahead of B and C. When B and C were collecting from D, the latter was already
insolvent. A is required to share the 2k to B & C.
Obligation of the Partners
Art. 1794
• Every partner is responsible to the partnership for damages suffered by it through
his fault
•He cannot compensate them with the profits and benefits which he may have earned
for the for the partnership by his industry
•However, the courts may equitably lessen the responsibility if through the partner’s
extraordinary efforts in other activities of the partnership, unusual profits have been
realized
Obligation of the Partners
Art. 1795 – Risk of loss of things contributed
1. Specific and determinate things which are not fungible where only the use is contributed (e.g. car)
– partner
2. Specific and determinate thing the ownership of which is transferred to the partnership –
partnership
3. Fungible things or things which cannot be kept without deteriorating even if they are contributed
only for the use of the partnership (e.g. oil, wine) – partnership
4. Things contributed to be sold – partnership
5. Things brought and apprised in the inventory – partnership
Obligations of the Partners
Art. 1796 – Responsibility of the partnership to the partners
 
In the absence of any stipulation to the contrary, every partner is an agent of the partnership for the
purpose of its business. Hence, the partnership has the obligation to:
Refund amounts disbursed by the partner on behalf of the partnership plus interest from the time the
expenses are made;
Answer for the obligations the partner may have contracted in good faith in the interest of the
partnership business; and
Answer for risks in consequence of its management
Obligations of the Partners
Example: The article of a trading partnership composed of A, B, and C provides that
any purchase in excess of P5k must first be approved by all the partners. C made a
purchase out of his personal fund for P7k without the knowledge of A and B. C is
not entitled to reimbursement.
 Arts. 1797-1799:  

Profits

Rules for
Distribution of
The partners share the profits according to their agreement (Art. 1797);
however, any agreement which excludes one or more partners from any
share in the profits or losses is void (Art. 1799).

Profits and If no agreement

Losses The share of each capitalist partner shall be in proportion to his capital
contribution. This rule is based on the presumed will of the parties.

The industrial partner shall receive such share, which must be satisfied first
before the capitalist partners shall divide the profits, as may be just and
equitable under the circumstances. If he also contributed money, then his
share is proportionate to his contribution (in addition to his share as an
industrial partner).
Rules for the Distribution of Profit
and Loss
Example:
 
A, B, and C formed a partnership with the following contributions: A – 100k, B – 50k, and C – 50k.
 
Agreement in the sharing is: A – 40%, B – 30%, C – 30%. They share in the profits in accordance with this
agreement.
Assuming no agreement: A – 50%, B – 25%, and C – 25% (in proportion to their capital contribution)
D is an industrial partner. If profits amount to 220k and A, B, and C agreed to give D 20k, leaving 200k to be
divided between them in accordance with their agreement or if there is none, in proportion to their contribution.
Rules for the Distribution of Profit
and Loss
Losses
The partners share in the losses according to their agreement (Art. 1797); however, any agreement which
excludes one or more partners from any share in the profits or losses is void (Art. 1799).
If there is no agreement, but the contract provides for the share of the partners in the profits, the share of
each in the losses shall be in accordance with the profit-sharing ratio.
If there is also no profit-sharing agreement in the contract, the losses shall be borne by the partners in
proportion to their capital contributions.
Note: The industrial partner shall not be liable for losses (compare this with Art. 1816 and 1824 [and
Arts. 1822&1823]), unless he also has contributions in which case he shares in the losses in proportion to
his contribution.
Rules for the Distribution of Profit
and Loss
Reasons:
 
A. He cannot withdraw the work or labor already done by him, unlike the capitalist
partners who can withdraw their capital.
B. If the partnership fails to realize any profits, then he has labored in vain and in a
real sense he has already contributed to his share in the loss.
Rules for the Distribution of Profit
and Loss

Question: Can the

partners agree to intrust
to a third person the
designation of the share
of each one in the
profits and losses?
 Rules for
the Answer: Yes, but not to one of the partners. (Art. 1798).
Reason – the fulfillment of a contract cannot be left to
Distributio the will of one of the contracting parties alone (Arts.
1308. 1309)
n of Profit
and Loss
Rules for the Distribution of Profit
and Loss
Such designation may be impugned only when it is manifestly inequitable
In no case may a partner who has begun to execute the decision of the third person, or who has not
impugned the same within a period of 3 months from the time he had knowledge thereof, complain
of such decision.
 
Reason for the 3-month rule: to forestall any paralyzation in the operations of the partnership
 
Art. 1799 – only the stipulation is void; the partnership, if otherwise valid, subsists and the profits or
losses shall be apportioned as if there was no stipulation on the same (Art. 1797, par. 2)
 Rules for the Distribution of
Profit and Loss
Question: Can the partners stipulate for unequal
shares in the profits or losses even if their
respective contributions are equal?
 

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 Rules for the Distribution of
Profit and Loss
Answer: Yes, unless the inequality is so gross that
it is, in effect, a simulated form or attempt to
exclude any partner from any share in the profits
or losses.

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 Two distinct cases of appointments of a managing
partner (Art. 1800) 
1) Appointment by common agreement in the
Arts. 1800- articles of partnership

1803: • He may execute all acts of administration (not

those of strict ownership such as those enumerated
Management in Art. 1818, par. 3) notwithstanding the opposition
of the of the other partners, UNLESS he should act in bad
faith
partnership • His power is revocable only upon just and lawful
cause (Art. 1920) and upon the vote of the partners
representing the controlling interest.
Reason: the revocation represents a change in the
terms of the contract
 2) Appointment as manager after the
constitution of the partnership
Management independently of the articles of
partnership
of the • May be revoked at any time for any cause
partnership whatsoever
Reason: revocation is not founded on a
change of will of the partners. It is
merely a contract of agency, which
may be revoked at any time (Art.
1920).
 Scope of power of an MP – As a general rule, a partner
Management appointed as manager has all the powers of a general
agent as well as all the incidental powers necessary to
of the carry out the object of the partnership in the transaction
partnership of its business.
 Compensation – his compensation is his share in the profits; he is not
entitled to compensation, unless:
a) A partner engaged by his co-partners to perform services not required
of him in fulfillment of the duties which the partnership relation imposes
and in a capacity other than that of a partner

Management b) Where there is extraordinary neglect on the part of one partner to

perform his duties toward the firm’s business thereby imposing the
of the entire burden on the remaining partner

partnership C) Partners exempted by the terms of partnership from rendering

services to the firm may demand pay for services rendered
D) Where one partner is entrusted with the management of the
partnership business and devotes his while time and attention thereto, at
the instance of the other partners who are attending to their individual
businesses and giving no time or attention to the business of the firm
Management of the partnership
Art. 1801 –
 
Requisites:
 
a) Two or more partners have been appointed as managers;
b) There is no specification of their respective duties; and
c) There is no stipulation that one of them shall not act without the consent of all the others
 
Management of the partnership
Rules:
 
a) Each one may separately perform acts of administration
b) If one or more of the managing partners (not any partner) shall oppose the acts of the
others, then the decision of the majority (per head) of the managing partners shall prevail
c) In case of tie, the matter shall have to be decided by the vote of the partners owning the
controlling interest, i.e., more than 50% of the capital investment (Art. 492).
Management of the partnership
Art. 1802 – Unanimity of action stipulated
a) In case there is a stipulation that none of the managing partners shall act without
the consent of the others
b) The concurrence of all shall be necessary for the validity of the acts
c) The absence or disability of any one of them cannot be alleged, UNLESS there is
imminent danger of grave or irreparable injury to the partnership
Management of the partnership
Art. 1803 – Rules when manner of management has not been agreed upon
a) All the partners shall be considered agents and whatever any one of them may do alone shall bind the
partnership, subject to Art. 1801 that in case of timely opposition of any partner, the matter shall first be
decided by the majority vote; in case of tie, the matter shall be decided by the vote of the partners
representing the controlling interest.
b) The unanimous consent (express or implied) of all the partners is necessary for any important alteration in
the immovable property, even if it may be useful to the partnership. Opinion – if the alteration is necessary
for the preservation of the property, it would seem that the consent of all partners is not required
c) If the refusal to give consent is manifestly prejudicial to the interest of the partnership, the intervention by
the court may be sought.
Management of the partnership
Art. 1804 – Sub-partnership
• A sub-partnership is a partnership formed between a member of a partnership and a
third person for a division of the profits coming to him from the partnership
enterprise. In effect, it is a partnership within a partnership and is distinct and
separate from the main or principal partnership
• A sub-partner does not become a member of the main partnership without the
consent of all the parties. Not being a member of the partnership, he does not acquire
rights of a partner nor is he liable for its debts.
Management of the partnership
Arts. 1805 to 1809: Other rights, duties, and obligations
1. Right to access, inspect, and copy (at any reasonable hour) partnership books,
which shall be kept at the principal place of business of the partnership (subject to
any agreement of the partners) (Art. 1805)
2. Duty, on demand, to render true and full information of all things affecting the
partnership to any partner or the legal representative of any deceased partner or of
any partner under legal disability (Art. 1806)
Management of the partnership
3. Duty to 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 (Art. 1807)
4. Right to a formal account as to partnership affairs (Art. 1809) under the following circumstances:
a) If he is wrongfully excluded from the partnership business or possession of its property by his co-
partners;
b) If the right exists under the terms of any agreement;
c) As provided by Art. 1807; and
d) Whenever other circumstances render it just and reasonable
Property rights of a partner
Principal Rights
 
1. His rights in specific partnership property (Art. 1811);
2. His interest in the partnership (Art. 1812); and
3. His right to participate in the management (Art. 1803)
Property rights of a partner
Related Rights
1) The right to reimbursement for amounts advanced to the partnership and indemnification for
risks in consequence of management (Art. 1796);
2) The right of access and inspection of partnership books (Art. 1805);
3) The right to true and full information of all things affecting the partnership (Art. 1806);
4) The right to a formal account of partnership affairs under certain circumstances (Art. 1809);
and
5) The right to have the partnership dissolved also under certain circumstances (Arts. 1830-1831).
Property rights of a partner
A. Right in specific partnership (tangible) property – he is a co-owner with his
partners
Incidents:
1. Equal right of possession and use for partnership purposes

• No right to possess and use property for any other purpose without the consent of his
partners, otherwise:
Property rights of a partner
He must account to the others for the profits derived therefrom (Arts. 1807, 1788, par. 2)
or the value of his wrongful possession.
partner who is wrongfully excluded from such possession by his co-partner has a right to
formal account from the latter (Art. 1809 [1]) and even apply for a judicial decree of
dissolution (Art. 1831 [3,4,6]

• By agreement, the right to possess specific property may be surrendered to one

partner
Property rights of a partner
2. Right not assignable
 Reasons:
a) It is impossible to determine the extent of the partner’s beneficial interest in the
property until after the liquidation of partnership affairs;
b) It prevents interference by outsiders in partnership affairs; and
c) It protects the rights of other partners and partnership creditors to have partnership
assets applied to firm debts
Property rights of a partner
3. A partner’s right in specific property is not subject to attachment, execution, garnishment, or injunction,
without the consent of all partners except on a claim against the partnership itself
Reasons:
a. The whole of partnership property belongs to the partnership considered as a juridical person (Art. 1768),
and a partner has no interest in it but his share of what remains after all the partnership debts are paid (Art.
1812).
b. If a partner’s right in the property is not assignable voluntarily, his separate creditors should not be able
to force an involuntary assignment.
4. A partner’s right in specific partnership property is not subject to legal support under Art. 195 of the
family Code. Note: a partner’s interest in the partnership (Art. 1812) is subject to legal support (Art. 1814)
Property rights of a partner
B. Interest in the partnership (Art. 1812)
 
• his share in the undistributed profits (i.e. net income) during the life of the partnership as
a going concern; and
• his share in the undistributed surplus (i.e. assets over liabilities) after its dissolution
Property rights of a partner
Assignment of interest in partnership (Art. 1813)
Rules:
• While a partner’s right in specific property is not assignable (Art. 1811 [2]), he may
assign his interest in the partnership (Art. 1812), in whole or in part, to any of his co-
partners or to a third person irrespective of the consent of the other partners, in the
absence of agreement to the contrary. This assignment will not cause dissolution.
 However, such assignment does not grant the assignee the right to:

a. Interfere in the management;

b. Require any information or account; or

c. Inspect any of the partnership books

Property rights The only rights of the assignee are:

of a partner
a. To receive in accordance with his contract the profits accruing to
the assigning partner;
b. To avail himself of the usual remedies provided by law in the
event of fraud in the management;
c. To receive the assignor’s interest in case of dissolution; and

d. To require an account of partnership affairs in case the partnership

is dissolved
Property rights of a partner
Remedies of separate judgment creditor of a partner
a. Secure a judgment on his credit and then apply to the court for a “charging order”, subjecting the
interest of the debtor partner in the partnership with the payment of the unsatisfied amount. By virtue of
the charging order, any amount or portion thereof which the partnership would otherwise pay to the
debtor-partner should instead be given to the judgment creditor
Note: This is without prejudice to the preferred rights of partnership creditors under Art. 1827, i.e. the
claims of the partnership creditors must be satisfied first before the separated creditors of the partners
can be paid out of the interest charged.
b. The court may resort to other courses of action if the judgment debt remains unsatisfied,
notwithstanding the issuance of the charging order, i.e. appointment of receiver, sale of the interest, etc.
Property rights of a partner
Redemption or purchase of interest charged
a. With the separate property of any one or more of the partners, or with partnership
property but with the consent of all the partners whose interests are not so charged or
sold.
b. The redeeming non-debtor does not acquire absolute ownership over the debtor’s
interest but holds it in trust for him
c. Period to redeem – before the sale or expiration of the redemption period fixed by
the court in its order of sale
OBLIGATIONS OF THE PARTNERS WITH
REGARD TO THIRD PERSONS

Art. 1815 – Firm Name

 
• It is necessary to distinguish the partnership which has a distinct and separate
juridical personality from the individuals composing it and from other entities
•General rule: any name; except – misleading name, identical or deceptively
confusingly similar to that of an existing entity
OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS
• Rule 3.02, Code of Professional Responsibility – the continued use of the name of a
deceased partner is permissible provided that the firm indicates in all its
communications that said partner is deceased
Note: Persons who, not being partners, include their names in the firm name do not
acquire the rights of a partner (Art. 1767) but under Article 1815, they shall be
subject to the liability of a partner (Art. 1816) insofar as third persons without notice
are concerned. Such persons become partners by estoppel (Art. 1825).
OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS
Art. 1816 – Liability for contractual obligations of the partnership (compare
this with Arts1797 and 1824 [and Arts. 1822&1823])
Rule: The partners, including the industrial partner, are liable to creditors of the
partnership for the obligations contracted in the name and for the account of the
partnership.

• The debts and obligations of the partnership are, in substance, also the debts and
obligations of each individual member of the firm.
OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS
• Their individual liability to creditors is pro rata and subsidiary.
Pro rata – it must be understood to mean equally or jointly, and not proportionately
which is its literal meaning; pro rating is based on the number of partners and not on the
amount of their contributions.
Subsidiary or secondary – because the partners become personally liable only after all the
partnership assets have been exhausted. Thus, the partners are liable as guarantors in
favor of partnership creditors to the extent that the assets of the firm are not sufficient to
meet its obligations
OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS
• Note: Even the industrial partner who, ordinarily, is not liable for losses (Art. 1797)
would have to pay but he can recover from the amount he has paid from the capitalist
partners unless there is an agreement to the contrary.
• This article refers to “liabilities” which arises from the inability of a partnership to pay
debt to a third party at a particular time (which does not necessarily mean that the
partnership business, as a whole, has been operating at a loss.
• The exemption of the industrial partner to pay LOSSES relates exclusively to the
settlement of the partnership affairs among the partners themselves and has nothing to do
with the LIABILITIES to third persons.
OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS
Example: A and B are capitalist partners, with C as an industrial partner. A and B contributed
P10,000.00 each to the partnership capital. A contractual liability of P26,000 was incurred by the
partnership in favor of D.
 Under Article 1816, D can sue the firm and all the partners including C. The capital assets of
P20,000.00 shall first be exhausted thereby leaving an unsatisfied liability of Php6,000.00. D can
recover the amount from A, B, and C jointly or pro rata at P2,000.00 each. After paying D, C can
recover of reimbursement of P1,000.00 each from A and B. Under Art. 1797, C is exempted from
the loss of P6,000.00 as among themselves, unless there is stipulation to the contrary.
 Note that under Art. 1817, the stipulation is valid and enforceable only as to the partners but void
as to third persons.
OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS
Art. 1818 – Liability of partnership for acts of partners
Three (3) acts under Art. 1818
1. Acts for apparently carrying on in the usual way the business of the partnership (par. 1)- Rule: Every
partner is an agent and may execute such acts with binding effect on the partnership even if he has in fact
no authority UNLESS the third person has knowledge of such authority
Example: A, B, and C are partners in the buying and selling of home appliances. The sale of a TV by C to
D is binding upon the partnership because it is apparently for carrying on in the usual way the business of
partnership, even if C had, in fact, no authority.
But if D had knowledge of such lack of authority, then the partnership would not be bound by the act of C.
OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS
2. Acts of strict dominion or ownership (pars. 2 & 3), i.e. acts not apparently for
carrying on in the usual way the business, the partnership is not bound: UNLESS, a)
authorized by all the other partners; or b) they have abandoned the business. There
are seven (7) acts under Art. 1818.
3. Acts in contravention of a restriction on authority (par. 4) – the partnership is not
liable to third persons having actual or presumptive knowledge of the restrictions,
whether or not the acts are for apparently carrying on in the usual way the business
of the partnership.
OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS
Art. 1819 – Conveyance of real property; legal effects
The real property may be registered or owned in the name of:
1. The partnership (pars. 1&2) – what is conveyed is title or ownership
Example: conveyance in partnership name (par. 1) – A, B, and C are partners of X
&Co. A sold a parcel of land registered in the name of X & Co. to D without express
authority.
 
OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS
Effects:
a. Title passes to D, but X & Co. can recover the property if a) the conveyance was
not in the usual way of business, or b) D had knowledge that A has no authority even
though the conveyance was made in the usual way of business.
b. The partnership cannot recover if D had, in turn, conveyed the property to E who
had no knowledge of A’s lack of actual authority in making the conveyance to D.
OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS
Example: conveyance in partner’s name (par. 2) – if the sale was executed by A in
his own name to D:
Effects:
a. D does not become the owner of the land; he gets only the equitable interest of X
& Co. assuming that the selling is in the usual course of business.
b. D would not get even the equitable interest if: i) X & Co. is not engaged in the
buying and selling of lands; or ii) D had knowledge of A’s lack of authority although
the sale was made in the usual course of business
OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS
2. One or more but not all the partners (par. 3) – conveyance in name of partner or
partners in whose name title stands
Example: Although the land really belongs to X & Co., it is however registered in
the name of A and the record does not disclose the right of X & Co. If A sold the
land in his own name to D, title is conveyed to D. The effect is the same as in par. 1.
OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS
3. Title in name of one or more or all partners or third person in trust for partnership;
conveyance executed in partnership name or in name of partner
Example: Suppose the land is in the name of A in trust for the partnership, if A sells the land
to D in the name of X & Co. or in his name, the conveyance will pass only the equitable
interest of X & Co., A being a mere trustee. The rule is the same as in par. 2.
4. Title in name of all partners, conveyance in name of all partners – passes title to D,
whether or not in the course of business
OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS
Art. 1820 – Effect of admission by a partner
Rule: An admission or representation made by any partner concerning partnership
affairs within the scope of his authority, is evidence against the partnership.
 Example: A borrowed P1,000.00 from B. A made the statement that he was acting
for C and the money was intended for C. C never authorized A to borrow from B.
The declaration of A is not admissible against C as to make him liable to B.
Suppose C said in one occasion in the presence of D that he received the money, this
statement can be testified to by D in a litigation by B against C.
OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS
Art. 1821 - Notice to, or knowledge of, a partner of matter affecting partnership affairs
Operates as a notice to or knowledge of the partnership EXCEPT in case of fraud
Three (3) cases of knowledge:
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; and
3. Knowledge of any other partners who reasonably could and should have communicated it
to the acting partner.
 OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS
Examples: A, acting for the partnership, bought a parcel of land from D. Before the sale, A acquired knowledge
that the land is involved in litigation in which E claims to be the owner. Nevertheless, A did not convey the
information to the partnership. E was able to recover the law. In this case, A’s knowledge is knowledge of the
partnership. Hence, D is not liable.
The knowledge by A may have been acquired before he became a partner provided that the same was then
present to his mind.
If B (not the acting partner) had received the information and it is reasonable to believe that he could and should
have communicated it to A, B’s knowledge is knowledge of the partnership. However, if B acquired knowledge
or notice before he became a partners, there is neither notice to nor knowledge of the partnership.
If A deliberately did not inform the partnership regarding the claim of E for a consideration paid by D, no
knowledge can be imputed to the partnership as there was fraud.
OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS
Art. 1824 – Solidary liability of the partners and the partnership to third
persons for the:
 
Wrongful act or omission (Art. 1822); or
Breach of trust (Art. 1823)
OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS
Art. 1822 – Tort (wrongful act or omission); requisites:
The partner must be guilty of a wrongful act or omission; and
He must be acting in the ordinary course of business, or with the authority of his co-
partners even if the act is unconnected with the business.
 
Example: A, acting in the course of the business, negligently operated a vehicle
which resulted in an accident. All the partners are liable.
OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS
This is true even though the other partners did not participate in, ratify, or had
knowledge of the act or omission
However, the partnership is not liable if the partner acted on his own and not for the
benefit of the partnership in the course of some transaction not connected with the
partnership business, even though he was in a position to commit the act only
because of his being a partner in the business
OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS
Note: Partnership liability under Art. 1822 does not extend to criminal liability, such
as embezzlement, where the wrongdoing is regarded as individual in character.
Example: One member of a law firm is not subject to disbarment or discipline for the
misconduct of his partner where he had no knowledge of the misconduct, nor
consented to it nor participated in it.
However, where the crime involves a fine rather than imprisonment, even criminal
liability, i.e. partnership fine, may be imposed
OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS
Article 1823 – Misapplication of money or property of a third person
 Rule: The partnership is liable for any losses suffered by a third person whose
money or property is misappropriated:
a) By a partner who received it within the scope of his authority; or
b) By any other partner after it was received by the partnership in the ordinary
course of business while in its custody.
OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS
Example: A, B, and C are partners in X & Co., an investment firm. C fraudulently
obtained D’s money in the ordinary course of the firm’s business and used the
money for personal expenses rather than investing it. A & C did not consent to or
participate in the breach of trust. As a matter of fact, they came to know of the
breach only some years after it had occurred.
 
Are A & B also liable?
OBLIGATIONS OF THE PARTNERS
WITH REGARD TO THIRD PERSONS
Yes. All partners are solidarily liable to D.
Reasons for the rule under Art. 1824:
1. Public policy. The rule of respondeat superior (vicarious liability) applies to the
law of partnership in the same manner as other rules governing agency
2. To protect a person who, in good faith, relied upon the authority of a partner,
whether such authority is real or apparent.
Art. 1824 vs. Art. 1816

  Art. 1816 Art. 1824

Scope Partnership Wrongful acts or
obligations omission of any
partner
Nature of liability Joint and Solidary
subsidiary
Partnership by Estoppel
Art. 1825 – Partner/ship by estoppel
 General rule: Persons who are not partners as to each other are not partners as to
third persons (Art. 1709 [1])
Exception: Partners by estoppel (Art. 1825
Partnership by Estoppel
Requisites:
a. The partner directly represents himself to anyone as a partner in an existing or
non-existing partnership, or, indirectly represents himself by consenting to another
representing him as a partner in an existing or non-existing partnership; and
b. Reliance in good by faith by third person on such representation/s.
 
Partnership by Estoppel
Liabilities:
A. There is an existing partnership
 1. Partnership liability – if all the actual partners (in an existing partnership) consented to the
representation
 Example: A, B, and C are partners in X & Co. D represented himself as a partner to E who on the
faith of such representation, extended credit to X & Co.
 D is a partner by estoppel. He is liable to E as though he is an actual member of X & Co.
 If all the partners A, B, and C consented to the representation, then a partnership liability results.
This is partnership by estoppel.
Partnership by Estoppel
2. Pro rata liability – not all of the partners in an existing partnership consented to
the representation
 
Example: If only A and B consented to the representation of D, there is no
partnership liability. Only A, B, and D are liable pro rata.
Partnership by Estoppel
3. Separate liability – none of the partners in an existing partnership consented
 
Example: If D acted alone without the consent of A, B and C, then he alone is liable
separately to E.
 
Partnership by Estoppel
B. Without existing partnership

1. Pro rata liability – all those represented as partners consented to the representation
 
Example: Suppose A, B, and C are not really partners. If they all consented to the
representation of D to E, all of them shall be liable pro rata.
Partnership by Estoppel
2. Separate liability
 
Example: If A, B, and C did not consent, only D is liable separately. If only A
consented, A and B are liable separately.
Liability of incoming partner
Art. 1826 – Liability of incoming partner for partnership obligations
 
Rule: A newly admitted partner is liable for all obligation existing at the time of his
admission as though he was already a partner when such obligations were incurred.
 
His liability, however, is limited only to his share in the partnership property,
UNLESS there is stipulation to the contrary.
Liability of incoming partner
Example: A, B, and C are partners; their contribution is P10,000 each. D is admitted
as a new partner with a contribution of P4,000. At the time of his admission, the
partnership has an outstanding obligation to E in the amount of Php40,000
 
D is also liable to the extent of his share in the partnership property. Thus, if the
assets of the partnership amount to P36,000, the same will be exhausted first leaving
a balance of P6,000 for which only A, B and C are liable pro rata out of their
separate property. D is not personally liable in the absence of an agreement.
Preference of Creditors
Art. 1827 – Preference of partnership creditors
Rules:
 
1. The creditors of the partnership shall be preferred to those of each partner as
regards the partnership property;
2. Without prejudice to this right, the private creditors of each partner may ask the
attachment and public sale of the share of the latter in the partnership assets.
Preference of Creditors
Example: A, B, and C are partners of X & Co. They contributed equally. As they have no
stipulation regarding their share in the profits, they share equally, i.e. 1/3 each. After one
year, the assets amount to P40,000.00. It is indebted to D in the amount of P28,000. E is a
separate creditor of A for P6,000.
 
Distribution – D shall be paid first the amount of P28k. The remaining assets is only P12k.
Thus, each partner has a share of P4k. Hence, E can collect only 4k from the assets of the
partnership. His remedy is to recover the balance of P2k from the private property of A.
 
Dissolution and Winding Up
Arts. 1828/1829 – Definitions
 
Dissolution – is the change in the relation of the partners caused by any partner ceasing to be associated
in the carrying on of the business (Art. 1828). The dissolution does not terminate the partnership, but
continues until the winding up of partnership affairs is completed (Art. 1829). Dissolution, however, is
not necessarily followed by a winding up of partnership affairs (See Arts. 1837, 1840)
 
After dissolution, no new partnership business should be undertaken, but affairs should be liquidated and
distribution made to those entitled to the partners’ interest.
Dissolution and Winding Up
Winding up – is the process of settling the business or partnership affairs after
dissolution
 
Termination – is that point in time when all partnership affairs are completely
wound up and finally settled. It signifies the end of the partnership life.
Dissolution and Winding Up
Arts. 1830 and 1831 – Causes of Dissolution
A. Dissolution effected without violation of partnership agreement
1. Termination of the definite term or particular undertaking
• After the expiration of the term or particular undertaking, the partnership is
automatically dissolved without the partners extending the said term or continuing the
undertaking.
• If after such expiration the partners continue the partnership without making a new
agreement, the firm becomes a partnership at will (Art. 1785
Dissolution and Winding Up
2. By the express will of any partner
• A partnership at will may be dissolved at any time by any partner without the
consent of his co-partners without breach of contract, provided the said partner acts
in good faith.
• If there is bad faith, there is still dissolution but a wrongful one and, therefore, the
acting partner is liable for damages. He would be liable for wrongful dissolution
under Article 1837.
Dissolution and Winding Up
3. By the express will of all the partners
• The agreement to dissolve the partnership before the termination of the specified
term or particular undertaking must be unanimous. The majority alone cannot
dissolve the partnership without breach of contract.
• By expulsion (in good faith) of any member
 
Dissolution and Winding Up
B. Dissolution effected in contravention of partnership agreement
• Any partner may cause the dissolution of the partnership at any time without the
consent of his co-partners for any reason which he deems sufficient by expressly
withdrawing therefrom even though the partnership was entered into for a definite
term or particular undertaking.
• Dissolution of such partnership is in contravention of the agreement.
• Legal effects – Article 1837, par. 2, Nos. 1,2, and 3
Dissolution and Winding Up
C. Business becomes unlawful
• Dissolution may be caused involuntarily when a supervening event makes the
business itself of the partnership unlawful
 Ex: J is a partner in a law firm. Later on, J is appointed Judge of the RTC. Under the
law, a Judge of the RTC is prohibited from engaging in the practice of law. In this
case, it would be unlawful for J to continue as a partner in the law firm. Thus, his
appointment dissolves the partnership of which he is a member.
 
Dissolution and Winding Up
D. Loss of specific thing
• Loss before delivery – partnership is dissolved
• Loss after delivery – partnership is not dissolved
• Loss where only use or enjoyment contributed – the loss of the specific thing before
or after delivery dissolves the partnership
 
Dissolution and Winding Up
E. Death of any partner
F. Insolvency of any partner
The insolvency of any partner subjects his interest in the partnership to the right of
his creditors (Art. 1814) and makes it impossible for him to satisfy with his property
partnership obligations to its creditors in the event that partnership assets have been
exhausted (Art. 1816).
Dissolution and Winding Up
G. Civil interdiction of any partner
 
• A person under civil interdiction cannot validly give consent (Art. 1327), as his
capacity to act is limited thereby (Art. 38).
• Civil interdiction deprives the offender during the time of his sentence of the right
to manage his property and dispose of such property by any act or conveyance inter
vivos (Art. 34, RPC)
Dissolution and Winding Up
H. By decree of court (Art. 1831)
1. On application by a partner
a. Insanity
b. Incapacity – one which is lasting from which the prospect of recovery is remote
c. Misconduct and persistent breach of partnership agreement – conduct prejudicial to the partnership like
inveterate drunkenness, misappropriation of funds, rendering false accounts, etc.
d. Business can be carried on only at a loss – unprofitable with no reasonable prospects of success
Ee Other/analogous circumstances – e.g. abandonment of the business, fraud, etc.
 
Dissolution and Winding Up
2. On application by a purchaser of a partner’s interest
 
a. After the termination of the specified term or particular undertaking; and
b. At any time if the partnership was a partnership at will when the interest was
assigned or when the charging order was issued
Dissolution and Winding Up
Example:
A, B, and C formed a partnership for a term of 5 years. On the 3 rd year, C sold his
interest to D.
Such conveyance does not dissolve the partnership, and D does not become a
partner, his only right being to receive the profits to which C would otherwise be
entitled. Hence, D cannot ask for judicial dissolution of the partnership.
 However, if after the 5th year, the partnership is continued, D is entitled to ask for
judicial dissolution.
Dissolution and Winding Up
Suppose after the 5th year, the partnership was continued without any express
agreement, becoming a partnership at will.
 
If C’s interest was purchased by D or a charging order was issued against C in favor
of D (his judgment creditor) when the partnership was already a partnership at will,
D, at any time, may ask for judicial dissolution.
Dissolution and Winding Up
Art. 1832
Rule: Dissolution terminates the actual authority
of the partner to undertake new business for or
binding to the partnership
Qualifications:
 a) Insofar as the partners themselves are
concerned – it is terminated when the dissolution is
NOT by the act, insolvency, or death of a partner.
 Example: A, B, and C are partners. The term as
fixed expired yesterday. Therefore, it was
dissolved. If today A enters into a new
transaction with D (not for winding up or to
Dissolution and complete a transaction begun but not yet
Winding Up finished), he alone assumes liability because
his authority to bind the partnership/partners
was terminated yesterday.
Dissolution and Winding Up
b) Therefore, it is not deemed terminated (insofar as the
partners are concerned) if the dissolution is by the act,
insolvency or death of a partner, UNLESS:
 1) The cause of the dissolution is by the act of the partner
and the acting partner HAD KNOWLEDGE of such
dissolution; and
2) The cause of the dissolution is the death or insolvency
of a partner and the acting partner HAD KNOWLEDGE
or NOTICE of the death or insolvency. (Art. 1833)
 Examples:
*A, B, and C are partners. A informed B that the
Dissolutio former was resigning or withdrawing from the
partnership. The partnership was thus dissolved by the
n and act of A.

Winding C had knowledge of the dissolution. If a partnership

liability is incurred by a contracted entered into by C,
Up A & B are bound to contribute their share of the
liability as if the partnership has not been dissolved.
Dissolution and Winding Up
If the contract was entered into by B despite his knowledge of the dissolution, A
and C can recover from B. Ultimately, only B will assume the entire liability.
Suppose C learned of the resignation of A only from B, in this case C had merely
notice (versus knowledge) of the dissolution. Hence, A & B can be called upon to
contribute their share in the liability.
 **If A had died or had become insolvent, knowledge or mere notice will justify
non-liability of the other partners.
 With respect to third persons (Art. 1834)
First Rule: After dissolution, a partner continues to
Dissolutio bind the partnership:

n and a) By an act appropriate for winding up partnership

affairs or completing transaction unfinished at
Winding dissolution; or

Up b) By any transaction which would bind the

partnership if dissolution had not taken place,
provided the other party to the transaction:
Dissolution and Winding Up
i) Had extended credit to the partnership prior to dissolution and had NO
knowledge or notice of the dissolution; or
ii. Had known of the partnership prior to dissolution (and there is no knowledge
or notice of the dissolution either actually or thru advertisement in a newspaper of
general circulation in the place at which the partnership was regularly carried on).
Dissolution and Winding Up
Second Rule: After dissolution, a partner cannot bind the partnership under the
following instances:
a) Dissolution due to unlawful business (except for winding up);
b) Insolvency of a partner;
Dissolution and Winding Up
) Where a partner had no authority to wind up partnership affairs, except by a
transaction with one who –
i) Had extended credit to the partnership prior to dissolution and had no knowledge
or notice of his want of authority; or
ii) Had not extended credit and no knowledge or notice of his want of authority
(either actually or thru an advertisement in a newspaper).
 
Dissolution and Winding Up
Example: A, B, and C are partners. A’s retirement terminates the actual authority of A, B, or C to
impose new obligations on the partnership (except winding up or completion of transactions).
Suppose D has extended credit to the partnership prior to A’s retirement, and he has no knowledge
or notice thereof, then on the ground of estoppel:
a) If B or C, purporting to act on behalf of the partnership, contracts with D, the partnership (A,B,
and C, jointly) is liable to D;
b) If A, purporting to act on behalf of the partnership, contracts with D, the partnership (A,B, and
C, jointly) is liable to D.
 
Dissolution and Winding Up
Art. 1835 – Effect of dissolution on partner’s existing liability
 Rule: The dissolution does not of itself discharge the existing liability of a partner
 How liability discharged – only by an agreement to that effect between the partner,
the partnership creditor, and the other partners.
Dissolution and Winding Up
Art. 1836 – Winding up and liquidation
 Manner of winding up
 1) Judicially, under the control and direction of the proper court upon cause shown
by any partner, his legal representative, or his assignee; or
2) Extrajudicially, by the partners themselves without court intervention
Dissolution and Winding Up
Persons authorized to wind up
1) The partner/s designed by the agreement;
2) In the absence of such agreement, all the partners who have not wrongfully
dissolved the partnership; or
3) The legal representative (executor or administrator) of the last surviving partner
(when all the partners are already dead), not insolvent.
Dissolution and Winding Up
Art. 1837 – Rights of partners in case of dissolution
1. Rights where dissolution NOT in contravention of agreement
a) To have the partnership property applied to discharge the liabilities of the
partnership; and
b) To have the surplus, if any, applied to pay in cash the net amount owing
to the respective partners.
Dissolution and Winding Up
2) Rights where dissolution IS IN contravention of agreement
 Rights of a partner who has NOT caused the dissolution wrongfully:
a) To have the partnership property applied for the payment of its liabilities and to
receive in cash his share of the surplus;
b) To be indemnified for damages caused by the partner guilty of wrongful dissolution;
c) To continue the business in the same name during the agreed term of the partnership,
by themselves or jointly with others; and
d) To possess the partnership property should they decide to continue the business.
Dissolution and Winding Up
Rights of partner who has wrongfully caused the dissolution
a) If the business is not continued by the other partners – to have the partnership
property applied to discharge its liabilities and to receive in cash his share of the
surplus LESS damages caused by his wrongful dissolution
b) If the business is continued – to have the value of his interest in the partnership at
the time of the dissolution, LESS any damage caused by the dissolution to his co-
partners, ascertained and paid in cash or secured by a bond approved by a court; and,
to be released from all existing and future liabilities of the partnership
Rescission
Art. 1838 – rescission of partnership contract
Rights of injured partner where partnership contract is rescinded due to fraud or misrepresentation:
1) Right of lien on, or retention of, the surplus of partnership property after satisfying partnership
liabilities for any sum of money paid or contributed by him;
2) Right to subrogation in place of partnership creditors after payment of partnership liabilities; and
3) Right of indemnification by the guilty partner against all debts and liabilities of the partnership
 
Liquidation
Art. 1839 – liquidation and distribution of assets of dissolved partnership
 
What are considered as assets of the partnership? – partnership property (including
goodwill), and contributions of the partners necessary for the payment of all
liabilities in accordance with Art. 1797
Liquidation
Order of application of the assets
1) Those owing to partnership creditors;
2) Those owing to partners other than for capital and profits, such as loans given by
the partners or advances for business expenses;
3) Those owing for the return of the capital contributed by the partners; and
4) The share of the profits, if any, due to each partner
Liquidation
Example:
A, B and C are partners with the following contributions:
A – 150k
B – 100k
C – 50k
On dissolution, the assets of the partnership amounted to 500k. The partnership owes D 70k, E,
50k, and A 20k.
 How do you settle the accounts?
Liquidation
• D and E, who are partnership creditors, shall be paid first the total sum of 120k, leaving
a balance of 380k
• Then A, who is also a creditor, will be paid his credit of 20k, leaving a balance of 360k.
• Then the contributions of A, B, and C to the partnership capital shall be returned to them
in the total sum of 300k, thereby leaving a balance of 60k.
• The 60k is the profit which shall be divided among the partners in accordance with their
agreement or in the absence thereof in proportion to their capital contribution, as follows:
A – 3/6 or 30k; B – 2/6 or 20k; and C – 1/6 or 10k.
Liquidation
What if the liabilities of the partnership amount to 560k?
 
The assets of 500k shall be exhausted first, leaving a balance of 60k. The partners
then shall contribute to the loss in accordance with their agreement or in proportion
to their capital contributions, as follows: A – 30k, B – 20k; and C – 10k.
Liquidation
What if C owes F 40k and the partnership liabilities amount to 500k?
 
C’s share in the profit of 10k can be used to pay his debt to F. The unpaid balance of
30k must be taken from the individual property of C.
Liquidation
What if the partnership liabilities amount to 560k and C owes F 40k?
 
C’s liability to partnership creditors (assuming there is no agreement) out of his separate
property amounts to 10k.
 
If his separate property is 45k, this shall first be applied to pay F 40k and the balance of
5k to pay part of his debt of 10k still owing to partnership creditors (Rule: regarding
individual properties, individual creditors are preferred).
Liquidation
Doctrine of the marshalling of assets – Partnership assets to partnership creditors,
individual assets to individual creditors; anything left from either goes to the other.
Creditors of Dissolved Partnership
Art. 1840 – Rule: Creditors of the dissolved partnership are also creditors of the person
or partnership continuing the business (i.e. without liquidation), under the following:
1. Admission of a new partner, retirement of a partner and assignment of his rights in
partnership property to two or more of the partners, or to one or more of the partners and one
or more third persons
2. When all but one partner retire and assign their rights in partnership property to the
remaining partners
3. When any partner retires or dies and the business is continued with the consent of the retired
partner (or the representative of the deceased partner), but without any assignment of his right
Creditors of Dissolved Partnership
4. When all the partners (or their representatives) assign their rights in partnership
property to one or more third persons who promise to pay the debts and who
continue the business
5. When any partner wrongfully causes dissolution and the remaining partners
continue the business, either alone or with others
 
Creditors of Dissolved Partnership
6. When a partner is expelled and the remaining partners continue the business either
alone or with others
• The liability of a third person becoming a partner in the partnership continuing the
business to the creditors of the dissolved partnership shall be satisfied out of the
partnership property only, unless there is stipulation to the contrary
• Prior right of partnership creditors over retired or representative of deceased partner
against the person or partnership continuing the business
Creditors of Dissolved Partnership
Examples:
Assume that C is admitted as a new partner into the existing partnership of A and B.
Technically the old firm of A and B is dissolved and a new firm composed of A, B,
and C is formed. C will not be individually liable for the debts of the old firm. His
investment, however, constituting a part of the firm assets, will be equally available
to both old and new creditors
Rights of retiring, etc.
Art. 1841 – Rights of retiring, or of estate of deceased partner when business is continued
Rule: When any partner retires or dies and the business is continued without settlement of
accounts, the retiring partner or representative of the deceased partner shall have the right:
1) To have the value of the interest of the retiring partner or deceased partner in the partnership ascertained
as of the date of dissolution; and
2) To receive thereafter, as an ordinary creditor, an amount equal to the value of his share in the dissolved
partnership with interest, or, at his option in lieu of interest, the profits attributable to the use of his right.

Note: The creditors of a dissolved partnership have a prior right as against the separate creditors
of the retired or deceased partner.
Rights of retiring, etc.
Art. 1842 – Right to account of interest
Rule: The right to an account of his interest shall accrue to any partner at the date of
dissolution (in the absence of any agreement to the contrary), as against:
a) The winding up partner/s;
b) The surviving partner/s; or
c) The person or partnership continuing the business
Limited Partnership
Art. 1843 – Definition
 
a) A limited partnership is one formed by two or more persons under the provisions of
the law (Art. 1844)
b) Having as members one or more general partners and one or more limited partners
c) The limited partners as such shall not be bound by the obligations of the partnership
Limited Partnership
Characteristics
 
1) A limited partnership is formed by compliance with the statutory requirements
(Art. 1844);
2) One or more general partners control the business and are personally liable to
creditors (Arts. 1848, 1850);
Limited Partnership
3) One or more limited partners contribute to the capital and share in the profits but
do not participate in the management of the business and are not personally liable for
partnership obligations beyond the amount of their capital contributions (Arts. 1845,
1848, 1856);
4) The limited partners may ask for the return of their capital contributions under the
conditions prescribed by law (Arts. 1844 [h], 1857);
5) The partnership debts are paid out of common fund and the individual properties
of the general partners
   GENERAL LIMITED
Limited
Partnership
Liability Personally liable for Liability extends only to
partnership obligations capital contribution (Arts.
(Art. 1816) 1845, 1848, 1856)

General Partner/Partnership vs. Management When the manner of A limited partner has no
Limited Partner/Partnership management has not been share in the management,
agreed upon, all of the his rights being limited to
general partners have an those in Art. 1851, such
equal right in the that he renders himself
management of the liable to creditors as a
business (Arts. 1803, 1810 general partner if he takes
[3]), whether or not the part in the control of the
general partner has made business (Art. 1848)
any capital contribution
Limited Partnership
Contribution Money, property, or industry (Art. 1767) Money or property, not services (Art. 1845)

Suit or proceedings Proper party Not a proper party to proceedings by or against

a partnership unless he is also a general partner
(Art. 1853), or where the object of the
proceedings is to enforce a limited partner’s
right against, or liability to, the partnership (Art.
1866)

Assignment of interest A general partner’s interest in the partnership A limited partner’s interest is freely assignable,
(Art. 1812) may not be assigned as to make the with the assignee acquiring all the rights of the
assignee a new partner without the consent of limited partner subject to certain qualifications
the other partners (Art. 1813) although he may (Art. 1859)
associate a third person with him in his share
(Art. 1804)
Limited Partnership
Name of the partner The name of a general partner may As a general rule, the name of the
appear in the firm name (Art. 1815) limited partner must not appear in
the firm name (Art. 1846)
Firm name Any name as long as it is not confusing The firm name must be followed by the
or similar with another name word “Limited” or “Ltd.” (Art. 1844
[1,a])
Conflict of interest A general part is prohibited from No such prohibition in the case of a
engaging in a business which is of the limited partner (Art. 1866)
kind of business in which the
partnership is engaged, if he is a
capitalist partner (Art. 1808), or in any
business for himself if he is an
industrial partner (Art. 1789)
Limited Partnership
Dissolution Retirement, death, insanity, or Retirement, etc. of a limited
insolvency of a general partner partner does not have the same
dissolves the partnership (Arts. effect, for his executor or
1860, 1830, 1831) administrator shall have rights of
a limited partner for the purpose
of selling his estate (Art. 1861)
Formation As a general rule, it may be It is created by the members after
constituted in any form by contract compliance with the requirements
or conduct of the partners set forth by law (Art. 1844)

Composition General partners only General and limited partners

Who may become partners Individuals and partnership Only individuals
Limited Partnership
Art. 1844 – Creation of a limited partnership
Two Essential Requisites
1) The certificate or articles of the limited partnership which contains the matters
enumerated in Art. 1844, must be signed and sworn to; and
2) Such certificate must be filed for record with the Securities and Exchange
Commission (SEC) [no time prescribed; reasonable time suffices]
Limited Partnership
• The creation of a limited partnership is a formal proceeding and is not a mere voluntary
agreement, as in the case of a general partnership. Accordingly, the requirements of the
statute must be followed. However, substantial compliance in good faith with the
requirements set forth in Art. 184 will suffice.
• If there is no compliance, the liability of the limited partners becomes the same as that of
general partners
• The failure of a limited partnership to extend its term when it expired and to register it
anew has the effect of divesting the limited partners of the privilege of limited liability. As
far as third persons are concerned, the law considers them as general partnership
Limited Partnership
Art. 1845 – Contributions may be cash or property, but not services
Rules:
1) If contribution is cash only – either a general partner or limited partner, or both
depending on the agreement as stated in the certificate. A partner may be a general
partner and a limited partner in the same partnership at the same time, provided that this
fact shall be stated in the certificate (Art. 1853)
2) If a partner contributes services only – general partner (industrial)
3) If a limited partner contributes cash and services – general partner and limited partner
Limited Partnership
Art. 1846 – Name
Rules:
• The surname of a limited partner shall not appear in the firm name unless:
 It is also the surname of a general partner; or
Prior to the time when the limited partner became such, the business had been carried on
under a name in which his surname appeared

• Otherwise, the limited partner is liable as a general partner to partnership creditors who
extend credit to the partnership without actual knowledge that he is not a general partner
 Art. 1847 – Liability for false statement in certificate
Rule:
Any partner to the certificate containing a false statement is liable
provided the following requisites are present:
1) He knew the statement to be false at the time he signed the certificate,

Limited or subsequently, but having sufficient time to cancel or amend it or file a

petition for its cancellation or amendment, he failed to do so;

Partnership 2) The person seeking to enforce liability has relied upon the false
statement in transacting business with the partnership; and
3) The person suffered loss as a result of reliance upon such false
statement.
Note: The liability is merely a statutory penalty. The law does not say
that the guilty partner shall be liable as a general partner.
Limited Partnership
Art. 1848 – Liability for active participation in management
 Rule: A limited partner shall not become liable as a partner unless he takes active
part in the management or control of the business
 
Art. 1849 – admission of additional limited partners requires the amendment of
the original certificate
Limited Partnership
Art. 1850 – Rights, powers, and liabilities of a general partner
Rules:
1) A general partner has the rights and powers and shall be subject to all the
restrictions and liabilities of a partner in a general partnership
2) However, he cannot do the following without the written consent or ratification of
the specific act by all the limited partners:
Limited Partnership
a) Do any act in contravention of the certificate;
b) Do any act which would make it impossible to carry on the ordinary business of the partnership;
c) Confess a judgment against the partnership;
d) Possess partnership property, or assign their rights in specific property, for other than a partnership
purpose;
e) Admit a person as a general partner;
f) Admit a person as a limited partner, unless the right to do so is given in the certificate; and
g) Continue the business with partnership property on the death, retirement, insanity, civil interdiction or
insolvency of a general partner, unless the right to do so is given in the certificate.
Limited Partnership
Art. 1851 – Specific rights of a limited partner
1) To require that the partnership books be kept at the principal place of business of
the partnership (Arts.1805, 1851);
2) To inspect and copy at a reasonable hour partnership books or any of them (Ibid);
3) To demand true and full information of all things affecting the partnership (Arts.
1806, 1851);
Limited Partnership
4) To demand a formal account of partnership affairs whenever circumstances render
it just and reasonable (Arts. 1809, 1851);
5) To ask for dissolution and winding up by decree of court (Arts. 1831, 1857 [4]);
6) To receive a share of the profits or other compensation by way of income
(Art.1856); and
7) To receive the return of his contribution provided the partnership assets are in
excess of all liabilities (Art. 1857).
Limited Partnership
Art. 1852 – Status of a person erroneously believing himself to be a limited
partner 
Rule: A person who has contributed capital to a partnership, erroneously believing
that he has become a limited partner, as when his name appears in the certificate as a
general partner or he is not designated as a limited partner (see Art. 1844 [d]), he is
NOT personally liable as a general partner by reason of his exercise of the rights of a
limited partner, provided:
 
Limited Partnership
1) On ascertaining the mistake, he promptly renounces his interest in the profits of
the business or other compensation by way of income (Art. 1852);
2) His surname does not appear in the partnership name (Art. 1846); and
3) He does not participate in the management of the business (Art. 1848)
Limited Partnership
Art. 1853 – One person, both a general partner and a limited partner
Rules:
1) This is possible provided this fact is stated in the certificate;
2) Generally, his rights and powers are those of a general partner. Hence, he is liable with his separate
property to third persons (Art. 1816). However, with respect to his contribution as a limited partner, he
would have the right of a limited partner insofar as the other partners are concerned (Arts. 1855-
1858). This means that while he is not relieved from personal liability to third persons for partnership
debts, he is entitled to recover from the general partners the amount he has paid to such third persons;
and in settling accounts after dissolution, he shall have priority over general partners in the return of
their respective contributions (Art. 1863)
Limited Partnership
Art. 1854 – Loans and other business transactions with limited partnership
Rules:
1) Allowable transactions – a purely limited partner is not prohibited from:
a) Granting loans to the partnership;
b) Transacting other business with it; and
c) Receiving a pro rata share of the partnership assets with general creditors if he is
not also a general partner.
Limited Partnership
2) Prohibited transactions – the limited partner, in respect of any such claim, is
prohibited from:
a) Receiving or holding as collateral security of any partnership property; or
)b Receiving any payment, conveyance, or release from liability if it will prejudice the
right of third persons –
IF at the time the assets of the partnership are not sufficient to discharge partnership
liabilities to persons not claiming as general or limited partners
 
Limited Partnership
• Any violation of the prohibition will give rise to the presumption that it has been
made to defraud partnership creditors
•Third persons always enjoy preferential rights over partnership assets
Limited Partnership
Example:
A, B, and C are general partners with D as a limited partner. The total partnership assets
amount to 200k. The partnership owed D 50K and E, a third-party creditor, 250k.
Since the assets are not sufficient to pay E, D cannot receive his claim of 50k; payment
to him will be presumed to have been made to defraud E.
D, however, is not prohibited from purchasing any partnership property if the purpose is
to generate cash with which to pay off partnership obligations to third persons.
Limited Partnership
Art. 1856 – Share of the profits or compensation by way of income
Rules:
1) The right of the limited partner to receive his share of the profits or compensation
by way of income stipulated for in the certification is subject to the condition that
partnership assets will still be in excess of partnership liabilities after such payment.
Third-party creditors have priority over limited partners.
Limited Partnership
2) In determining the liabilities of the partnership, the following are not included:
 
a) Liabilities to the limited partners for their contributions; and
b) Liabilities to general partners, whether for contributions or not
Limited Partnership
Art. 1857
A. Return of contributions of limited partner, requisites
 1) All liabilities of the partnership have been paid or if they have not yet been paid, the assets of
the partnership are sufficient to pay such liabilities. The rule in determining partnership liabilities
is the same as in Art. 1856;
2) The consent of ALL the members has been obtained (EXCEPT when the return may be
rightfully demanded); and
3) The certificate is cancelled or so amended as to set forth the withdrawal or reduction of the
contribution
Limited Partnership
Example:
 A, B, and C are general partners who contributed Php30,000 each. D and E are
limited partners who contributed Php20,000 each.
 Total assets amount to Php150,000
 Liabilities are:

For return of contributions of D & E – Php40,000

Due to third party credits – Php50,000

For loan extended by C – Php25,000

Limited
Partnership For loan extended by D – Php35,000

For taxes – Php15,000

For indemnity to B for damages suffered in consequence of

management – Php5,000
Total: Php170,000
Limited Partnership
Question: May E legally demand the return of his contributions assuming that all
partners have given their consent and are willing to have the certificate amended as
to set forth the withdrawal?
Answer: Yes. The total assets of Php150,000 are well over the amount of
Php100,000, the total of the liabilities mentioned in Nos. 2, 4, and 5. The other
liabilities are not to be considered
Limited Partnership
B. When return of contribution a matter of right (provided Nos. 1 & 3 conditions in
letter A above are present)
1) On the dissolution of the partnership; or
2) Upon the arrival of the date specified in the certificate for the return; or
3) After the expiration of the 6 months’ notice in writing given by him to the other
partners if no time is fixed in the certificate for the return of the contribution or for
the dissolution of the partnership
Limited Partnership
C.Right of a limited partner to cash in return of contribution
 Even if he has contributed property, he has only the right to demand and receive
cash for his contributions, except:
 1) When there is stipulation to the contrary in the certificate; or
2) Where ALL the partners consent to the return in form other than cash.
Limited Partnership
D. When limited partner may have partnership dissolved
1) When his demand for the return of his contribution is denied although he has a
right to such return; or
2) When his contribution is not paid although he is entitled to its return because the
other liabilities of the partnership have not been paid or the partnership property is
insufficient for their payment.
 Note: the limited partner must first ask the other partners to have the partnership
dissolved; if they refuse, then he can seek the dissolution by judicial decree
Limited Partnership
Note Art. 1855 – All the members may agree that one or more of the limited
partners shall have priority over other limited partners as to the return of their
contributions, as to their compensation by way of income, or as to any other matter.
Such agreement must be stated in the certificate; otherwise, all the limited partners
shall stand upon equal footing.
Limited Partnership
Art. 1858 – Liabilities of a limited partner
A. Liability for unpaid contribution – he is liable for:
1) the difference between the amount of his actual contributions and that stated in the
certificate as having been made; and
2) any unpaid contribution he agreed to make at a future time.
 
Limited Partnership
B. Liability as a trustee
 He is a trustee for the partnership for:
1) specific property stated in the certificate as contributed by him but which he had not
contributed;
2) specific property of the partnership which had been wrongfully returned to him;
3) Money wrongfully conveyed or paid to him on account of his contribution; and
4) Other property wrongfully paid or conveyed to him on account of his contribution.
 
Limited Partnership
C. Liability for return of contribution lawfully received
The limited partner is liable to the partnership for the return of contribution lawfully
received by him to pay creditors who extended credit or whose claim arose before
such return.
His liability cannot extend the sum received by him plus interest
Limited Partnership
Example:
If A (limited partner) lawfully received the return of his contribution of Php10,000 on the date
specified in the certificate.
If the partnership subsequently became liable to X for Php7,000, and if the assets of the
partnership are insufficient, the claim of X should be directed against the general partners.
What if X extended credit or his claim arose before A received the return of his contribution?
 A is liable to the partnership. Thus, A is liable to the partnership for Php7,000 plus interest.
But in no case is A liable beyond Php10,000 plus interest.
Limited Partnership
D. Waiver or compromise of limited partner’s liabilities is possible provided:
1) The waiver or compromise is made with the consent of all the partners; and
2) The waiver or compromise does not prejudice partnership creditors who extended
their credit or whose claims arose before the cancellation or amendment of the
certificate.
Limited Partnership
Art. 1859 – Assignee/Substituted Limited Partner
 Rule: A limited partner may assign his interest in the partnership to another person
Effects:
1) He is only entitled to receive the share of the profits or other compensation by way of
income or the return of the contribution to which the assignor would otherwise be
entitled
2) He has no right to require any information or account of partnership transactions or to
inspect partnership books
Limited Partnership
Substituted limited partner: Refers to a person admitted to all the rights of a limited partner who has died or
assigned his interest in a partnership
Requisites
1) All the members must consent to the assignee becoming a substituted limited partner or the limited partner
being empowered by the certificate, must give the assignee the right to become a limited partner
2) The certificate must be amended; and
3) The amended certificate must be registered with the SEC.
Note: The substituted limited partner is liable for all the liabilities of his assignor except only those of which
he was ignorant at the time he became a limited partner and which could not be ascertained from the
certificate
Limited Partnership
Art. 1860 – retirement, death, etc. of a general partner
Rule: the retirement, death, insolvency, insanity, or civil interdiction of a GENERAL
partner dissolves the partnership, UNLESS the business is continued by the remaining
general partners:
 1) Under the right to do so stated in the certificate, or
2) With the consent of all the members
Note: Any of such causes affecting a limited partner does not dissolve the partnership,
unless there is only one limited partner
Limited Partnership
Art. 1861 – on the death of a limited partner
 1) His executor or administrator shall have all the rights of a limited partner for the
purpose of settling his estate (and the estate shall be liable for all his liabilities as a
limited partner),
 2) And such power as the deceased had to constitute his assignee as a substituted
limited partner
Limited Partnership
Art. 1862 – rights of creditors of a limited partner
1) To apply for a charging order with the court
2) Court may also other acts which the circumstances of the case may require
 Art. 1863 – dissolution; preferences of credits

Causes of dissolution:

Misconduct of a general partner

Fraud practiced on the limited partner by the general partner

Limited Retirement, death, insolvency, insanity, or insolvency of a general

Partnership partner
When all limited partners ceased to be such

Expiration of the term for which it was to exist

Mutual consent of the partners before the expiration of the firm’s

original term
When a limited partner rightfully but unsuccessfully demands for a
return of his contributions (see Art. 1857, par. 4)
Limited Partnership
Priority in the distribution of assets
1) Those due to creditors, including limited partners, except those on account of their contributions, in the
order of priority as provided by law (Arts. 1854, 1856, 1857 [1[);
2) Those due to limited partners in respect to their share of the profits and other compensation by way of
income on their contributions;
3) Those due to limited partners for the return of capital contributed;
4) Those due to general partners other than for capital and profits;
5) Those due to general partners in respect to profits; and
6) Those due to general partners for the return of the capital contributed
Limited Partnership
Art. 1864 – cancellation and amendment of certificate
Cancellation
 1) When the partnership is dissolved other than by reason of the expiration of the
term of the partnership; or
2) When all the limited partners cease to be such.
Amendment – all other cases enumerated in Art. 1864 [1-10]
 Art. 1865 – how to amend a certificate (read the article; self-explanatory)
Limited Partnership
Art. 1866 – Limited partner not a proper party to proceedings
• A limited partner is a mere contributor
• The relationship between a limited partner and the other partners is not one of trust
and confidence. Thus, he is not prohibited from engaging in business for himself
even in competition with that conducted by the partnership and may transact
business with the partnership for ordinary purposes as though he were a stranger
Limited Partnership
• Since limited partners are not principals in partnership transactions, their liability, as a general
rule, is to the partnership not to the creditors of the partnership. For the same reason, they have
no right of action against third persons against whom the partnership has any enforceable claim
• Hence, a limited partner is not a proper party to proceedings by or against the partnership,
UNLESS:
a) He is also a general partner or has become liable as a general partner, or
b) The object is to enforce a limited partner’s right against or liability to the partnership