Essentials of Partnerships and Corporation 2.

Entity - a partnership can also be defined as an

Accounting artificial being created by the operation of law.
This results in partnerships having juridical
Module 1 personalities separate and distinct from their
owners (called partners) (Articles 1768). It can
A partnership requires a combination of:
acquire, sell or dispose of properties, incur
1. Capital resources or assets obligations and transact business in its name.
2. Managerial skills and expertise 3. Co-ownership of Property - partnership assets
are jointly owned by the partners. Once assets are
Partnership invested and acquired by the partnership, these
➢ Is a legal entity guided by the rules and regulations cease to become personal properties and instead
put up by each country or state. become joint property of all partners. Partners
➢ In the Philippines, partnerships as well as have a claim on all partnership assets based on
corporations are governed by the new Civil Code their capital accounts and share in partnership
of the Philippines, Article 1767 to 1867. earnings.
4. Taxable Entity - tax rate of 20% is imposed on
New Civil Code, Article 1767 ordinary partnerships and domestic corporations
effective July 2020 for net income not exceeding
➢ A partnership is an organization where two or
more people bind themselves to contribute PHP 5 million with assets not exceeding PHP 100
million. Except for income tax is general
money, property, or industry (refers to an expertise
professional parentship which I formed for the
of a person) into a common fund with the
sole purpose of exercising a common profession.
intention of dividing the profits among
5. Mutual Agency - each partner is a fully authorized
themselves.
agent of the partnership. Acts of the partners
The Uniform Partnership Act defines a partnership: within the scope of the partnership are binding
when transacting partnership business. The
➢ As an association of two or more people to carry
partnership can be sued, together with the
on co-owners of business for profit.
partners, by third parties when a partner commits
From the previous definition: a wrongful act or a breach of trust. (Article 1818).
“The act of one is the act of all” it means even
1. Two or more people are needed to form a
without asking permission of the partner or even
partnership.
though a partner has no authority to do so as long
2. Money is not the only resource that a person can
as the act concerns the normal business
contribute. Property that assets owned by a
operations.
person can also be a form of contribution.
6. Limited Life - legally, a partnership can operate
Industry refers to the skills or expertise of a
for an indefinite period. However, in practice, it
person.
can easily be dissolved or terminated with the
3. A partnership must be established for the purpose
mere withdrawal, incapacity or death of a partner.
of obtaining profit. If an organization is created for
(Articles 1830-1831).
purposes other than the generation of profit (e.g.
7. Unlimited Liability - each partner is personally
charitable institutions, public hospitals) it cannot
and individually liable for all partnership liabilities.
take the form of partnership.
In the event that cash flow problems occur and
4. Partnerships are the common form of business
partnership assets are not sufficient to liquidate
organization used by companies who generate
partnership liabilities, the personal assets of the
profits by the practice of their profession (e.g. law
partners should be used to help settle the
firms, auditing firms).
company’s obligation. (Art. 1791 and 1835)
Features of a Partnership
Partnership Dissolution
1. Voluntary Association - individuals, by their own
➢ Occurs when there is a change in the relationship
free will, agree to join and form a partnership.
among the partners. Dissolution does not
 necessarily mean that the partnership will cease ➢ Additionally, Article 1772 provides: Every contract
to exist. Withdrawal and Admission of partners are of partnership having a capital of three thousand
normal occurrences in a partnership, and they pesos (P3,000) or more, in money or property,
only lead to the formation of a new partnership. shall appear in a public instrument, which must
be recorded in the office of the Securities &
Partnership Liquidation
Exchange Commission.
➢ An event that ends both the legal and economic
Role of Partners
life of a partnership. Where all assets are sold,
liabilities are paid, and the remaining assets are 1. The partners are co-owners of the partnership
distributed to all the partners. property. It means that when a partner invests his
land or building, this ceases to be his personal
Characteristics of a Partnership
property. Instead, this becomes joint property of
8. Mutual Contribution - partners should have both all the partners.
or either of the personal or expertise contribution 2. The partners have unlimited liability. The
in the partnership. partners become individually liable for all
9. Division of Profits - each person is entitled to partnership debts in the event that the partnership
receive a share in the profits realized by the assets are not sufficient to cover up their liabilities
business. The profit or loss is divided among (Article 1791).
partners in accordance with their agreement or 3. The partnership is bound by the acts of any of the
the profit-sharing scheme agreed upon the partners since they are considered agents of the
formation of the partnership. In the absence of partnership for the purpose of carrying out its
stipulation or if there is no profit-sharing scheme, activities.
profits or losses will be shared or distributed by
Advantages of a Partnership
the partners in the ratio of their actual
contributions or the original capital contributions 1. It is easier and inexpensive to organize than a
in the business. Industrial partners, however, do corporation, as it is formed by a simple contract
not share in the losses. between two or more people.
10. Partnership Agreement - partnership is a 2. The unlimited lability of the partners makes it
contract. Contracts are perfected through oral or reliable from the point of view of creditors.
written agreements. Partnership can be formed 3. The Capital of the partnership is bigger in amount
orally or in written form. However, to protect the since there are at least two people forming it.
interests of all partners, it is ideal to form a 4. The participation in the business by more than one
partnership in a written contract. The written person makes it possible for a closer supervision
contract is called the Articles of partnership. of all the partnership activities.
5. The direct gain to the partners is an incentive to
Elements of a Partnership
give close attention to the business.
1. There must be a valid contract, whether oral or 6. The personal element in the characters of the
written. partners is retained.
2. A partnership must be put up by people having 7. It does not have to comply with as many legal
legal capacity to contract. requirements of the government nor its heavy
3. Their contributions must be in the form of money, burden of taxation.
property or service.
Disadvantages of a Partnership
4. The purpose of the business is to divide the profit
between them. 1. The personal liability of a partner for firm debts
deters many from investing capital in a
➢ With regards to a written or oral contract, the law partnership.
does not provide a mandatory requirement for 2. A partner may be subject to personal liability for
this, not unless the investment of the partner is in the wrongful acts or omissions of his/her
the form of immovable property, in which case a associates.
public instrument is necessary (Article1667). 3. It is less stable because it can easily be dissolved.
 4. There is divided authority among the partners ➢ Industrial partner - one who contributes
5. There is constant likelihood of dissension and industry, labor, skill, talent or service.
disagreement when each of the partners has the Capitalist-industrial partner - one who
same authority in the management of the firm. contributes cash, property, and industry.
6. Disputes and misunderstandings may arise due to 2. As to Liability
some acts of one partner which binds the ➢ General partner - one whose liability to third
partnership. persons extends to his separate (private)
7. Unlimited liability of the partners. General property. A partner whose liability for the
partners are liable for the debts of the firm beyond debts of the partnership is unlimited and
their capital contributions made. therefore may extend to his personal assets.
8. The life of the business is limited. The death, ➢ Limited partner - one whose liability to third
incapacity or withdrawal of a partner will dissolve persons is limited only to the extent of his
the partnership unlike a corporation whose capital contribution to the partnership.
maximum life is 50 years. 3. As to Management
9. Any transfer of partners’ interests would ➢ Managing partner - one who manages
necessitate the consent of all the partners. actively the business of the partnership.
10. A partnership has a smaller amount of capital as ➢ Silent Partner - one who is known publicly as
compared to a corporation. a partner but does not participate in the
management of the partnership affairs.
Kinds of Partnerships
4. As to Publicity
1. As to Liability ➢ Ostensible partners- One who takes active
➢ General Partnership – one where all partners part in the management of the firm and is
are general partners with unlimited liability known to the public as a partner in the
and are therefore liable to partnership business.
creditors event up to the extent of their ➢ Real/Ordinary partners- one which actually
personal properties especially when exists among the partners and also the third
partnership becomes insolvent. persons known that he is a partner.
➢ Limited Partnership – composed of at least ➢ Nominal partners - one who is not really a
one general partner with the others a limited partner, not being a party to the partnership
partners who are liable to partnership agreement, but is made liable as a partner for
creditors only to the extent of their investment the protection of innocent third persons.
in the partnership. This type of partnership Partner in name only. A partner has no
has two classes of partners: general and contributions at all but permits his name to be
limited (Art. 1816, 1843). used by the firm.
2. As to Object or Property ➢ Secret partners- one who takes active part in
➢ Universal Partnership of Property – one the management of the business but whose
where all the partners contribute all their connection with the partnership is concealed
properties into a common fund (Art. 1778 of or unknown to the public.
the New Civil Code). ➢ Dormant partners- one who does not take
➢ Universal Partnership of Profits – one where active part in the management of the business
the partners contribute all what they will and is not known to the public as a partner, he
receive as a result of their work or service is both a silent and a secret partner. A partner
rendered during the lifetime of the that does not participate in business affairs.
partnership. 5. As to Property or Object
➢ Universal partner- is one whose participation
Classes of Partners extends to the entire business.
1. As to Contribution ➢ Particular partner- is one whose participation
➢ Capitalist partner - one who contributes is limited to a unit or part of a business.
capital in cash (money) or property into the 6. Other classifications
partnership fund.
 ➢ Liquidating partner - one who takes charge of 9. The provision for Arbitration in settling disputes
the winding up of partnership affairs upon
Comparison of Business Organizations
dissolution.
➢ Continuing Partners- these are partners that 1. Partnership and a sole proprietorship
remain after the dissolution of the previous ➢ Sole proprietors and partners have unlimited
partnership that they want to continue to liability and an active role in managing the
operate. It is sometimes called Surviving business.
Partners. ➢ Both businesses have limited life because its
continuity depends upon the decision of the
Partnership Contract
proprietor or the partners.
Articles of Co-Partnership ➢ A partnership is a taxable entity It is also a
juridical or legal entity and has a combination
➢ An agreement concerning formation, operation,
of capital resources and skills.
dissolution, and liquidation of the partnership is
➢ A partnership is a taxable entity It is also a
embodied in a contract.
juridical or legal entity and has a combination
➢ The contract will act as a form of governance of
of capital resources and skills.
partnership activities and will clearly reflect the
➢ Partnerships have a greater amount of capital
relationships of the partners between each other
because of the number of people involved.
and with third parties.
➢ Better management will result because of the
➢ Article 1772 of the New Civil Code requires that
shared managerial skills, efforts and
contributions of partners in cash or properties
experiences of the partners.
should be in a public instrument duly registered
➢ The number of people involved may delay
with the Securities and Exchange Commission if it
matters involving prompt and immediate
amounts to three thousand pesos or more.
attention.
Securities and Exchange Commission (SEC) ➢ Conflicts and disagreements may easily arise,
which may adversely affect the operation of
➢ Is a government agency which supervises the business and may cause its downfall or,
partnership and corporate forms of businesses. worse, its termination.
Registration with the SEC is necessary as a 2. Partnership and a Corporation
condition for the issuance of a license to engage in ➢ Both are taxable entities and legal entities. A
business or trade. In this way, tax liabilities of corporation has an indefinite life as compared
partnerships as well as corporate businesses to a partnership.
cannot be evaded. ➢ The corporate shareholders or investors are
The following information are contained in the articles of free from liability except for what they
co-partnership: invested.
➢ Management in a corporation is vested in a
1. Name of the partnership few shareholders whereas partners in general
2. Principal place of business may actively manage the business.
3. Date of effectiveness and life of the partnership ➢ Unlike a shareholder, a further can commit or
4. Purpose of the partnership bind the partnership to any contract entered
5. Names, addresses and contributions of the in the name of the partnership.
individual partners, their description on what ➢ Ease in forming, less legal requirements,
classes of partners and agreed values access to records, and active management
6. Manner of dividing the profits or loss among the ➢ Difficult to transfer and or increase ownership
partners, including salary, allowance and interest as it requires unanimous consent of all
in capital partners whereas shareholders may transfer
7. Periodic withdrawals allowed for a partner. These easily their shares
are the conditions under which the partners may ➢ Limited life as it is easy to dissolve a
withdraw money or other assets for personal use partnership with the death, incapacity or
8. Manner of liquidating the partnership with the insolvency of anyone partner. Unlimited
rights and duties of the partners
 liability makes the partners personally liable
to partnership creditors.

Organizing a Partnership

Rights of a Partner

1. A partner has a right over specific partnership

property
2. A partner has a right to share in the profits
resulting from business operation.
3. A partner has a right to share in the remaining
assets upon partnership liquidation after the
partnership creditors have been paid.
4. A partner has a right to co-manage the partnership
5. A partner has a right to ask that the books be kept
in the principal place of business subject to
inspection at a reasonable time.

Compiled and formatted by: Hanz Chloe Celestino

Content: From Sir Dean Carlo S. Maneja’s Class
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