TOPIC 5
CHAPTER 4 – LIMITED PARTNERSHIP
A. Definition
1. A partnership
2. Formed by two or more persons
3. Having as members:
a. One or more general partners; and
b. One or more limited partners
The limited partners as such shall not be bound by the obligation of the partnerships (Art. 1843),
except to the extent of their capital contributions
B. Characteristics
1. A limited partnership is formed by compliance with the statutory requirements (Art.
1844)
2. The business is controlled or managed by one or more general partners, who are
personally liable to creditors (Art. 1848 and Art. 1850)
3. One or more limited partners contribute to the capital and share in the profits but do
not manage the business and are not personally liable for partnership obligations
beyond their capital contributions (Arts. 1845, 1848, 1856)
4. Obligations or debts are paid out of the partnership assets and the individual property
of the general partners. (Art. 1843)
5. The limited partners may have their contributions back subject to conditions prescribed
by law (Arts. 1844, 1957)
A limited partnership has the following advantages:
1. For general partners, to secure capital from others while retaining control and
supervision for the business;
2. For limited partners, to have a share in the profits without risk of personally liability
C. General and Limited Partners distinguished
Factors General Partner Limited Partner
Extent of liability Personally, but subsidiarily Liable only to the extent of
liable for obligations of the his capital contributions
partnership (subject to exceptions)
Right to participate in Unless otherwise agreed No right to participate in
management upon, all general partners management
have an equal right to
manage the partnership
Nature of contribution Cash, property or industry Cash or property only, not
industry
Proper party in proceedings Proper Party Not a proper party, unless (1)
by or against partnership he is also a general partner,
or (2) where the object of the
proceedings is to enforce his
right against or liability to the
partnership.
The limited partner is a
necessary but not an
indispensable party
Firm name Name may appear in the firm Name must not appear in the
name firm name (subject to
exceptions)
Prohibition to engage in Prohibited (subject to Not prohibited
other business qualifications)
Effect of retirement, death, Dissolves the partnership Does not dissolve the
insanity or insolvency partnership; rights
transferred to executor or
administrator for selling his
estage
Assignability of interest Not assignable assignable
D. General and Limited Partnership distinguished
Factors General Partnership Limited Partnership
Creation May be constituted in any Partners must: (1) sign and
form, subject to exceptions swear to a certificate in
compliance with Art. 1844;
and (2) file the certificate for
record in the SEC
Composition Only general partners One or more general, and
one or more limited partners
Firm name Must contain the word Must include the word
“Company” (SEC Memo Circ. “Limited” SEC Memo Circ No.
No. 14-00), except for 14-00)
Professional Partnership
Must not include name of
limited partners, unless (1)
also the surname of a general
partner, or (2) prior to the
time when the limited
partner became such, the
business has been carried on
under a name in which his
surname appeared
Rules governing dissolution Art. 1828-1842 Arts. 1860-1863
E. Formation
I. General Requirements
1. Sign and swear to a certificate stating the items in Art. 1844; and
2. File for record the certificate in the SEC
A limited partnership is formed if there is substantial compliance in good faith with the
requirements (Art. 1844)
When there is failure to substantially comply with the requirements:
1. In relation to 3rd persons, the partnership is general, unless they recognized that
the firm is a limited partnership; and
2. As between the partners, the partnership remains limited, since they are bound
by their agreement
II. Purpose of Filing
1. To give actual or constructing notice to potential creditors or persons dealing
with the partnership;
2. To acquaint them with its essential features, including the limited liability of
limited partners
III. Firm Name
General Rule: The surname of a limited partner shall not appear in the partnership
name.
Exceptions:
1. It is also the surname of a general partner; or
2. Prior to the time when the limited partner became such, the business had been
carried on under a name in which his surname appeared
A limited partner whose surname appears in a partnership name contrary to this
prohibition is liable as a general partner to partnership creditors who extend credit
without actual knowledge that he is not a general partner (Art. 1846)
IV. False Statement in the Certificate
If the certificate contains a false statement, one who suffers loss by reliance thereon
may hold liable any party to the certificate who knew the statement to be false:
1. At the time he signed the certificate;
2. Subsequently, but within a sufficient time before the statement was relied upon
to enable him to cancel or amend the certificate, or to file a petition for its
cancellation or amendment (Art. 1847)
V. General and limited partner at the same time
A person may be:
1. A general partner; and
2. A limited partner in the same partnership at the same time
This fact must be stated in the certificate.
Such person shall have:
1. All the rights and powers of a general partner; and
2. Subject to all the restrictions of a general partner
Except that, in respect to his contribution as a limited partner, he shall have the rights
against other members which he would have had if he were not also a general partner
(Art. 1853)
F. Management
General rule: Only general partners have the right to manage the partnership.
A general partner shall have the right and powers and be subject to all restrictions and liabilities
of a partner in a partnership without limited partners. Thus, he has general authority over the
business.
Thus, if a limited partner takes part in the control of the business, he becomes liable as a general
partner. (Art. 1848)
However, written consent or ratification by all limited partners is necessary to authorize the
general partners to:
1. Do any act in contravention of the certificate
2. Do any act which would make it impossible to carry on the ordinary business of the
partnership;
3. Confess a judgment against the partnership
4. Possess partnership property, or assign their rights in specific property, for other than a
partnership purpose;
5. Admit a person as a general partner
6. Admit a person as a limited partner, unless the right to do so is given in the certificate
G. Obligations of a Limited Partner
I. Obligations related to contribution
The contributions of a limited partner may be cash or other property, but not services.
(Art. 1845)
A limited partner is liable for partnership obligations when he contributes services
instead of only money or property to the partnership.
A limited partner is liable to the partnership:
1. For the difference between his actual contribution and that stated in the
certificate as having been made;
2. For any unpaid contribution which he agreed in the certificate to make in the
future, at the time and on the conditions stated in the certificate
He holds as trustee for the partnership:
1. Specific property stated in the certificate as contributed by him, but which was
not contributed or which has been wrongfully returned; and
2. Money or other property wrongfully paid or conveyed to him on account of his
contribution. (par. 2, Art. 1858)
II. Liability to partnership creditors
General rule: A limited partner is not liable as a general partner. His liability is limited to
the extent of his contributions. (Art. 1843)
Exceptions: The limited partner is liable as a general partner when:
1. His surname appears in the partnership name, with certain exceptions. (par. 2,
Art. 1846);
2. He takes part in the control of the business;
3. The certificate contains a false statement of which he knows and which was
relied upon, resulting in loss (Art. 1847)
In cases (1) and (2), the limited partner is entitled to reimbursement by the general
partners.
Ratio: The general partners may not have been aware of such false statement.
III. Liability to separate creditors
On due application to a court of competent jurisdiction by any separate creditor of a
limited partner, the court may:
1. Charge his interest with payment of the unsatisfied amount of such claim;
2. Appoint a receiver;
3. Make all other orders, directions and inquiries which the circumstances of the
case may require.
The interest so charged may be redeemed with the separate property of any general
partner, but may not be redeemed with partnership property. (Art. 1862).
Note: In a general partnership, the interest may be redeemed with partnership
property with the consent of all the partners whose interests are not charged (Art.
1814)
H. Rights of a Limited Partners
1. Same rights as with general partners in Art. 1851;
2. Right to transact business with the partnership;
3. Right to share in profits
4. Right to return of contribution
5. Preference of limited partners
6. Right to assign interest
7. Right to ask for dissolution
I. Dissolution
General rule: the retirement, death, insolvency, insanity or civil interdiction of a general partner
dissolves the partnership.
Exception: it is not so dissolved when the business is continued by the remaining general
partners:
1. Under a right to do so stated in the certificate; or
2. With the consent of all members (Art. 1860)
Upon the death of a limited partner, his executor or administrator shall have:
1. All the rights of a limited partner for the purpose of settling his estate; and
2. The power to constitute an assignee as a substituted limited partner, if the deceased
was so empowered in the certificate
The estate of a deceased limited partner shall be liable for all his liabilities as a limited partner
(Art. 1861)
J. Settlement of Accounts
1. Order of payment
In settling accounts after dissolution, the liabilities of the partnership shall be entitled to
payment in the order:
a) Those to creditors, including limited partners, except those on account of their
contribution, in the order of priority as provided by law;
b) Those to limited partners in respect to their share of the profits and other
compensation by way of income in their contributions
c) Those to limited partners in respect to the capital of their contributions;
d) Those to general partners other than for capital and profits
e) Those to general partners in respect to profits
f) Those to general partners in respect to capital (par. 1, Art. 1863)
2. Share in the Partnership Assets
The share of limited partners in respect to their claims for capital, profits, or for
compensation by way of income, is in proportion of their contribution, unless:
a) There is a statement in the certificate as to their share in the profits; or
b) There is a subsequent agreement fixing their share (Art. 1863)
K. Amendment or Cancellation of Certificate
1. The certificate shall be cancelled when:
a) The partnership is dissolved; or
b) All limited partners cease to be such limited partners
2. A certificate shall be amended when:
a) There is a change in the name of the partnership or in the amount or character
of the contribution of any limited partner;
b) A person is substituted as a limited partner
c) An additional limited partner is admitted
d) A person is admitted as a general partner
e) A general partner retires, dies, becomes insolvent or insane, or is sentenced to
civil interdiction and the business is continued
f) There is a change in the character of the business of the partnership
g) There is false or erroneous statement in the certificate
h) There is a change in the time as stated in the certificate for the dissolution of
the partnership or for the return of a contribution
i) A time is fixed for the dissolution of the partnership, or the return of a
contribution, no time having been specified in the certificate
j) The members desire to make a change in any other statement in the certificate
in order that it shall accurately represent the agreement among them (Art.
1864)
The amendment or cancellation must be in writing:
a) It must be signed and sworn to by all the members including the new members,
and the assigning limited partner in case of substitution or addition of a limited
or general partner
b) The writing to amend (with the certificate, as amended) or to cancel must be
filed and recorded in the SEC.