Business Laws and Regulations by Hector De Leon

Accountancy (LYCEUM OF THE EAST AURORA)

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 BUSINESS LAW AND REGULATIONS: PARTNERSHIP AND
CORPORATION
PARTNERSHIP
CHAPTER 1
ART. 1767. By the contract of partnership two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing the profits among
themselves.
Two or more persons may also form a partnership for the exercise of a profession. (1665a)
A contract is considered a partnership when at least to persons bind themselves to contribute
money, property or industry to a common fund to earn and divide those earnings among
themselves.

To end, the following must be present before a contract can be considered as a partnership:

• Two or more persons must form the partnership

• Partners must contribute money, properties, or industries
• Contributions must be gathered to a common fund
• There must be intention to earn
• There must be intention to divide the earnings among partners
• NOMINATE - There is a name given by the law - Contract of Partnership: CONSENSUAL
(meaning it is perfected by both parties)
• PERSONS - Includes not only natural persons but also JURIDICAL persons. A corporation
may NOT be a partner but it may engage in JOINT VENTURES.
• BIND THEMSELVES - Must be capable and competent, meaning, the following may are not
included:
1. Minors
2. Emancipated Minors
3. Those under civil interdiction – accessory penalty of being convicted of crimes
4. Insane persons
5. Incompetent persons (see oblicon notes) - HOWEVER, if the person is only a SUSPECT, he
may still bind himself into a contract since there is no final verdict yet.
• TO CONTRIBUTE MONEY, PROPERTY OR INDUSTRY - Makes the contract onerous
since this is MUTAL and ALL must give either one of the above

ART. 1768. The partnership has a juridical personality separate and distinct from that of each of
the partners, even in case of failure to comply with the requirements of article 1772, first
paragraph. (n)
• Consequences of being a Juridical Person - Can sue and be sued - Acquire any kind of
property - Insolvency of a partnership does not mean that the partners themselves are
insolvent.

ART. 1769. In determining whether a partnership exists, these rules shall apply:

1. Except as provided by article 1825, persons who are not partners as to each
other are not partners as to third persons.

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 2. Co-ownership or co-possession does not of itself establish a partnership, whether
such-co- owners or co-possessors do or do not share any profits made by the use
of the property.

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 prima facie evidence
that he is a partner in the business, but no such inference shall be drawn if such profits
were received in payment:

a. As a debt by installments or otherwise;

b. As wages of an employee or rent to a landlord;

c. As an annuity to a widow or representative of a deceased partner;

d. As interest on a loan, though the amount of payment vary 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. (n)

To determine whether a person is a partner:

1. Required contribution

2. Say in management

3. Share in losses

ART. 1770. A partnership must have a lawful object or purpose, and must be established for the
common benefit or interest of the partners.

When an unlawful partnership is dissolved by a judicial decree, the profits shall be confiscated in
favor of the State, without prejudice to the provisions of the Penal Code governing the
confiscation of the instruments and effects of a crime. (1666a)

• The partnership must have a lawful object or purpose

• Lawful object refers to CAPITAL

• Lawful purpose refers to the BUSINESS itself

• There must be common interest and benefit

• Unlawfulness of the partnership will cause it to be dissolved and profits shall be confiscated

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• Legal effects of a Judicial Dissolution

• Partnership is considered void from the beginning

• Profit and instrument of the crime is confiscated

• The only returnable items are those that were never related to or connected with
the crime committed.

ART. 1771. A partnership may be constituted in any form, except where immovable property or
real rights are contributed thereto, in which case a public instrument shall be necessary.
(1667a)

• Can a partnership be created orally?

Yes. A partnership may be constituted in any form (as stated in Article 1771)

• Partnerships are not covered by the Statute of Fraud since these are not necessarily
required to be in writing (contract of partnership can be in any form).

• If immovable property and/or real rights are contributed to the partnership, then the
contract must be in a public instrument (notarized documents).

• In order to bind 3rd persons, the transfer of OWNERSHIP of immovable property

MUST BE REGISTERED with the REGISTRY OF PROPERTY in the province or
city where the property is located.

• The article shows that partnerships can be perfected by MERE CONSENT.

ART. 1772. Every contract of partnership having a capital of three thousand pesos or more, in
money or property, shall appear in a public instrument, which must be recorded in the Office of
the Securities and Exchange Commission.

• If the partnership’s capital is P3,000.00 or more (in any form), it must be in a public
instrument, recorded with the SEC and note that property referred to here is movable
since immovable property is covered by Article 1771.

• Failure to comply with the requirements of Article 1772 will not affect the liability
of the partnership to 3rd persons.

➢ Isn’t this inconsistent with Article 1358?

No, remember that in Article 1358, if the contract terms exceed P500.00 then the
contract must be in writing. This is merely for purposes of convenience and not validity
or enforceability of the law. Also note that according to Article 1768, the partnership will
still be valid and have a juridical entity.

➢ How do we reconcile this with Article 1358 and 1357?

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 Article 1358 is for purposes of convenience and not for validity or enforceability of the
law. Article 1357 states that contracting parties have the right to compel each other to
place the contract into writing.

• Purpose of Registration:

1. Condition for obtaining a license to engage in business and in trade.

2. 3rd persons want proof that the partnership is existent, who the partners are and
what the capitalization is before they enter into contracts/engage in business.

3. The government requires this so that tax liabilities may not be avoided (BIR).

• Failure to comply with the Article’s requirements will not prevent the formation
of the partnership.

• The Statute of Fraud will only apply if there was an agreement made by the contracting
parties.

ART. 1773. A contract of partnership is void, whenever immovable property is contributed

thereto, if an inventory of said property is not made, signed by the parties, and attached to the
public instrument. (1668a).
• Refers specifically where one or both of the parties contribute immovable
property. The requirements are:
1. The contract must be in a public instrument.
2. An inventory of the immovable property must be made, signed by BOTH
parties and attached to the public instrument, otherwise the partnership is
VOIDED.
ART. 1774. Any immovable property or an interest therein may be acquired in the partnership
name. Title so acquired can be conveyed only in the partnership name. (n)
• Being a juridical entity, a partnership can acquire property and subsequently become its
owner.
• Applicable to immovable as well as personalty because the partnership is a juridical
entity, capable of owning and possessing property.
• Alien partners must comply with the requirements as provided for in Sec. 7, Art 12 of the
1987
Constitution.
ART. 1775. Associations and societies whose articles are kept secret among members, and
wherein anyone of the members may contract in his own name with third persons, shall have
no juridical personality and shall be governed by the provisions relating to co-ownership. (1669)
• There is no juridical entity since the members can contract with 3rd persons in their
own name without binding others.

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 • In a partnership:
1. The partners are merely agents who cannot act alone.
2. Articles of Partnership are known to ALL partners AND to the GENERAL PUBLIC.

ART. 1776. As to its object, a partnership is either universal or particular.

As regards the liability of the partners, a partnership may be general or limited. (1671a)
• Classifications of Partnerships:
1. As to the Object:
a. Universal Partnership of All Present Property – defined in Article 1778.
b. Universal Partnership of All Profits – defined in Article 1780.
c. Particular Partnerships – defined in Article 1783
2. As to the Liability
a. General – general partners are liable PRO-RATA and subsidiarily, sometimes
solitarily, with their own property/assets if the partnership is insolvent. (may
include industrial partners)
b. Limited – limited partners are liable only up to the extent of their contribution.
3. As to Duration:
a. At will – no particular undertaking, can be dissolved at any time.
b. With a Fixed Term – may only be dissolved upon the end of its term unless
continued by the partners.
4. As to Legality of Existence:
a. De Jure – complied with ALL requirements.
b. De Facto – failed to comply with ALL requirements.
5. As to Representation to Others:
a. Ordinary/Real – actually exists.
b. Ostensible/by Estoppel – exists only to partners.
6. As to Publicity:
a. Secret – some partners are not known to the public.
b. Open/Notorious – all partners are known to the public
7. As to Purpose:
a. Commercial/Trading – business transactions.
b. Professional/Non-Trading – exercise of professions
• Kinds of Partners:
1. Under the Civil Code:
a. Capitalist – contributes money/property
b. Industrial – contributes industry
c. General – liability extends to personal assets
d. Limited – liability up to contribution only
e. Managing – manages the partnership
f. Liquidating – responsible during dissolution
g. By Estoppel – not really a partner
h. Continuing – continues business after dissolution
i. Surviving – remains after partner’s death
j. Sub-partner – contracts with partners, Article 1804
• Other Classifications:

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 a. Ostensible – active, known to the public
b. Secret – active, unknown to the public
c. Silent – inactive, known to the public
d. Dormant – inactive, unknown to the public
e. Original – member at time of organization
f. Incoming – about to become a member
g. Retiring – about to withdraw

ART. 1777. A universal partnership may refer to all the present property or to all the profits.
(1672)

ART. 1778. A partnership of all present property is that in which the partners contribute all the
property which actually belongs to them to a common fund, with the intention of dividing the same
among themselves, as well as all the profits which they may acquire therewith. (1673)

ART. 1779. In a universal partnership of all present property, the property which belongs to each
of the partners at the time of the constitution of the partnership becomes the common property of
all the partners, as well as all the profits which they may acquire therewith. A stipulation for the
common enjoyment of any other profits may also be made; but the property which the partners
may acquire subsequently by inheritance, legacy or donation cannot be included in such
stipulation, except the fruits thereof. (1674a)

• Why is the universal partnership of all present property not popular in the Philippines?

• Property owned at the time of contribution will become common property of the
partnership eventually because only the profits acquired through the contribution will
become common property, unless there was a stipulation that says otherwise.

• In a partnership, contributions must be determinate/certain and partners are akin to

donors. Donations cannot comprehend future property but profits can be stipulated.

ART. 1780. A universal partnership of profits comprises all that the partners may acquire by
their industry or work during the existence of the partnership. Movable or immovable property
which each of the partners may possess at the time of the celebration of the contract shall
continue to pertain exclusively to each, only the usufruct passing to the partnership. (1675)

• As long as it is PROFIT, the profit becomes common property to the partners UNLESS
there was a stipulation in their agreement
• If A and B form a Universal Partnership of All Profits for a Taxi-Cab business and both
contribute
vehicles that will serve as the taxi, what they were actually contributing is the USE or
the RIGHT TO USE their vehicles. Upon dissolution, the vehicles will be returned to
them since there was never a transfer of ownership.
• Unique feature of the Universal Partnership of All Profits:
• The partners retain the title of ownership

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REASONS WHY FUTURE PROPERTIES CANNOT BE MADE:
1. Contracts regarding successional rights cannot be made
2. A partnership demands that the contributed things be determinate
3. Universal partnership of all present properties really implies a donation, and it is well
known that generally future property cannot be donated.

ART. 1781. Articles of Universal Partnership, entered into without specification of its nature,
only constitute a universal partnership of profits (1676)
• If the articles of universal partnership are doubtful or unclear then the presumption is
that it is a universal partnership of all profits.
• Because a universal partnership of all profits require less obligations and is less onerous
since
the partners get to retain ownership over the property that they contribute.
ART. 1782. Persons who are prohibited from giving each other any donation or advantage
cannot enter into a universal partnership. (1677)
• A husband and wife cannot join a universal partnership.
a. They are not allowed to donate to each other and a universal partnership
essentially requires that the partners donate to each other.
b. They can join a particular partnership instead.
• A partnership formed in violation of this article shall be null and void. It shall not have
any legal personality either.
• Illustrative Case:
• A, B and C form a partnership to engage in the importation, marketing and
operation of automatic phonographs, radios, television sets, amusement
machines and their parts accessories, with B and C as limited partners.
Subsequently, A and B got married and thereafter, C sold his share to A and B
for a nominal amount. Was the partnership dissolved after the marriage of A
and B and C’s sale to them of his share in the partnership? No, the firm was not
a universal partnership but a particular one.
• Pertinent Legal Provisions
1. Article 87: Every donation or grant of gratuitous advantage, direct or indirect, between
spouses during their marriage, valid or not, shall be void except moderate gifts which
the spouses may give each other on the occasion of any family rejoicing.
2. Article 739: The following donations shall be void:
a. Those made between persons who were guilty of adultery or concubinage at the
time of the donation
b. Those made between persons found guilty of the same criminal offense, in
consideration thereof
c. Those made to a public officer or his wife, descendants and ascendants by
reason of his office
ART. 1783. A particular partnership has for its object determinate things, their use or fruits, or a
specific undertaking, or the exercise of a profession or vocation (1678)
• Defines what a particular partnership is

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 • Particular partnerships are those that are:
- Neither a universal partnership for all present property nor a universal
partnership for all profit.
- Example: Those that are formed for the acquisition and sale of property,
Accounting Firms, Law Firms, etc.
- Popular because it is easy to join

CHAPTER 2
OBLIGATIONS OF THE PARTNER

ART. 1784. A partnership begins from the moment of the execution of the contract, unless it is
otherwise stipulated. (1679)

ART. 1785. When a partnership for a fixed term or particular undertaking is continued after the
termination of such term or particular undertaking without any express agreement, the rights and
duties of the partners remain the same as they were at such termination, so far as is consistent
with a partnership at will.

• A continuation of the business by the partners or such of them as habitually acted

therein during the term, without any settlement or liquidation of the partnership affairs, is
prima facie evidence of a continuation of the partnership. (n)

ART. 1786. Every partner is a debtor of the partnership for whatever he may have
promised to contribute thereto.

• He shall also be bound for warranty in case of eviction with regard to specific and
determinate things which he may have contributed to the partnership, in the same
cases and in the same manner as the vendor is bound with respect to the vendee. He
shall also be liable for the fruits thereof from the time they should have been delivered,
without the need of any demand. (1681a)
• 3 IMPORTANT DUTIES OF A PARTNER
1. to contribute what he had promised
2. to warrant against eviction
3. to deliver what should have been delivered

THERE IS EVICTION WHENEVER by final judgement based on a right prior to the sale or an act
imputable to the partner, the partnership is deprived of the whole or the part of the thing purchased.

ART. 1787. When the capital or a part thereof which a partner is bound to contribute consists of goods,
their appraisal must be made in the manner prescribed in the contract of partnership, and in the
absence of stipulation, it shall be made by experts chosen by the partners, and according to current
prices, the subsequent changes thereof being for account of the partnership. (n)

A. When contribution consist of goods

- appraisal of value is needed to determine how much has been contributed.

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 B. How appraisal is made
- as prescribed by the contract.
- in default of the first, experts chosen by the partners, and at current prices.
C. Necessity of the Inventory Appraisal
- proof is needed to determine how much goods or money had been
contributed. An inventory is useful.
D. Risk of loss
- after goods have been contributed, the partnership bears the risk of subsequent
changes in their value.

ART. 1788. A partner who has undertaken to contribute a sum of money and fails to do so
becomes a debtor for the interest and damages from the time he should have complied with his
obligation.

• The same rule applies to any amount he may have taken from the partnership
coffers, and his liability shall begin from the time he converted the amount to his own
use. (1682)

1. To contribute on the date due the amount he has undertaken to contribute

to the partnership.
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, if he fails to pay his contribution on time or in
case he takes any amount from the common fund and converts it for his own
use.
4. To indemnify the partnership for the damages caused to it by the delay in the
contribution or the conversion of any sum for his personal benefit

Art. 1789. An industrial partner cannot engage in business for himself, unless the partnership
expressly permits him to do so; and if he should do so, the capitalist partners may either
exclude him from the firm or avail themselves of the benefits which he may have obtained in
violation of this provision, with a right to damages in either case. (n)

ART. 1790. Unless there is a stipulation to the contrary, the partners shall contribute equal
shares to the capital of the partnership. (n)

GEN. RULE: Partner shall contribute equal shares to the capital of the partnership.

Exception: Stipulations to the contrary.

ART. 1791. If there is no agreement to the contrary, in case of an imminent loss of the business
of the partnership, any partner who refuses to contribute an additional share to the capital, except
an industrial partner, to save the venture, shall he obliged to sell his interest to the other partners.
(n)

GEN. RULE: A capitalist partner is not bound to contribute to the partnership more than what
he agreed to contribute.

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Exception: In case of imminent loss of the business, and there is no agreement to the contrary,
a partner is under obligation to contribute an additional share to save the venture, if he refuses
to contribute, he shall be obliged to sell his interest to the other partners.

ART. 1792. If a partner authorized to manage collects a demandable sum which was owed to
him in his own name, from a person who owed the partnership another sum also demandable,
the sum thus collected shall be applied to the two credits in proportion to their amounts, even
though he may have given a receipt for his own credit only; but should he have given it for the
account of the partnership credit, the amount shall be fully applied to the latter.

The provisions of this article are understood to be without prejudice to the right granted to
the other debtor by article 1252, but only if the personal credit of the partner should be more
onerous to him. (1684)

Requisites:
a. Existence of at least two debts
b. Both sums are demandable
c. Collecting partner is authorized to manage and actually manages the partnership.

ART. 1793. A partner who has received, in whole or in part, his share of a partnership credit,
when the other partners have not collected theirs, shall be obliged, if the debtor should
thereafter become insolvent, to bring to the partnership capital what he received even though he
may have given receipt for his share only. (1685a)

As compared to Art. 1792

a) one debt only (firm credit)

b) applies to any partner

ART. 1794. Every partner is responsible to the partnership for damages suffered by it through
his fault, and he cannot compensate them with the profits and benefits which he may have
earned for the partnership by his industry. However, the courts may equitably lessen this
responsibility if through the partner's extraordinary efforts in other activities of the partnership,
unusual profits have been realized. (1686a)

• Why General Damages cannot be offset by benefits:

- The partner has the duty to secure benefits for the partnership; on the other
hand, he has the duty also not to be at fault.
- since both are duties, compensation should not take place, the partner being the
debtor in both instances.
- compensation requires 2 persons who are reciprocally debtors and creditors of
each other.
• Mitigation of Liability
- Equity may mitigate liability if there are “extraordinary efforts” resulting in
unusual “profits”.
• Need for Liquidation

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 - Before a partner sues another for alleged fraudulent management and resultant
damages, a liquidation must first be effected to know the extent of damages.

ART. 1795. The risk of specific and determinate things, which are not fungible, contributed to
the partnership so that only their use and fruits may be for the common benefit, shall be borne
by the partner who owns them.

If the things contribute are fungible, or cannot be kept without deteriorating, or if they were
contributed to be sold, the risk shall be borne by the partnership. In the absence of stipulation,
the risk of the things brought and appraised in the inventory, shall also be borne by the
partnership, and in such case the claim shall be limited to the value at which they were
appraised. (1687)

Cases contemplated:
1. Specific and determinate things which are not fungible where only the use is contributed
- the risk of loss is borne by the partner because he remains the owner of the things
2. Specific and determinate things the ownership of which is transferred to the partnership
- the risk of loss is for the account of the partnership, being the owner
3. Fungible things or things which cannot be kept without deteriorating even if they are
contributed only for the use of the partnership
- the risk of loss is borne by the partnership for evidently the ownership was being
transferred since use is impossible without the things being consumed or
impaired
4. Things contributed to be sold
- the partnership bears risk of loss for there cannot be any doubt that the
partnership was intended to be the owner; otherwise’ the partnership could not
effect the sale
5. Things brought and appraised in the inventory
- the partnership bears the risk of loss because the intention of the parties was to
contribute to the partnership the price of the things contributed with an appraisal
in the inventory. There is thus an implied sale making the partnership owner of
the said things, the price being represented by their appraised value.

ART. 1796. The partnership shall be responsible to every partner for the amounts he may have
disbursed on behalf of the partnership and for the corresponding interest, from the time the
expense are made; it shall also answer to each partner for the obligations he may have
contracted in good faith in the interest of the partnership business, and for risks in consequence
of its management. (1688a)

Obligation of the partnership to the partners:

- refund amounts disbursed by the partner in behalf of the partnership
plus the corresponding interest from the time the expenses are made.
- to answer for the obligations the partner may have contracted in good faith
in the interest of the partnership business.
- answer for risk in consequence of its management.

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ART. 1797. The losses and profits shall be distributed in conformity with the agreement. If only
the share of each partner in the profits has been agreed upon, the share of each in the losses
shall be in the same proportion.

In the absence of stipulation, the share of each partner in the profits and losses shall be in
proportion to what he may have contributed, but the industrial partner shall not be liable for the
losses. As for the profits, the industrial partner shall receive such share as may be just and
equitable under the circumstances. If besides his services he has contributed capital, he shall
also receive a share in the profits in proportion to his capital. (1689a)

Distribution of Profits:
• Partners share the profits according to their agreement subject to Art. 1799
• If there is no such agreement:
1. the share of each capitalist partner shall be in proportion to his capital contribution
(this rule is based on the presumed will of the partners)
2. 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.
- the share of the industrial partner in the profits is not fixed, as in the case of
the capitalist partners, as it is very difficult to ascertain the value of the services
of a person

Distribution of Losses:
• the losses shall be distributed according to their agreement subject to Art. 1799
• if there is no such 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, but the industrial partner shall not be liable for losses. The profits or losses of the
partnership cannot be determined by taking into account the result of one particular
transaction but of all the transactions had.
• If there is also no profit-sharing stipulated in the contract, then losses shall be born
by the
partners in proportion to their capital contributions, but the purely industrial partner shall
not be liable for the losses.

Industrial Partner’s Profit:

• A just and equitable share.

Industrial Partner’s Losses:

• He may be held liable by third persons, still he can recover whatever he is made to give
them, from the other partners, for he is exempted from losses, with or without stipulation
to this effect.

Non-applicability to Strangers:
• Art. 1797 applies only to the partners, not when liability in favor of strangers are
concerned, particularly with reference to the industrial partner.

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ART. 1798. If the partners have agreed to intrust to a third person the designation of the share
of each one in the profits and losses, 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 three months from the time
he had knowledge thereof, complain of such decision.

The designation of losses and profits cannot be intrusted to one of the partners. (1690)

Designation by Third Persons:

a) third person:
- in the article, not a partner; to avoid partiality.
b) when designation by the 3rd party may be impugned:
- when it is manifestly inequitable.
c) when designation cannot be impugned even if manifestly inequitable:
- if the aggrieved partner has already begun to execute the decision.
- if he has not impugned the same within 3 months from the time he had
knowledge thereof.

ART. 1799. A stipulation which excludes one or more partners from any share in the profits or
losses is void. (1691)

GEN. RULE: a stipulation excluding one or more partners from any share in the profits or
losses is void.
Exceptions: In the case of the industrial partner whom the law itself excludes from
losses note: stipulation exempting a partner from losses should be allowed.

ART. 1800. The partner who has been appointed manager in the articles of partnership may
execute all acts of administration despite the opposition of his partners, unless he should act in
bad faith; and his power is irrevocable without just or lawful cause. The vote of the partners
representing the controlling interest shall be necessary for such revocation of power.

A power granted after the partnership has been constituted may be revoked at any time. (1692a

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