PAC(reviewer)

Lesson 1: PARTNERSHIP FORMATION

DEFINITION OF PARTNERSHIP

- A partnership is an association where two or more persons bind themselves to contribute money,
property, or industry into a common fund with the intention of dividing the profits among themselves
(New Civil Code, Article 1767).

CHARACTERISTICS OF PARTNERSHIP

-Voluntary agreement- agreement formed by two or more persons that is perfected by consent.

-Mutual contribution- an individual must contribute money and/or property but also can contribute
time and service to the firm.

-Co ownership of property- the assets that is contributed by an individual are now belongs to the
partnership.

-Mutual agency- every partner held legally responsible the actions of any of their partners as long as
it is related to normal partnership activities.

-Unlimited liability- when the liabilities or obligations of the partnership are not settled yet their
assets at exhausted, then the creditors can claim from the personal assets of the partners.

-Limited life- the legal life of the partnership can be terminated due to the admission of new partner,
death, bankruptcy, or withdrawal of any partner.

-Division of profits among partners- according to the primary purpose of the partnership is to
maximize profit and divide it among the partners according to the terms of the partnership.

ADVANTAGES & DISADVANTAGES OF A PARTNERSHIP

-ADVANTAGES

(Combining skills and resources of two or more individuals.)

(Ease of formation)

(Freedom from government regulations and restriction)

(Ease of decision making)

-DISADVANTAGES

(Mutual agency)

(Limited life)

(Unlimited liability)
KIND OF PARTNERS

As to the nature of contribution:

-Capitalist partner- One who contributes money or property into the partnership.

-Industrial partner- One who contributes only his industry or services to the partnership.

-Capitalist-industrial partner- One who contributes money or property as well as his services to the
partnership.

As to liabilities to the third person:

-General partner- One whose liability to partnership creditors extends to his separate personal
property.

-Limited partner- One whose liability to third persons is limited to his capital contributions.

As to their interest in or obligations to the business, partners may be classified as:

-Managing partner- One who manages the affairs of the business.

- Secret partner- One who is not known by third parties to be a partner in the business but takes an
active part.

-Silent partner- One who does not take an active part in the business but is known by third parties to be
a partner in the business.

-Dormant partner- One who does not take an active part in the business and is not known by third
parties to be a partner.

-Ostensible partner- One who takes an active part and is known to the public as a partner in the
business, whether or not he has an actual interest in the firm.

KINDS OF PARTNERSHIP

As to liability of the partners:

-General partnership- One in which all partners are general partners, which means that the liability of all
partners to the partnership creditors extends to their separate personal property.

-Limited partnership- One which is composed of one or more general partners and one or more limited
partners. A limited partnership shall bear the word "Limited" (or LTD) in its firm name.

As to either universal or particular:

-Universal 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 and all the profits they may acquire therewith.

-Universal partnership of profits- comprises all that the partners may acquire profit by their industry or
work during the existence of the partnership.
-Particular partnership- If the partnership is formed only to carry out one business venture or to
complete one undertaking.

As to duration:

-Partnership at will- is one in which no time or period is specified for its existence and is not formed for
a particular undertaking or venture. This may be terminated anytime by mutual agreement of the
partners or by the will of any one partner alone.

-Partnership with a fixed term- is one which the term for which the partnership will exist is fixed or
agreed upon. This also applies to a partnership that is formed for a particular objective or undertaking.

As to purpose:

-Commercial or trading partnership- is organized to undertake business transactions such as

-Professional or non-trading partnership- is formed for the practice of a profession, such as auditing
firm (for CPAs), law firm (for lawyers), medical clinic (for medical practitioners), and similar professions.

As to representation to others:

-Ordinary partnership- one which actually exists among partners and also third persons.

-Partnership by estoppel- one which in reality is not a partnership but is considered as one only in
relation to those who, by their conduct or omission are precluded to deny or disprove the partnership’s
existence.

As to the legality of existence:

-De jure partnership- one that has complied with all the requirements for its establishment.

-De facto partnership- one which failed to comply with one or more of the legal requirements for its
establishment.

As to publicity:

-Secret partnership- one wherein the existence of certain persons as partners not made known to the
public by any partners.

-Open partnership- one wherein the existence of certain persons as partners is made known to the
public by the members of the firm.

FORMING A PARTNERSHIP

-Initial investment- recorded at the fair market value of the assets at the date of their transfer to the
partnership. Value assigned must be agreed to by all of the partners.

-Once partnership has been formed- accounting is similar to accounting for transaction of any types of
business organization.
REMEMBER:

- Receivable to (Due from) Partner is debited when a partner advances from the partnership.

- Payable to (Due to) Partner is used to account loan extended to the partnership.

- Permanent withdrawal of Capital resulted in an outright debiting of the Capital account.

- Share in earnings' withdrawal uses Drawing account to which eventually close to capital account.