Module 1 Part 2

BASIC CONSIDERATIONS AND FORMATION OF PARTNERSHIP

Classifications Of Partnership

1. According to Object
A. Universal Partnership of all Present Property. All contributions of the partners become part of the
Partnership fund or common Fund (Art. 1778) with the intention of dividing the same among themselves
including the profits. The properties which belong to each of the partners at the time of the constitution
of the partnership, becomes the common property of all the partners including profits they may have
acquired therewith. (Art. 1779).

B. Universal Partnership of Profit. The partners retain ownership of the things they placed into the
common fund which comprises of all that the partners may have acquired by their industry or work
during the existence of the partnership (Art. 1780). Their actual contributions will be their industry or
work and the use of the things they have placed into the common fund, only profits acquired by their
industry or work will be divided among themselves.

Movable or immovable property which each of the partners may possess at the time of the
celebration of the contract shall continue to pertain exclusive to each, only the usufruct passing
to the partnership.

NOTE: If the articles of universal property did not specify the nature, it will be considered
universal partnership of profits.

Usufruct means the legal right given to an individual or party and conferring temporary right to
use and derive income or benefit from someone else’s property.

In reference to Art. 1779, universal partnership of all present property, properties belonging to
each, becomes the common property of all the partners, BUT “the property which the partners
may acquire subsequently by inheritance, legacy, or donation cannot be included in such
stipulations”, only the fruits are for the common enjoyment of partners.

C. Particular Partnership. A partnership which has for its object determinate things -its use or fruits, to
carry out specific undertaking, or the exercise of a profession or vocation.

2. According to Liability

A. General Partnership. One wherein all partners may publicly act on behalf of the firm and each
partner can be held individually liable for the obligations of the firm to the extent of their personal
property. Such partners are called general partners. The contract or agreement is called Articles of
Partnership.

B. Limited Partnership. A partnership wherein one or more but not all the partners have limited
 liability. The law provides that at least one partner shall be a general partner. A limited partner can only
contribute money and property but not industry and it cannot participate in the management of the
business. The contract is called Certificate of Partnership.

3. According to Purpose

A. Commercial or Trading Partnership. The main activity is the manufacture or purchase and sale of
goods and services or one formed for the transaction of business.

B. Professional or Non-Trading Partnership. One organized for the purpose of rendering professional
services. E.g. professional firm of accountants, lawyers, engineers, doctors, etc.

4. According to Duration

A. Partnership at Will. The term of existence for this type is unlimited since no period is fixed. It is
formed only for a particular undertaking; however, it can be terminated anytime by the agreement of the
partners.
B. Partnership with Fixed Term. It has specified period or term of existence and the expiration thereof
dissolves the partnership.

5. According to Legality of Existence

A. De Jure Partnership. One that has complied to all the legal requirements for its existence. B.
De Facto Partnership. One that has not complied with some or all the legal requirements for its
formation.

6. According to Manner of Creation

A. Orally Agreed Upon. Partnership agreement was formed by means of articulation.

B. Written

• in Public Instrument. When the partnership agreement was incorporated in article of co

partnership and approved by Securities & Exchange Commission (SEC).
• in Private Instrument. When the partnership agreement was made in writing but such writing was
not submitted and approved by the Securities & Exchange Commission. (SEC).
KINDS OF PARTNERSHIP

1. General partner - one who is liable to pay personally the obligations or debts of the partnership in
case all its assets have been exhausted or not sufficient to cover the claims of the creditors. 2.
Limited partner - liable only up to the extent of his contributed capital
 3. Capitalist partner - one who contributes cash or non-cash properties.
4. Industrial partner - one who contributes only his labor, knowledge and skill or personal
knowledge. 5. Managing partner - one who is chosen or appointed to manage the operation of the
partnership business.
6. Liquidating partner - designated to wind-up or settle the affairs of the business after dissolution.
7. Dormant partner - not known to be a partner and does not take active part in the management of
the business.
8. Silent partner - known to be a partner but does not take active part in the management of the
affairs of the business.
9. Secret partner - a partner not known to the public as partner but participates actively in the
management of the affairs of the business.

10. Nominal partner - one who is not a partner but allows the use of his name either for accommodation
or for consideration. He does not participate in the management of the business and has no financial
investment in the business.

A nominal partner will be liable as a partner, because of the false appearance the person holds before
the world...Generally a nominal partner is a well-known, well-connected individual whose name lends credibility
and recognition to the firm.

11. Partner by estoppel- a person who is not a partner but allows others to think that he is a partner
through his behavior and conduct or consents to another representing him to a third person as a partner in an
existing partnership.

The law considers him to be a partner in that partnership as far as the third person is concerned and can
therefore, be held liable for any debts and damages owed to a third party.

OTHER LAWS GOVERNING PARTNERSHIP BUSINESS

ARTICLE OF PARTNERSHIP
The Partnership may be formed through an oral agreement but it is always advisable that the
agreement be in writing referred to as Articles of Partnership. Important provisions that must be covered by the
agreement are as follows:

▪ Partnership name, nature, purpose and location;

▪ Names, citizenship and residences of all the partners;

▪ Effectivity date of the contract of partnership or date of formation and its duration;
▪ The capital contribution of its partner (procedure in valuing non-cash investments, treatment of excess
contribution as Capital or as Loan) and penalties for partner’s failure to invest and maintain the agreed
capital

▪ Rights, powers and duties of each partner and their limitations;

 ▪ The accounting period to be adopted (nature of accounting records, financial statements and audits by
independent accountants);

▪ Profit and loss sharing ratio including any provisions for the recognition of differences in contributions,
frequency of income measurement and distribution; The drawings and salaries allowed to partners;

▪ The provision for arbitration of disputes and dissolution of partnership.

A contract of partnership is void whenever immovable property or real rights are contributed and a
signed inventory of the said property is not made and attached to a public instrument.

SEC REGISTRATION
Though the partnership with a capital of P3,000 or more, in money or property is required to register
the public instrument with SEC, even if unregistered, the partnership with capital of P3,000 or more is
still valid and therefore has legal personality. The purpose of registration is to set a condition for the
issuance of the licenses to engage in business or trade thus, tax liabilities of big partnerships cannot be
evaded and the public can also determine more accurately their capital and membership.

Basic Steps to Register

🞆 Have the proposed business name verified in the verification unit of SEC. The name must have the
word “Company” or “Co.” or Limited or Ltd for limited partnerships and “Company”, “Associates” or
“partners” for general professional partnerships. (SEC Memorandum Circular 5, Series of 2008.

🞆 Submit the following documents:

o Articles of Partnership
o Verification slip for the business name.
o Written undertaking to change business name if required.
o Tax Identification numbers of each partner and /or that of the Partnership.

o Registration data sheet for partnership duly accomplished in six (6) copies.

o other documents that may be required:

Endorsement from government agencies if the proposed partnership will engage in an

industry regulated by the government.
For partnership with foreign partners-SEC Form F-105, bank certificate on the capital
contribution of partners, proof of remittance contribution of foreign partners.

🞆 Pay the registration, filing and miscellaneous fees: Filing fee equivalent to 1/5 of 1% of the
partnership capital but not less than P1,000 and legal research fee which is 1% of the filing fee.

🞆 Forward documents to the SEC Commissioner for signature.

Accreditation to practice PUBLIC ACCOUNTANCY

All Certified Public Accountants (CPAs), firms and partnerships of CPAs, engaged in the
 practice of public accountancy, including partners and staff members thereof, shall register with
Professional Regulation Commission and Professional Regulatory Board of Accountancy. Registration
shall be renewed every three (3) years. (Philippine Accountancy Act of 2004, Sec. 31).

CHARACTERISTICS OF PARTNERSHIP CONTRACT.

OTHER LEGAL PRINCIPLE

A. Valid contract. A partnership can exist only if there is a valid contract entered into by two or more
persons, the contract of which must contain the following elements namely: Consent, Object and
Cause. The partnership is an association of persons with mutual trust and confidence under the
principle of “delectus personae”.

*Delectus Personae is the right of partners to exercise their choice and preference as to
admission of new members into the partnership and that NO set of partners can take another
person into the partnership without the consent of each of the other partners.

B. Capacity to Become a Partner. The persons constituting the partnership contract must be capable
of entering into a contractual relation. Un-emancipated minors, insane, demented persons and deaf
mutes (who do not know how to write) cannot give consent to a contract of partnership. Neither can a
corporation be a partner in partnership for reason of public policy.

C. Lawful Purpose. The objective must be lawful and must be established for the common benefit or
interest of the partners. If such purpose is contrary to law, morals, good customs, public order or public
policy, the contract of partnership is considered void.

D. Contribution to Common Fund. Partner’s contribution may include Money, Property (real or
personal, tangible or intangible), or Industry (physical or intellectual)
**Limited partners may contribute money or property only, never industry.

E. Division of Profit. The purpose in which a partnership is formed is to obtain profits and divide the
same among themselves, establishing the common benefit of all the partners, thus, any stipulation to
exclude one or more partners from any share in the profit of partnership is void.