Partnership Business Law

Partnership Definition and Characteristics

• A partnership is a contract where two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing profits among themselves or to exercise a profession.
• Characteristics of a partnership:
  • Consensual: perfected by mere consent or meeting of minds between parties (Art. 1305)
  • Bilateral or Multilateral: entered into between two or more persons
  • Nominate: designated by a specific name and subject to specific rules
  • Principal: its existence does not depend on the existence of another contract
  • Onerous: certain contributions have to be made to become a partner
  • Preparatory: other contracts essential to its purposes can be entered into after its formation

Principles Applicable to Partnership

• Affectio Societatis: desire to formulate an active union with mutual confidence and trust among partners
• Delectus Personae: right to choose who to associate with

Purpose of Partnership

• Can be for the intention of dividing profits among themselves or to exercise a profession
• Must have a lawful object or purpose; otherwise, it may be declared dissolved by judicial decree, and profits shall be confiscated in favor of the state (Art. 1770)

Partnership vs. Corporation

• Creation: partnership is a voluntary agreement of parties, while a corporation is created by the state in the form of a special charter or by a general enabling law
• Number of Organizers: two or more for partnership, not more than 15 for corporation
• Existence: no time limit for partnership (except by agreement of parties), 50 years (now with perpetual existence under the Revised Corporation Code) for corporation
• Liability of Owners: may extend to private property for partnership, liable only up to capital contributions for corporation
• Transferability of Interest: all partners need to consent for partnership, does not need consent of other stockholders for corporation
• Ability of Owners to Bind the Firm: partners acting on behalf of the partnership are agents thereof, while stockholders cannot bind the corporation (must be through a board of directors)
• Remedies in Case of Mismanagement: a partner can sue another partner for mismanagement, while a stockholder cannot sue a director (must be in the name of the corporation, through a derivative suit)

Separation of Judicial Personality

• A partnership has a separate judicial personality, distinct from that of each partner
• Can acquire and possess property, incur obligations, bring civil or criminal actions, and be adjudged insolvent

Rules to Apply in Determining Existence of Partnership

• No partnership exists:
  • Between persons who are not partners as to each other (except by estoppel)
  • By co-ownership or co-possession of property
  • By sharing of gross returns
• Presumption: receipt of a share of profits is prima facie evidence of partnership, unless received as payment for debt, wages, annuity, or interest on a loan

Formal Requirements

• A partnership may be constituted in any form, except:
  • When immovable property is contributed, an inventory of said property must be made, signed by the parties, and attached to the public instrument
  • When capital is more than P3,000, the contract of partnership must appear in a public instrument, which must be recorded in the SEC

Kinds of Partnerships

• According to Object:
  • Universal: all profits and all present property are contributed
  • Particular: determinate things, their use or fruits, or specific undertaking, or exercise of a profession
• According to Liability:
  • General: all partners are liable up to their individual properties
  • Limited: at least one partner is liable only up to their capital contribution
• According to Term:
  • Partnership with a fixed term or particular undertaking
  • Partnership at will

Kinds of Partners

• According to Contribution:
  • Capitalist: contributes capital
  • Industrial: furnishes industry or labor
  • Capitalist-Industrial: furnishes both
• According to Liability:
  • General: liable up to personal assets
  • Limited: liable up to capital contributions only
• Other kinds of partners:
  • Silent: does not participate in management
  • Secret: not known to third persons as a partner
  • Dormant: both silent and secret
  • Ostensible: participates in management and is known to third persons
  • Managing: undertakes management
  • Liquidating: undertakes winding-up of partnership affairs
  • Incoming: admitted to the partnership after its constitution

Obligations of a Partner

• To the Partnership and Other Partners:
  • To give his contribution
  • To give additional contribution in case of imminent losses
  • Prohibition to engage in other businesses
  • To account for and hold as trustee unauthorized personal profits
  • To pay for damages caused by his fault
  • To share with other partners the share of the partnership credit
  • To keep the partnership books in the principal office
  • To inform the other partners of all matters affecting the partnership
  • To observe the diligence of a good father of a family
  • To adhere to the partnership agreement and decisions of appointed managing partner(s)

Obligations of Partners to Third Parties

• Firm Name: every partnership shall operate under a firm name
• Liability after Exhaustion of Partnership Assets: all partners, including industrial ones, shall be liable pro rata with all their property and after all partnership assets have been exhausted, for contracts entered into in the name and for the account of the partnership### Partnership Liability
• A partner is liable to the extent of his personal assets for partnership debts incurred after admission.
• A new partner is not liable for debts incurred prior to admission, unless there is a stipulation to that effect.

Solidary Liability

• Partners are solidarily liable for torts/quasi-delicts committed by any partner in the ordinary course of business or with authority of co-partners.
• Partners are solidarily liable for misappropriation of funds or property received by the partnership or by a partner within the scope of his apparent authority.

Partner by Estoppel

• A person who represents himself as a partner of an existing partnership with or without consent of the partnership is liable as a partner.
• A person who represents himself as a partner of a non-existent partnership is liable to the extent of his personal assets.

Rights of a Partner

• Right to share in profits and losses according to agreement or contribution.
• Right to participate in the management of the partnership business.
• Right to inspect and copy partnership books.
• Right to demand a formal account in certain cases (e.g. wrongful exclusion from business, stipulation granting such right).
• Right to ask for dissolution of the firm at the proper time.
• Right to reimbursement for expenses incurred on behalf of the partnership.

Dissolution and Winding Up

• Dissolution of a partnership is the change in the relation of partners caused by any partner ceasing to be associated in the carrying on of the business.
• Winding up is the process of settling business affairs after dissolution.
• Termination is the point where all partnership affairs have been wound up.

Causes of Dissolution

• Extrajudicial causes: without intervention of the court (e.g. termination of definite term, express will of any partner, expulsion of a partner).
• Judicial causes: where the dissolution of the partnership is decreed by the court (e.g. when the business becomes unlawful, death or insolvency of a partner, civil interdiction of a partner).

Authority to Act for and on Behalf of the Partnership

• Every partner is an agent of the partnership for the purpose of its business.
• Authority of a partner to act in behalf of the partnership may be express, implied, or apparent.
• Consent of all partners is necessary for certain acts (e.g. assignment of partnership property in trust, disposition of goodwill, confession of judgment).

Conveyance of Real Property

• Conveyance of partnership property by a partner may be valid, but the partnership may recover the property if the conveyance was not authorized.
• Conveyance of partnership property by one or more partners may be valid if authorized by the other partners or if they have abandoned the business.### Dissolution of Partnership
• A partner can be declared insane in a judicial proceeding, making them incapable of performing their part of the partnership contract.
• A partner can become incapable of performing their part of the partnership contract in any other way.
• A partner can commit conduct that affects the business prejudicially, leading to dissolution.
• A partner can willfully or persistently breach the partnership agreement, making it impractical to continue the business.
• The business can only be carried on at a loss, making dissolution necessary.
• Other circumstances can render dissolution equitable.

Effects of Dissolution

• Mutual agency is terminated, and partners can no longer act to bind the partnership.
• Exceptions to this rule include:
  • Acts to wind up the partnership's affairs.
  • Contracts with creditors who had no notice of the dissolution.
• Partners may continue the partnership after dissolution, but this creates a new partnership.
• The old partnership is dissolved, and creditors become creditors of the new partnership or individual continuing the business.

Winding Up or Liquidation

• This is the process of liquidating the partnership's assets and distributing the proceeds to satisfy claims.
• The liquidator is responsible for this process and can be:
  • A party who has not wrongfully caused the dissolution.
  • The legal representative of the last surviving partner (if all are dead), if not insolvent.
  • The court, upon cause shown by a partner, their legal representative, or assignee.

Distribution of Assets

• Assets are distributed in the following order:
  1. Those owing to creditors other than partners.
  2. Those owing to partners other than for capital and profits.
  3. Those owing to partners in respect of capital.
  4. Those owing to partners in respect of profits.

Limited Partnership

• A limited partnership is formed by two or more persons with one or more general partners and one or more limited partners.
• Limited liability: a limited partner's liability is limited to their capital contribution.
• Formation requirements:
  • Sign and swear to a certificate stating the partnership's name, business, location, and members' names and residences.
  • State the term for which the partnership exists, cash and property contributions, and additional contributions.
  • File the certificate with the SEC.

Limited Partner's Interest

• A limited partner's interest can be assigned or attached/executed.
• Unlike a general partner, a limited partner's interest can only be redeemed with the general partner's property, not with partnership property.

Limitations on a Limited Partner

• A limited partner cannot be an industrial partner and must contribute money or property.
• A limited partner's surname cannot appear in the partnership name unless it is also the surname of a general partner or the business has been carried on under that name before.
• A limited partner cannot take part in the management of the partnership.

Rights of a Limited Partner

• A limited partner has the right to:
  • Inspect and copy partnership books.
  • Receive true and full information about the partnership.
  • Demand dissolution and winding up by decree of court.
  • Receive a share of profits or compensation by way of income.
  • Receive the return of their contribution under certain conditions.

General-Limited Partner

• A person can be a general partner and a limited partner in the same partnership, provided this is stated in the certificate.
• They have the rights and powers of a general partner, except in respect of their contribution, where they have the rights against other partners as if they were not also a general partner.

Dissolution and Winding-Up of a Limited Partnership

• Grounds for dissolution include the retirement, death, insolvency, insanity, or civil interdiction of a general partner.
• Exceptions to this rule include:
  • Continuation of the partnership by the remaining general partners under a right to do so as stated in the certificate.
  • Continuation with the consent of all partners.
• A limited partner can have the partnership dissolved and its affairs wound up when they rightfully but unsuccessfully demand the return of their contribution.
• Distribution of assets is done in the following order:
  1. Those owing to creditors other than partners.
  2. Those owing to the limited partners, other than capital and profits.
  3. Those owing to the limited partners in respect of profits.
  4. Those owing to the limited partners in respect of capital.
  5. Those owing to general partners other than for capital and profits.
  6. Those owing to general partners in respect of profits.
  7. Those owing to general partners in respect of capital.