Partnership Formation & Legal Aspects

Partnership Defined

• A partnership is formed when two or more individuals commit to pooling money, property, or industry into a shared fund, aiming to split the profits among themselves
• Partnerships can also be formed by two or more individuals to practice a profession, as per Art. 1767
• Partnerships possess their own legal identity, distinct from their partners
• In legal proceedings, a partnership has the capacity to sue and be sued under its name through authorized representatives

Formation of Partnership Contracts

• Generally, partnership contracts do not require a specific form to be valid
• An exception exists when immovable property or real rights are contributed; in such cases, the contract is void unless it is in writing in a public instrument, as stated in Art. 1771
• An inventory of contributed property must be made, signed by the parties, and attached to the public instrument (Art. 1773)
• Contracts that cannot be fulfilled within a year fall under the statute of frauds, requiring a written enforceable agreement
• A contract of partnership with a capital of 3,000 pesos or more in money or property must be in a public instrument and recorded with the Securities and Exchange Commission
• Partnerships maintain a juridical personality even if they fail to comply with SEC requirements

Requirements for Partnership Formation

• Intention to form a partnership, a shared fund from contributions, and shared interest in profits are required to form a partnership
• A valid contract, legal capacity of all parties, mutual contributions of money, property, or industry, a lawful object, and a primary purpose of obtaining profits are essential features of a parntership

Joint Ventures

• Joint ventures are similar to partnerships, sharing elements like community of interest, profit and loss sharing, and mutual control rights
• A key difference in common law is that partnerships are for general business with continuity, while joint ventures are for single, temporary transactions

Similar Contracts

• Collaboration refers to working together on a joint project
• Association is when a number of people come together for a specific purpose or business

Partnership vs. Co-ownership

• Partnerships are created by contract, whether expressed or implied, whereas co-ownership is generally created by law, with or without a contract
• Partnerships have a separate juridical personality from each partner, unlike co-ownership
• Partnerships aim for profit realization, while co-ownership focuses on the common enjoyment of a thing or right, not necessarily involving profit sharing
• There is no time restriction on how long a partnership can last
• An agreement to not divide the item for more than 10 years, is not permitted
• Unlike co-owners, partners cannot dispose of their individual interest to make the assignee a partner without the consent of all partners
• Co-owners can dispose of their share without the consent of the others
• Partners, unlike co-owners, may bind the partnership unless stipulated otherwise
• Co-owners cannot represent the co-ownership
• A co-owner's death or incapacity does not necessarily dissolve the co-ownership, partnership dissolves upon the death or incapacity of a partner
• Partnerships operate on mutual agency unlike co-ownership, which generally does not involve mutual representation
• Partnerships are created by agreement of the parties
• Co-ownership is created by law or by operation of law

Number of Incorporators

• Partnerships need at least two people
• A corporation needs five incorporators
• Partnerships obtain juridical personality upon contract execution, while corporations do so from the date of certificate issuance by the SEC
• Partnerships can exercise powers authorized by partners however Corporations can only exercise powers granted/implied by law
• Every partner is an agent of the partnership, however management in corporations are vested in the board of directors/trustees
• The term of existence for partnerships is any period stipulated by the partners however the term of existence for a corporation is 50 years, but amendable

Rules to Determine Existence of Partnership

• General rule states that individuals not partners to each other are not partners to third parties, barring partnership by estoppel
• Co-ownership of property does not establish a partnership, though co-owners share joint ownership incidents
• Sharing of gross returns does not indicate a partnership unless there is a joint interest in the shared property
• Receiving a share of profits presumes partnership, unless profits are payment for debt installments, wages, rent, annuity to a deceased partner's representative, interest on a loan, or sale consideration for goodwill

Classifications of Partnership

• As to object, partnerships can be universal (of all present property or profits) or particular
• Regarding partner liability, they can be general or limited
• According to duration, partnerships can be at will or for a fixed period
• By legality of existence, they are either de jure or de facto
• In representation to others, partnerships can be ordinary or real, or ostensible or by estoppel
• Considering publicity, they can be secret or notorious/open
• According to purpose they can be commercial/trading or professional/non-trading

Universal vs. Particular Partnerships

• A universal partnership of all present property involves partners contributing all currently owned property to a common fund, with the intention of sharing both the property and any derived profits
• A universal partnership of profits includes all that partners may acquire through their work or industry during the partnership, and the usufruct of movable or immovable property they possess when the contract is made
• A particular partnership focuses on specific items, their use and fruits, a single undertaking, or practicing a profession

General vs. Limited Partnerships

• In a general partnership, general partners are liable pro rata, subsidiarily, and sometimes solidarily with their separate assets for partnership debts
• A limited partnership includes one or more general partners and one or more limited partners, with the latter not personally liable for partnership obligations

Types of Partnerships Based on Duration

• A partnership at will has no specified duration and can be dissolved at any time by any partner's will or mutual agreement
• A partnership with a fixed term exists for a set period or undertaking; it dissolves upon completion of the term or undertaking, unless continued

Other Kinds of Partnership

• De Jure Partnership: Complies with all legal requirements for establishment
• De Facto Partnership: Fails to comply with all legal requirements for its establishment
• • Ordinary/Real Partnership*: Exists among partners to third persons
• Open/Notorious Partnership: Existence is known to the public
• Commercial/Trading: To transact business
• Professional/Non-Trading: To practice a profession

Classifications of Partners

• Capitalist Partner: Contributes money or property
• Industrial Partner: Contributes industry or service

Partner Liability

• General: Extends to separate property
• Limited: Limited to capital contribution

Partner Management

• Managing: Manages business affairs
• Silent: Known as partner but no business involvement
• Liquidating: Manages winding up of affairs after dissolution

Classifications of Partners (Miscellaneous)

• Ostensible Partner: takes part in business and is known to public
• Secret Partner: takes part in business and not known to outside parties
• Dormant Partner: does not take active part in business and not known as partner

Capitalist vs. Industrial Partner

• Contribution: Capitalist contributes money or property; industrial contributes industry
• Other Business: Capitalist cannot engage in similar enterprise; industrial cannot engage in any business
• Profits: Capitalist shares profits pro rata; industrial receives just and equitable share
• Losses: Capitalist and Industrial partner share losses pro rata

Partner Obligation

• Must contribute promised property
• Answer for eviction of determinate property
• Answer for fruits of delayed property
• Preserve property with diligence
• Indemnify partners for damages from retention/delay

Money Contributions by Partners

• Obligation to contribute
• Contribute due amount
• Reimburse taken funds
• Pay agreed/legal interest for failure to contribute
• Indemnify damages from delay/conversion

Engagement in Other Business

• An industrial partner is prohibited from engaging in any business for himself, with remedies for other partners
• Capitalist partners are prohibited from engaging in business that is the same kind of business

Managing Partner Debt

• Sums collected are proportionately for the individual and partnership debts

Sharing Partnership Credit

• Partners must contribute to the capital

Partner Damages

• Liable for damages to partnership by fault, but cannot be compensated with profits

Duties of Partners

• Duty is to provide information and to account for any benefit, and hold as trustee unauthorized personal profits

Rights of A Partner

• Rights include property rights of a partner, reimbursement, association with others, formal accounting etc.

Distribution of Profits and Losses

• Distribution of profits and losses follow what is agreed
• If there is no agreement , it is split according to capital contribution
• Purely industrial partners are not liable for losses

Contract Sub-Partnership

• Formed between partnership member and third third person
• Absence of consent result in the person not attaining rights as a partner

Partner Rights

• Partners have rigths to specific property and interest in the partnership

Conveyance by Partner

• Partner interest being conveyed results in partner remaining or dissolving

Creditor Remedies

• Application for a charging order provides relief of judgements for creditors

Manner of Management

• Managing partner appointed in the articles holds irrevocable power unless just cause is present -Managing partners can be removed for cause with vote
• Extent of Powers: Acts in good faith, then he can peform administration acts. Acts in bad faith, then he cannot
• For two managing partners duties carried without duties/unanimity can be executed
• Governing Laws: Majority vote / decision of the partners prevails

Imminent danger of grave exception

• Occurs when partner acts without absent/unable partner present

Obligations to third persons

• Liability to contractual or partnership obligations from partner extends

Pro rata liability

• Liability among partners in the event of contract breach or violation of duty

Criminal liability of partnership

• Partnership liability does not extend to criminal action

Principle of delectus personarum

• Cant add or remove partner without consent from other party

Partnership dissolution

• Winding is the settling of all business after dissolution

Causes for dissolution

• Occurs based on art 1830 for parties to expand, but not delimit
• *Without violation between partners
  • termination of the agreement
  • by will of partner
  • by all partners without assignment.

Judicial Dissolution

• Occurs where a partner is rendered unstable, incapable of performing contract or due to bad faith

Effects of Dissolution

: Dissolution terminates all authority of any partner to act for the partnership, except for winding up and finishing transactions

Rights of a partner

• Occurs when not prevented by rights/contract
  • partner maintains rights to have property applied and receive cash of surplus

Fraud dissolution of partnership

• Partner has right of lien and retention of the sum of contributions

Winding up manner

• Extrajudicial occurs by the partnership itself
• Judicial occurs when it requires direction shown by partner or assignee

Winding up persons

• Governed by partner that are designated

Order of payments in winding up

• General: Order is creditors, capital, profits
• Limted: creditor, comensation and profits

Limited Partnership

• One or more partners or more limits where parties are not liable for party debts

Doctrines of marshalling assets

• Partnership creditors are preferencial to the partnership

Characterisitcs of limited partnership

• Must be formed on good standard
• Management under general partener

Limitations

• General partner cannot:
  • act without contract
  • impossble acts
  • assign

Rights if a limited partner

• Can keep books
• Can inspect
• Demand information
• Receive profit

Liabilities of a limited partner

• Liable for contribution

Transaction of a limitied partner

• CAN loan to the agreement
• CAN transom with business

Explore the basics of partnership formation, including its definition, legal identity, and the contractual requirements for establishing a partnership. Learn about the conditions under which a partnership contract must be in writing and the necessity of an inventory of contributed property.