LAW ON PARTNERSHIPS

CONTRACT OF PARTNERSHIP, IN GENERAL

PARTNERSHIP is a contract whereby 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, or in order to exercise a
profession.
CHARACTERISTICS:
1. Consensual – it is perfected by mere consent or the meeting of minds between parties (Art. 1305).
2. Bilateral or Multilateral – it is entered into between two or more persons;
3. Nominate – it is designated by a specific name and there are specific rules applicable only to it;
4. Principal – its existence does not depend on the existence of another contract;
5. Onerous – certain contributions have to be made to become a partner;
6. Preparatory – in the sense that after it has been entered into, other contracts essential in the carrying out
of its purposes can be entered into.
Principles applicable: There must be Affectio Societatis – the desire to formulate an ACTIVE union with people
among whom there exist mutual confidence and trust.
In connection thereto, the principle of Delectus Personae (Personal Choices), which pertains to the right to
choose who to associate with, is also applicable.
PURPOSE: can either be for the intention of dividing the profits among themselves, or in order to exercise a
profession. Nevertheless, it is required that a partnership must have a LAWFUL object or purpose, otherwise
it may be declared dissolved by judicial decree, and the profits shall be confiscated in favor of the state. (Art.
1770)
PARTNERSHIP vs. CORPORATION
PARTNERSHIP CORPORATION
Creation Voluntary agreement of parties. Created by the state in the form of a special
character or by a general enabling law (The
Corporation Code)
Number of Two or more Not more than 15
Organizers
Existence No time limit except agreement of Not more than 50 years (now with perpetual
parties. existence under the Revised Corporation
Code)
Liability of may extend to private property. Liable only upto their capital contributions
owners
Transferability All partners need to consent to the Does not need the consent of the other
of interest transfer of interest to another. stockholders.
Ability of owners Generally, partners acting on behalf of Generally, stockholders cannot bind
to bind the firm the partnership are agents thereof; corporations since its official acts are through
a board of directors
Remedies in A partner can sue another partner who A stockholder cannot sue a director who
case of mismanages mismanages, it must be in the name of the
mismanagement corporation, through a derivative suit.
Nationality A partnership is a national of the country Generally, under whose laws it was created as
where it was created, and dependent on to whether domestic or foreign, and as to
percentage of ownership. nationality, on the ownership of the
outstanding capital stock.
Legal from the time the contract begins Generally from issuance of COR.
Personality
Right of None. Death, retirement, insolvency, civil Yes. Such causes do not dissolve a
Succession interdiction, or insanity of a partner corporation.
dissolves the partnership.

SEPARATE JURIDICAL PERSONALITY: The partnership has a judicial personality separate and distinct from
that of each of the partners. The partnership can, in general:
1. Acquire and possess property of all kinds;
2. Incur obligations;
3. Bring civil or criminal actions;
4. Adjudged insolvent even if the individual members be each financially solvent.
RULES TO APPLY IN DETERMINING EXISTENCE OF PARTNERSHIP:
1. There is no partnership:
a. Between persons who are not partners as to each other are not partners as to third persons; except a
partnership by estoppel.
b. Co-ownership or co-possession of itself, whether such-co-owners or co-possessors do or do not share any
profits made by the use of the property;
c. The sharing of gross returns, whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived;
2. Presumption: 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.
FORMAL REQUIREMENTS:
General Rule: A partnership may be constituted in any form,
Except: 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.
Capital is P3,000 or more – the contract of partnership must appear in a public instrument, which must be
recorded in the SEC. This does not in any way affect validity of the partnership as it is intended only to affect
third persons.
KINDS OF PARTNERSHIPS
According to OBJECT:
1. Universal:
• ALL PROFITS VS. ALL PRESENT PROPERTY
ALL PROFITS ALL PRESENT PROPERTY
Only the USUFRUCT of the properties of ALL the property actually belonging to the partners are contributed
the partners become common property; both ownership and naked ownership.
NAKED OWNERSHIP is retained by each
of the partners.
ALL PROFITS acquired by industry or As a rule, aside from the contributed properties, only the PROFITS
work of the partners become common OF THE CONTRIBUTED PROPERTY.
property (regardless of whether or not
said profits were obtained through the Profits from other sources may become partnership property, but
usufruct contributed) only if there is a stipulation to such effect.

Properties subsequently acquired by inheritance, legacy, or

donation, cannot be included in the stipulation, BUT the fruits thereof
can be included in the stipulation.

• In case of ambiguity: If the Articles of Universal Partnership does not specify the nature of the Universal
Partnership, it is deemed that what is constituted is only a universal partnership of profits.
• Persons not allowed to form a universal partnership: those who cannot donate to each other, namely:
a. Husband and Wife (Art. 133)
b. Those guilty of adultery and concubinage (Art. 739);
c. Those guilty of the same criminal offense, if the partnership was entered into in consideration of the
same (Art. 739);
A universal partnership is virtually a donation to each other of the partner’s properties (or at least their
usufruct). Therefore, if persons are prohibited by law to donate to each other, they should not be allowed to
do indirectly what the law forbids directly.
2. Particular where the object are:
a. Determinate things, their use or fruits;
b. A specific undertaking, or
c. The exercise of a profession or occupation.
According to LIABILITY:
1. General where all the partners are general partners whose liability extends to their individual properties,
after the assets of the partnership have been exhausted;
2. Limited where at least one of the partners are liable only up to the extent of his contribution.
According to TERM:
1. Partnership with a fixed term or particular undertaking - upon arrival of the fixed term or fulfilment of
a particular undertaking, partnership is dissolved, and if continued, it will constitute a partnership at will and
the rights and duties of the partners remain the same, so far as is consistent with a partnership at will.
2. Partnership at will – when there is no fixed term or particular undertaking.
KINDS OF PARTNERS
ACCORDING TO CONTRIBUTION:
1. Capitalist Partners – contributes capital; and
2. Industrial Partners – furnishes industry or labor.
3. Capitalist-Industrial Partners – furnishes both.
AS TO LIABILITY:
1. General Partners - liable upto his personal assets.
2. Limited Partners – liable upto his capital contributions only.

OTHER KINDS OF PARTNERS:

1. Silent Partner – one who does not participate in the management of the partnership
2. Secret Partner – one who is not known to third persons as a partner
3. Dormant Partner – one who is both a silent and secret partner
4. Ostensible Partner – direct opposite of a dormant partner or one who participates in the management and
is known to third parties as a partner.
5. Managing Partner – one who undertakes the management of the partnership.
6. Liquidating Partner – one who undertakes the winding-up of partnership affairs after its dissolution.
7. Incoming Partner – one who is admitted to the partnership after it has already been constituted.
OBLIGATIONS OF A PARTNER: TO THE PARTNERSHIP AND OTHER PARTNERS
1. To give his contribution
a. Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the capital of
the partnership.
b. As a rule, the contribution must be provided upon perfection of the contract, except if the partners
stipulate otherwise.
c. 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. Thus, no demand shall
be necessary since the law specifically provides for the liability in case of delay.
d. A partner is likewise liable similar to a vendor:
i. He is bound to deliver the fruits thereof from the time they should have been delivered, without need
of demand (Art. 1786).
ii. A partner must exercise due diligence in preserving the thing promised to be contributed; otherwise,
he shall be liable for loss and deterioration.
iii. Warrant the thing delivered against eviction
Risk of Loss:
LOSS BORNE BY THE PARTNER:
a. Thing contributed is specific and determinate which is NOT fungible and only their use and fruits may be
for the common benefit; and
b. There is stipulation that he shall bear the loss of the thing brought and appraised in the inventory.
LOSS BORNE BY THE PARTNERSHIP:
a. Things contributed are
i. fungible;
ii. cannot be kept without deteriorating; or
iii. they were contributed to be sold; and
b. here was appraisal in the inventory and no stipulation that partner will bear the loss.
2. To give additional contribution in case of imminent losses: In case of an imminent loss of the business
of the partnership, any partner who refuses to contribute an additional share to the capital to save the venture,
shall he obliged to sell his interest to the other partners. Except:
a. Industrial partners except if there is stipulation that he will likewise contribute
b. If there is stipulation to the contrary
3. Prohibition to engage in other businesses:
a. Industrial partners - cannot engage in business for himself except when the capitalist partners permit him
to do so.
Effect of non-compliance: The capitalist partners may either
i. Exclude him from the firm or
ii. Avail themselves of the benefits which he may have obtained in violation of this provision.
b. Capitalist partners – the prohibition is limited to businesses in the same industry as that of the partnership
which may result in competition. Exceptions:
i. When it is expressly stipulated that the capitalist partner can so engage himself;
ii. When the other partners allow him to do so, whether expressly or impliedly;
iii. During the period of liquidation and winding up, when the partnership is already non-existent.
iv. When the general-capitalist partner becomes a limited partner in a competitive enterprise.
Effect of non-compliance:
i. He shall bring to the partnership all the profits illegally obtained;
ii. He is liable, personally, for all the losses;
iii. He may be ousted for loss of trust and confidence.
4. Credit to the firm the payment made by a debtor who owes both the partnership and the managing
partner (Art. 1792)
MANAGING PARTNER COLLECTING FROM A COMMON DEBTOR: To prevent the managing partner from
furthering his personal interest to the detriment of the firm, if such managing partner collects a sum from a
common debtor who owes money both to said partner and to the partnership:
 1. If the managing partner issued a receipt in the name of the partnership: the payment shall be applied to
the partnership credit;
2. If the managing partner issued a receipt in his name: the payment shall be applied proportionate to the
amounts of the two debts. EXCEPT: When the debt owed by the debtor to the managing partner is more
onerous, the debtor may choose to apply the payment exclusively to such

5. Other obligations of partners to the partnership and to other partners:

a. Not to convert partnership funds/ property for his own use (Art. 1788)
b. To account for and hold as trustee, unauthorized (or secret) personal profits (Art. 1807)
c. Pay for damages caused by his fault (Art. 1794)
d. Share with other partners the share of the partnership credit which he has received from an insolvent
firm debtor (Art. 1743)
e. Keep the partnership books in the principal office (except when otherwise agreed) and allow other
partners to have access, inspect and copy the same.
f. Reimburse the partnership of damages suffered by it through his fault.
i. The liability for damages is not compensable with profits and benefits earned for the partnership;
ii. Damages, however, may be decreased by courts if through the partner’s extraordinary efforts, the
partnership earned unusual profits.
g. To inform the other partners on all matters affecting the partnership or relative to partnership affairs.
h. To observe the diligence of a good father of a family in all his dealings.
i. To adhere to the partnership agreement and decisions of appointed managing partner(s)

OBLIGATIONS OF PARTNERS: TO THIRD PARTIES:

1. FIRM NAME: Every partnership shall operate under a firm name, which may or may not include the name of
one or more of the partners.
Strangers who include their name in the firm are liable as partners because of estoppel but do not have the
rights of partners. – this is to protect customers from being misled.
Under Art. 1846, if a limited partner included his name in the firm name, he shall be liable as a general
partner.

2. LIABILITY AFTER EXHAUSTION OF PARTNERSHIP ASSETS: All partners, including industrial ones, shall
be liable pro rata with all their property and after all the partnership assets have been exhausted, for
the contracts which may be entered into in the name and for the account of the partnership, under its
signature and by a person authorized to act for the partnership. However, any partner may enter into a
separate obligation to perform a partnership contract.

Any stipulation to the contrary shall be void, except as to the partners.

3. AUTHORITY TO ACT FOR AND IN BEHALF OF THE PARTNERSHIP: Every partner is an agent of the
partnership for the purpose of its business.

The authority of the partner to act in behalf of the partnership may be:
a. Express – those expressly granted to the partner; or
b. Implied – those which may be implied from the express authority; or
c. Apparent – when he apparently carries on the usual business of the partnership and the person to whom
he is dealing has no knowledge of the fact that he has no such authority.
If the partner is not carrying on the usual business of the partnership, the act will not bind the partnership
unless it is authorized by the other partners.

Consent of ALL partners necessary to:

a. Assign the partnership property in trust for creditors or on the assignee's promise to pay the debts of the
partnership;
b. Dispose of the good-will of the business;
c. Do any other act which would make it impossible to carry on the ordinary business of a partnership;
d. Confess a judgment;
e. Enter into a compromise concerning a partnership claim or liability;
f. Submit a partnership claim or liability to arbitration;
g. Renounce a claim of the partnership.
Except when authorized by the other partners or unless they have abandoned the business.

Admission of Partners: an admission made by one partner within the scope of his authority is evidence
against the partnership .

Notice to a Partner: operates as notice to the partnership, except in case of fraud committed by such
partner.
4. EFFECTS OF CONVEYANCE OF REAL PROPERTY:
Property is in Conveyance is in Who conveyed Effect
the name of the name of the property
Partnership Partnership Partner Valid conveyance but partnership may
recover, except (no right to recover):
One or more One or more partners One or more a. When the transfer binds the
partners partners partnership
b. Transferee had no knowledge of
lack or excess of authority
Partnership Partner Partner Passes only equitable interest of the
partnership if within the authority (if
One or more Partner/Partnership Partner not, apparently nothing transfers)
partners/ Third
persons (in
trust)
All partners All partners All partners Valid transfer

5. SOLIDARY LIABILITY FOR TORTS/QUASI-DELICT: Where, by any wrongful act or omission of any
partner acting in the ordinary course of the business of the partnership or with the authority of co-
partners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is
incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting to act.

6. SOLIDARY LIABILITY FOR MISAPPROPRIATION: The partnership is bound to make good the loss, in two
situations:
a. Pertains to partner as receiver: Where one partner acting within the scope of his apparent authority
receives money or property of a third person and misapplies it.
b. Pertains to partnership as receiver: Where the partnership in the course of its business receives money
or property of a third person and the money or property so received is misapplied by any partner while it
is in the custody of the partnership.

In both 5 and 6 above, all partners are solidarily liable with each other and the partnership.

7. PARTNER BY ESTOPPEL:
a. One who represents himself as a partner of an existing partnership with or without consent of the
partnership:
i. When the partnership consented – a partnership by estoppel is created between the original members
and the deceiver. A partnership liability results.
ii. When the partnership did NOT consent – deceiver becomes a partner by estoppel where he is liable
as a partner but does not acquire the rights thereof. No partnership liability exists. Only those who
consented shall be liable.
b. One who represents himself as a partner of a NON-existent partnership. Liability of parties is pro rata,
since there is no partnership liability.

This applies whenever the third person is misled by the representation.

8. LIABILITY OF NEW (or INCOMING) PARTNER:

a. Debts incurred prior to admission: liable upto his contribution (Except if there is stipulation)
b. Debts incurred after admission: liable upto his personal assets.

RIGHTS OF A PARTNER
1. Right to share in the profits

DISTRIBUTION OF PROFITS:
a. In accordance with the agreement as to the distribution of profits;
b. If there was no such agreement, in proportion to contribution and the industrial partner shall receive such
share as may be just and equitable.

DISTRIBUTION OF LOSSES:
1. In accordance with agreement as to distribution of losses;
2. If there was no agreement as to losses, same proportion as to the agreement as to profits;
3. If no agreement as to losses and profits, in proportion to contribution but the industrial partner shall not be
liable for losses.

An industrial may be made liable for losses only if there was stipulation to that effect.

Void Stipulation: A stipulation which excludes one or more partners from any share in the profits or losses is
void, this is otherwise known as Pactum Leonina.

2. Property rights (Art. 1810)

PROPERTY RIGHTS OF A PARTNER:
1. His rights in specific partnership property – a partner is a co-owner with his partners of specific
partnership property. The incidents of such co-ownership are:
a. A partner, subject to any agreement between the partners, has an equal right with his partners to
possess specific partnership property for partnership purposes; but he has no right to possess such
property for any other purpose without the consent of his partners;
b. A partner's right in specific partnership property is not assignable except in connection with the
assignment of rights of all the partners in the same property;
c. A partner's right in specific partnership property is not subject to attachment or execution, except
on a claim against the partnership. When partnership property is attached for a partnership debt the
partners, or any of them, or the representatives of a deceased partner, cannot claim any right under the
homestead or exemption laws;
d. A partner's right in specific partnership property is not subject to legal support.

2. His interest in the partnership - A partner's interest in the partnership is his share of the profits and
surplus.
Effect of conveyance of a partner’s whole interest:
a. Does not, in itself, dissolve the partnership. The partnership is deemed dissolved only if there is stipulation
to that effect.
b. The conveyee does not necessarily become a partner and such has no right to
i. demand accounting and settlement;
ii. interfere in the management or administration of the partnership business; or
iii. demand information, accounting and inspection of the partnership books.
Rights of the assignee/conveyee:
a. To get profits the assignor-partner would have obtained;
b. To avail of the usual remedies in case of fraud in the management;
c. Receive assignor’s interest in the event of a dissolution.
Partner’s Interest may be subject to a charge or attachment by the court:
a. Only the interest, that is profits and surplus of the partner and not his share in the specific properties of
the partnership
b. Priority is still given to creditors of the partnership
c. Such interest may be redeemed prior to foreclosure with:
i. The separate property of any one or more of the partners; or
ii. partnership property with the consent of ALL the other partners

Note: for limited partners, their interest may only be redeemed with the separate property of the general
partners and not with the property of the partnership.

3. His right to participate in the management.

RULES ON MANAGEMENT
a. ONE MANAGING PARTNER
MANAGING PARTNER in the ARTICLES OF PARTNERSHIP: May execute all acts of administration, in good
faith, even with opposition from the other partners;
The power to execute all acts of administration can only be revoked if (a) with just or lawful cause; and (2) by a
vote of the partners representing the controlling interest.
MANAGING PARTNER AFTER PARTNERSHIP HAS BEEN CONSTITUTED: The power as manager may be
revoked by a vote of the partners representing the controlling interest EVEN WITHOUT just or lawful cause.

b. MULTIPLE MANAGING PARTNERS:

i. With stipulation that no Managing Partner may act without the consent of the others – no one can
perform an act of administration without the others’ consent.
ii. With Specification of Duties – each Managing Partner can perform an act of administration within
their respective duties.
iii. Without specification of their respective duties, or without a stipulation that one of them shall not
act without the consent of all the others:
1) Each managing partner may separately execute all acts of administration;
2) Should one of the managing partners oppose the act of another, the matter shall be decided by a
majority of the managing partners per head count;
3) Should there be a tie in the votes of the managing partners, the controlling interest of ALL the
partners shall prevail.
c. NO MANAGING PARTNER; WITH STIPULATION THAT NO PARTNER CANNOT ACT WITHOUT THE
SUPPORT OF PARTNERS: the concurrence of all shall be necessary for the validity of the acts, and the
absence or disability of any one of them cannot be alleged.

Except: if there is imminent danger of grave or irreparable injury to the partnership.

d. NO AGREEMENT AS TO MANAGEMENT OF PARTNERSHIP:
All the partners shall be considered agents and whatever any one of them may do alone shall bind the
partnership, without prejudice to the provisions of Article 1801 (on Multiple Managing Partners)
Except: None of the partners may, without the consent of the others, make any important alteration in
the immovable property of the partnership, even if it may be useful to the partnership.

Exception to the exception: if the refusal of consent by the other partners is manifestly prejudicial to
the interest of the partnership, the court's intervention may be sought.

OTHER RIGHTS OF A PARTNER:

1. To associate with another person in his share (Art. 1804) - every partner may associate another person
with him in his share, but the associate shall not be admitted into the partnership without the consent of all
the other partners, even if the partner having an associate should be a manager.
2. To inspect and copy partnership books (Art. 1805) – the partnership books shall be kept in the principal
place of business unless otherwise agreed.
3. To demand a formal account (Art. 1809) in the following cases:
a. A partner was wrongfully excluded from the partnership business or possession of its property by his co-
partners;
b. When there is a stipulation granting such right
c. As to information affecting partnership affairs, such as secret profits earned by other partners;
d. Whenever just and reasonable.
4. To ask for a dissolution of the firm at the proper time (Art. 1830-31) and the right to return of
capital and advancements – subject to the rules of distribution of partnership assets during liquidation.
5. Right to compensation – exists only when there is an agreement or stipulation granting such right or
entitlement
6. Right to reimbursement – the partnership is 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 was
made
DISSLUTION AND WINDING-UP
Dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be
associated in the carrying on as distinguished from the winding up of the business.
On dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is
completed.

Winding up: on the other hand, is the process of settling business affairs after dissolution.
Termination: is the point where all the partnership affairs have been wound up.

CAUSES OF DISSOLUTION:
Extrajudicial causes: without intervention of the court:
1. Without violation of the agreement between the partners:
a. By the termination of the definite term or particular undertaking specified in the agreement;
b. By the express will of any partner, who must act in good faith, when no definite term or particular is
specified;
c. By the express will of all the partners who have not assigned their interests or suffered them to be
charged for their separate debts, either before or after the termination of any specified term or particular
undertaking;
d. By the expulsion of any partner from the business bona fide in accordance with such a power conferred
by the agreement between the partners;

2. In contravention of the agreement between the partners, where the circumstances do not permit a
dissolution under any other provision of this article, by the express will of any partner at any time;
Note: that the partnership may be dissolved with or without contravention to the agreement of the parties,
but if it is dissolved in contravention to the agreement, the partner who causes the dissolution will be liable
for damages. In Ortega vs. CA, it was held by the SC that “neither would the presence of a period for its
specific duration or the statement of a particular purpose for its creation prevent the dissolution of any
partnership by an act or will of a partner. Among partners, mutual agency arises and the doctrine
of delectus personae allows them to have the power, although not necessarily the right, to
dissolve the partnership. An unjustified dissolution by the partner can subject him to a possible action for
damages.” (GR No. 109248; July 3, 1995)

3. By operation of law:
a. By any event which makes it unlawful for the business of the partnership to be carried on or for the
members to carry it on in partnership;
b. When a specific thing which a partner had promised to contribute to the partnership, perishes before
the delivery; in any case by the loss of the thing, when the partner who contributed it having reserved
the ownership thereof, has only transferred to the partnership the use or enjoyment of the same; but the
partnership shall not be dissolved by the loss of the thing when it occurs after the partnership has acquired
the ownership thereof;
 c. By the death of any partner;
d. By the insolvency of any partner or of the partnership;
e. By the civil interdiction of any partner;

Judicial causes: where the dissolution of the partnership is decreed by the court:
1. A partner has been declared insane in any judicial proceeding or is shown to be of unsound mind;
2. A partner becomes in any other way incapable of performing his part of the partnership contract;
3. A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business;
4. A partner wilfully or persistently commits a breach of the partnership agreement, or otherwise so
conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry
on the business in partnership with him;
5. The business of the partnership can only be carried on at a loss;
6. Other circumstances render a dissolution equitable.

Note that in all the above judicial causes, a trial will be necessary to prove the facts necessary to dissolve the
partnership.

EFFECTS OF DISSOLUTION:
1. The mutual agency is terminated. As a rule, the partners can no longer act to bind the partnership, subject
to the following rules:
a. If the cause of the dissolution is Acts, Insolvency or Death (AID) – NOTICE should be given by the partners
to terminate the mutual agency
b. If the cause is NOT AID – the mutual agency is terminated and the dissolution is binding even without
notice.
2. The following acts are still binding even after dissolution:
a. Acts to for winding-up of the affairs of the partnership
b. Contracts with creditors who had no notice of the dissolution
3. The partners may continue the partnership after dissolution of the old partnership. Such continuation still
dissolves the old partnership and a new partnership is created. The creditors of the old partnership are also
creditors of the person or partnership continuing the business.

WINDING UP OR LIQUIDATION
This is the process of liquidating the partnership assets and the distributing the proceeds to satisfy the claims
against the partnership.

Liquidator: the liquidator shall be:

1. A party who has not wrongfully caused the dissolution;
2. The legal representative of the last surviving partner (if all are dead), if not insolvent;
3. The court, upon cause shown by a partner, his legal representative or assignee.

Distribution of Assets: will be done 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.

Note: that in the distribution of a Limited Partnership’s assets, priority is given to the share of partners as to the
profits over their share as to capital.

Partner’s Liability: in case the assets of the partnership are not sufficient to cover the liabilities, the remaining
claims may be satisfied against the separate assets of the partners.

However, where a partner has become insolvent, the claims against his separate property shall be satisfied in the
following order:
1. Those owing to separate creditors;
2. Those owing to partnership creditors;
3. Those owing to partners by way of contribution.

LIMITED PARTNERSHIP

Limited Partnership: is one formed by two or more persons having as members one or more general partners
and one or more limited partners.

Limited liability: a limited partners’ liability is limited only to his capital contribution. Such that, after exhaustion
of partnership assets, he cannot be made to contribute to answer the remaining liabilities to third parties.
FORMATION: Two or more persons desiring to form a limited partnership shall:

Sign and swear to a certificate, which shall state -

a. The name of the partnership, adding thereto the word "Limited"; - absence of the word Limited or “LTD” in
the firm name, the partnership will be treated as a general partnership.
b. The character of the business;
c. The location of the principal place of business;
d. The name and place of residence of each member, general and limited partners being respectively designated;
e. The term for which the partnership is to exist;
f. The amount of cash and a description of and the agreed value of the other property contributed by each
limited partner;
g. The additional contributions, if any, to be made by each limited partner and the times at which or events on
the happening of which they shall be made;
(f) and (g) are important because as to any difference (in amount stated in the certificate and actual
contributions, or failure to provide additional contributions), the limited partner will be liable as a debtor to
the partnership.

h. The time, if agreed upon, when the contribution of each limited partner is to be returned;
Note, however, that the limited partner may nevertheless demand the return of his contribution:
i. After he has six months' notice in writing to all other members, if no time is specified in the certificate,
either for the return of the contribution or for the dissolution of the partnership; or
ii. On the dissolution of a partnership;

The above, however, is still subject to availability of funds after partnership debts are paid.
i. The share of the profits or the other compensation by way of income which each limited partner shall receive
by reason of his contribution;
j. The right, if given, of a limited partner to substitute an assignee as contributor in his place, and the terms
and conditions of the substitution;

However, the assignee does not necessarily become a substitute limited partner.
i. Substitute Limited Partner: A Substituted Limited Partner is a person admitted to all the rights of a limited
partner who has died or has assigned his interest in a partnership: Provided:
1) All the partners consent;
2) The assignor (Limited Partner), being thereunto empowered by the certificate, gives the assignee that
right.
ii. The substitute has all the rights and powers and is subject to all the restrictions and liabilities of his
assignor except those liabilities of which he was ignorant at the time he became a limited partner and
which could not be ascertained from the certificate.
1) The substitution does not release the original limited partner from liability to the partnership.
2) If the assignee does not become a substitute, he has no right to require any information or account
of the partnership books; he is only entitled to receive the share of the profits or other compensation
by way of income or the return of his contribution to which his assignor would otherwise be entitled;
The assignee is still an OUTSIDER to the Partnership.

Limited Partners’ Interest: or his share in the profits and surplus may likewise be the subject of assignment or
attachment/execution. However, unlike the interest of a general partner, a limited partners’ interest may only be
redeemed with the general partners’ property and not with partnership property. (see Rights of a Partner)

k. The right, if given, of the partners to admit additional limited partners;

l. The right, if given, of one or more of the limited partners to priority over other limited partners, as to
contributions or as to compensation by way of income, and the nature of such priority;
m. The right, if given, of the remaining general partner or partners to continue the business on the death,
retirement, civil interdiction, insanity or insolvency of a general partner; and
n. The right, if given, of a limited partner to demand and receive property other than cash in return for his
contribution.

The said certificate will be filed with the SEC and a limited partnership is formed if there has been substantial
compliance in good faith with the foregoing requirements

LIMITATIONS ON A LIMITED PARTNER:

1. A limited partner cannot be an industrial partner. His contribution must always be money or property.
2. The surname of a limited partner shall not appear in the partnership name unless:
a. It is also the surname of a general partner, or
b. Prior to the time when the limited partner became such, the business has been carried on under a name
in which his surname appeared.
3. The limited partner cannot take part in the management of the partnership.

If a limited partner contributed industry, or his name appears in the partnership name (except for the above
exceptions) and/or took part in the management of the partnership, he shall be liable as if he is a general partner.

RIGHTS OF A LIMITED PARTNER:

1. Have the partnership books kept at the principal place of business of the partnership, and at a reasonable
hour to inspect and copy any of them;
2. Have on demand true and full information of all things affecting the partnership, and a formal account of
partnership affairs whenever circumstances render it just and reasonable; and
3. Have dissolution and winding up by decree of court.
4. Receive a share of the profits or other compensation by way of income, and to the return of his contribution.
However, a limited partner shall not receive any part of his contribution until:
a. All liabilities of the partnership, except liabilities to general partners and to limited partners on account of
their contributions, have been paid or there remains property of the partnership sufficient to pay them;
b. The consent of all members is had, unless the return of the contribution may be rightfully demanded as
provided in number 5; and
c. The certificate is cancelled or so amended as to set forth the withdrawal or reduction.
5. Rightfully demand for his contribution:
a. On the dissolution of a partnership; or
b. When the date specified in the certificate for its return has arrived, or
c. After he has six months' notice in writing to all other members, if no time is specified in the certificate,
either for the return of the contribution or for the dissolution of the partnership.
6. Have his written consent or ratification be sought by the general partner/s in order to:
a. Do any act in contravention of the certificate;
b. Do any act which would make it impossible to carry on the ordinary business of the partnership;
c. Confess a judgment against the partnership;
d. Possess partnership property, or assign their rights in specific partnership property, for other than a
partnership purpose;
e. Admit a person as a general partner;
f. Admit a person as a limited partner, unless the right so to do is given in the certificate;
g. Continue the business with partnership property on the death, retirement, insanity, civil interdiction or
insolvency of a general partner, unless the right so to do is given in the certificate.
7. A limited partner may loan money and to transact other business with the partnership, subject to the following
restrictions:
a. He cannot receive or hold as collateral security any partnership property;
b. He cannot receive any payment, conveyance or release from liability if at the time the assets of the
partnership are not sufficient to discharge partnership liabilities to persons not claiming as general or
limited partners.

Any violation of the above restrictions would be in fraud of creditors and may thus be treated as a rescissible
contract.

GENERAL-LIMIED PARTNER: A person may be a general partner and a limited partner in the same
partnership, provided that this fact is stated in the certificate.

He shall have the rights and powers and be subject to all the restrictions of a general partner. Except that, in
respect of his contribution, he shall have the rights against the other partners which he would have had if he were
not also a general partner.

DISSOLUTION AND WINDING-UP

Grounds: The retirement, death, insolvency, insanity or civil interdiction of a GENERAL PARTNER dissolves the
partnership. Except: If the partnership business is continued by the remaining general partners under a right to
do so as stated in the Certificate of Limited Partnership OR with the consent of all the partners.

A limited partner may have the partnership dissolved and its affairs wound up when he rightfully but
unsuccessfully demands the return of his contribution.

Distribution of Assets of a Limited Partnership: will be 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 capital;
7. Those owing to general partners in respect of profits.

1. What is an essential difference between a partnership and a corporation?

A. A partnership is created by voluntary agreement of the partners, whereas a corporation is
always created by some express legislative authority either in the form of a special law or of
a general law.
B. Stockholders are usually liable to corporation’s creditors not only to the extent of their
contribution but even with their own private property, whereas the partners, after they have
paid for their contributions, are not subject to any further liability, unless otherwise provided
by law.
C. The third person to whom a stockholder has transferred his interest does not become a
stockholder without the consent of all other stockholders, whereas the third person to whom
a partner has transferred his interest becomes automatically a partner even without the
consent of the other partners.
D. The death or bankruptcy of a stockholder usually causes the dissolution of the corporation,
whereas the death or bankruptcy of a partner does not result in such dissolution.
2. First Statement: As a general rule, the partners are the agents of the partnership; hence, acts of the partners for
the account of the partnership are binding not only on the partnership but also on the partners.
Second Statement: Whatever acts the stockholders might execute for the account of the corporation, either
individually or collectively, are not binding on the corporation.
A. Only the first statement is true. C. Both statements are true.
B. Only the second statement is true. D. None of the statements is true.

3. As to object, a partnership may be:

A. General or limited C. Capitalist or industrial
B. Universal or particular D. Managing or silent

4. It refers to a partnership which comprises all that the partners may acquire by their industry or work during the
existence of the partnership.
A. Universal partnership of profits C. Partnership of all present property
B. Particular partnership of profits D. Partnership of all present profits

5. It refers to partners who can be held liable for partnership obligations even to the extent of their private
property.
A. General C. Capitalist
B. Limited D. Industrial

6. It refers to partners who contribute only their skill or industry to the common fund.
A. Capitalist C. Silent
B. Managing D. Industrial

7. It refers to partners who manage or administer partnership affairs.

A. Silent C. Secret
B. Ostensible D. Managing

8. It refers to partners whose connection with the partnership is not known.

A. Secret C. Managing
B. Ostensible D. Silent

9. It refers to partners who represent themselves, or consent to another or others representing them to anyone as
partners either in an existing partnership or in one that is fictitious or apparent.
A. Partners by estoppel C. Ostensible
B. Secret D. Managing

10. First Statement: If the partnership is general, it may be constituted in any form, except where immovable property
or real rights are contributed to the common fund, in which case a public instrument, to which is attached an
inventory of said property, signed by any of the partners, shall be necessary for validity.
Second Statement: If the general partnership has a capital of P3,000 or more, it must appear in a public instrument,
which shall be recorded in the office of the SEC. However, it is not necessary for its validity.
A. Only the first statement is true. C. Both statements are true.
B. Only the second statement is true. D. None of the statements is true.

11. First Statement: If the partnership is limited, it is required that the contracting parties, in addition to the
formalities prescribed for the organization of a general partnership, shall execute a certificate of limited
partnership which must be recorded in the office of the SEC.
Second Statement: The formalities for a limited partnership must be complied with, otherwise, thepartnership is
not limited but general.
A. Only the first statement is true. C. Both statements are true.
B. Only the second statement is true. D. None of the statements is true.

12. If there is agreement only with respect to the profits, how shall the losses be distributed?
A. Same proportion as their share in the capital
B. Same proportion as their share in the profits
C. Partners shall meet and determine the shares.
D. No loss shall be distributed.

13. If there is no agreement as to the distribution of profits and losses, how are the profits distributed to the capitalist
partner?
A. Just and equitable under the circumstances
B. No entitlement
C. Profits go to the reserve fund.
D. In proportion to what he may have contributed to the common fund
14. If there is no agreement as to the distribution of profits and losses, how shall the losses be distributed to the
industrial partner?
A. In proportion to what he may have contributed to the common fund
B. Just and equitable under the circumstances
C. No liability
D. Profits go to the reserve fund.
15. What is the status of an agreement whereby one or more partners shall not share in the profits and losses?
A. Void C. Voidable
B. Valid D. Unenforceable

16. When can an industrial partner engage in business for himself?

A. When the partnership expressly permits him to do so.
B. When the partnership impliedly permits him to do so.
C. When the industrial partner still has available time to engage in another business.
D. When the industrial partner engages in another business with one of the capitalist partners.

17. Can a capitalist partner engage in a business similar to the kind of business in which the partnership isengaged?
A. Yes, if he has extra available capital.
B. Yes, if he brings with him another capitalist partner.
C.No, unless there is a stipulation to the contrary.
D.Never, as the prohibition is absolute.

18. Jean and John are partners in a certain business, Jean being the managing partner. Ruth owes Jean P50,000 and
the partnership P100,000, and both credits are demandable. Ruth pays Jean P30,000 and Jean issues a receipt
in her name. How much is Jean entitled to apply to her credit?
A. P10,000 C. P30,000
B. P20,000 D. Nothing

19. Jean and John are partners in a certain business, Jean being the managing partner. Ruth owes Jean P50,000 and
the partnership P100,000, and both credits are demandable. Ruth pays Jean P30,000 and Jean issues a receipt in
the partnership’s name. How much should Jean apply to the partnership’s credit?
A. Nothing C. P20,000
B. P30,000 D. P10,000

20. Jean and John are partners in a certain business, Jean being the managing partner. Ruth owes Jean P50,000 (more
onerous) and the partnership P100,000, and both credits are demandable. Ruth pays Jean P30,000 andJean issues
a receipt in the partnership’s name. How much should Jean apply to the partnership’s credit?
A. Nothing C. P20,000
B. P30,000 D. P10,000

21. The management of the partnership may be vested (1) in the articles of the partnership and/or (2) after the
partnership had already been constituted.
A. 1 only C. Neither of 2
B. 2 only D. Either of 2

22. If there is no agreement on who will manage the partnership, it is vested in:
A. The partner with highest contribution
B. The partners with majority stake
C. All of the partners
D. The oldest partner

23. Ruth, Carlo, Maricel, and Dustin organized a general partnership, with Ruth and Carlo as industrial partners and
Maricel, who contributed P30,000 to the common fund, and Dustin, who contributed P10,000 to the common fund
as capitalist partners. Ruth and Carlo were both appointed managing partners without any specification of their
respective duties. When the firm commenced business operations, the 2 appointed Olive as accountant of the firm.
A year later, Ruth decided to dismiss Olive, but this was opposed by Carlo. How can the conflict between Ruth and
Carlo be resolved?
A. Dustin and Maricel will decide.
B. Ruth and Carlo will decide.
C. Maricel will decide.
D. Ruth prevails.

24. Ruth, Carlo, Maricel, and Dustin organized a general partnership, with Ruth and Carlo as industrial partners and
Maricel, who contributed P30,000 to the common fund, and Dustin, who contributed P10,000 to the common fund
as capitalist partners. Nobody was appointed managing partner. When the firm commenced business operations,
the Ruth and Carlo appointed Olive as accountant of the firm. A year later, Ruth decidedto dismiss Olive, but this
was opposed by Carlo. How can the conflict between Ruth and Carlo be resolved in case of a tie?
A. Majority of the partners will decide.
B. Dustin and Maricel will decide.
C. Maricel will decide.
D. Ruth prevails.

25. Gem, Mondy and Maddie formed a general partnership with the following contributions to the common fund: Gem,
P20,000; Mondy, P40,000; Maddie, P60,000. There was agreement on the division of profits and apportionment
of losses proportionate to their capital contributions. After some years of business operations, the assets of the
partnership dwindled to P30,000, so the partners agreed to stop their business. The partnership is indebted to
Sansa for a loan of P120,000. Under the circumstances, how much can Sansa collect from the partners?
A. Gem, P15,000; Mondy, P30,000; Maddie, P45,000
B.Gem, P20,000; Mondy, P40,000; Maddie, P60,000
C. Gem, P30,000; Mondy, P30,000; Maddie, P30,000
D.Gem, P40,000; Mondy, P40,000; Maddie, P40,000
26. Rosh, Juju and Anna formed a partnership under the where Rosh’s participation is 40%; Juju, 40%; and Anna,
20%. Rosh and Juju would supply the entire capital. Anna would contribute her management expertise and be
manager for the first 5 years without compensation. They also agreed that Anna shall not liable for losses.
Unfortunately, the partnership became bankrupt. Who can remove Anna as manager?
A. Rosh
B. Juju
C.None
D.The partner/s with controlling interest

27. Rosh, Juju and Anna formed a partnership under the where Rosh’s participation is 40%; Juju, 40%; and Anna,
20%. Rosh and Juju would supply the entire capital. Anna would contribute her management expertise and be
manager for the first 5 years without compensation. They also agreed that Anna shall not liable for losses.
Unfortunately, the partnership became bankrupt. What is the status of the agreement exempting Anna from
losses?
A. Valid C. Voidable
B. Void D. Unenforceable

28. It refers to that moment when partnership affairs are wound up.
A. Winding up C. Termination
B. Dissolution D. Liquidation

29. When does the right of a partner to demand an accounting of the partnership business prescribes?
A.4 years upon the dissolution of the partnership when the final accounting is done.
B.4 years upon the dissolution of the partnership before the final accounting is done.
C. 5 years upon the dissolution of the partnership when the final accounting is done.
D.5 years upon the dissolution of the partnership before the final accounting is done.

30. Distinguish between a general partner and a limited partner.

A. A general partner can be held personally liable for partnership obligations after all of the assets of the
partnership have been exhausted, where a limited partner cannot be held liable.
B. A general partner may not participate in the management of the partnership, whereas a limited partner
may.
C. A general partner may contribute money or other property only to the common fund, whereas a limited partner
may contribute money, property, or industry.
D. The name of a general partner may not appear in the firm name, whereas that of a limited partner may.

31. First Statement: The interest of a limited partner is assignable.

Second Statement: An assignee of a limited partner has the right to become a substituted limited partner if all
the members consent thereto or if the assignor, being thereunto empowered by the certificate of limited
partnership, gives the assignee that right.
A. Only first statement is true.
B. Only second statement is true.
C. Both statements are true.
D. None of the statements is true.

32. If the partnership is a general partnership, the order of payment is as follows, those owing to: (1) creditors
other than partners, (2) partners other than for capital and profits, (3) partners in respect of capital, and (4)
partners in respect of profits.
A. 1, 2, 3, 4 C. 1, 3, 2, 4
B. 1, 2, 4, 3 D. 1, 3, 4, 2

33. If the partnership is a limited partnership, the order of payment is as follows, those to: (1) creditors, in the
order of priority as provided by law, except those to limited partners on account of their contributions, and to
general partners, (2) limited partners in respect to their share of the profits and other compensation by way
of income on their contributions, (3) limited partners in respect to the capital of their contributions,
(4) general partners other than for capital and profits, (5) general partners in respect to profits, and (6)
general partners in respect to capital.
A. 1, 2, 3, 4, 5, 6 C. 1, 2, 4, 3, 5, 6
B. 1, 2, 3, 4, 6, 5 D. 1, 2, 3, 5, 4, 6

34. Dissolution is caused when a specific thing, which had promised to contribute to the partnership, perishes
A. Upon the delivery
B. Before the delivery
C. After the delivery
D. After the partnership acquires ownership thereof

35. On application by or for a partner, the court shall decree a dissolution whenever:
A. A partner becomes in any other way capable of performing his part of the partnership contract.
B. A partner has been innocent of such conduct as tends to affect prejudicially the carrying on of the
business.
C. A partner has been declared insane in any judicial proceeding or is shown to be of unsound mind.
D. A partner unwillfully or persistently commits breach of the partnership agreement, or otherwise so conducts
himself in matter relating to the partnership business that it is not reasonably practicable to carry on the
business in partnership with him.
 36. First Statement: The court can decree a dissolution if the business of the partnership can only be carried on
at a loss.
Second Statement: The court can decree a dissolution if the circumstances render a dissolution equitable.
A. Only first statement is true.
B. Only second statement is true.
C. Both statements are true.
D. None of the statements is true.

37. On the application of the purchaser of a partner’s interest, dissolution is caused (1) at the termination of the
specific term or particular undertaking, or (2) at any time if the partnership was a partnership at will when the
interest was assigned or when the charging order was issued.
A. 1 only C. None of them
B. 2 only D. Both of them

38. The dissolution of the partnership terminates all authority of the managing partner or of any partner, as the
case may be, to act for the partnership, except (1) acts necessary to wind up partnership affairs, (2) acts
necessary to complete transactions begun but not then finished, and (3) acts or transactions which would bind
the partnership if dissolution had not taken place.
A. 1 and 2 only C. 2 and 3 only
B. 1 and 3 only D. All three

39. If the winding up or liquidation of partnership affairs is judicial, who has the right or duty to wind up or
liquidate partnership affairs?
A. Partner or legal representative or assignee designated by the partners
B. Partner or legal representative or assignee designated by the court
C. Managing partner
D. Notary public

40. When there is no managing partner, or even when there is, he dies, the right or duty to wind up or liquidate
partnership affairs devolves upon the (1) partners who have not wrongfully dissolved the partnership, or
(2) legal representative of the last surviving partner, not insolvent.
A. 1 only C. Any of the two
B. 2 only D. None of the two

ANSWER KEY

1. A 11. C 21. D 31. C

2. C 12. B 22. C 32. A
3. B 13. D 23. C 33. A
4. A 14. C 24. C 34. B
5. A 15. A 25. A 35. C
6. D 16. A 26. D 36. C
7. D 17. C 27. A 37. D
8 A 18. A 28. C 38. D
9. A 19. B 29. A 39. B
10. C 20. B 30. A 40. C