I.A. Nature and Creation of Partnerships

Question 1

What is a contract of partnership?

Answer 1

Art. 1767. By the contract of partnership 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.

Two or more persons may also form a partnership for the exercise of a profession.

Question 2

What are the characteristic elements of partnership?

Answer 2

The contract of partnership is:

1. Consensual - perfected by mere consent;
2. Nominate - special name or designation in law;
3. Bilateral - entered into by 2 or more persons and the rights and obligations arising therefrom are always reciprocal;
4. Onerous - each of the parties aspires to produce from himself a benefit through the giving of something;
5. Commutative - because the undertaking of each of the partners is considered as the equivalent of that of the others;
6. Principal - because it does not depend for its existence or validity upon some other contracts; and
7. Preparatory - because it is entered into as a means to an end, ie. to engage in business or specific venture for the realization of profits with the view of dividing them among the contracting parties.

Question 3

What are the essential features of partnership?

Answer 3

The essential features of partnership are:

1. There must be a valid contract;
2. The parties (two [2] or more persons) must have legal capacity to enter into the contract;
3. There must be a mutual contribution of money, property or industry to a common fund;
4. The object must be lawful; and
5. The primary purpose must be to carry on a business for profits and to divide the same among the parties.

Question 4

What is the rule as to the object of the contract of partnership?

Answer 4

Art. 1770. A partnership must have a lawful object or purpose, and must be established for the common benefit or interest of the partners.

When an unlawful partnership is dissolved by a judicial decree, the profits shall be confiscated in favor of the State, without prejudice to the provisions of the Penal Code governing the confiscation of the instruments and effects of a crime.

Question 5

What is the rule as to the object of the contract of partnership?

Answer 5

Art. 1770. A partnership must have a lawful object or purpose, and must be established for the common benefit or interest of the partners.

When an unlawful partnership is dissolved by a judicial decree, the profits shall be confiscated in favor of the State, without prejudice to the provisions of the Penal Code governing the confiscation of the instruments and effects of a crime.

Question 6

What are the effects of an unlawful partnership?

Answer 6

The following are the consequences of a partnership formed for an unlawful purpose:

1. The contract is void ab initio and the partnership never existed in the eyes of the law (Art. 1409(1)), and consequently;
2. Neither partner has the right to require the division of the profits if any;
3. The profits shall be confiscated in favor of the government;
4. The instruments or tools and proceeds of the crime shall also be forfeited in favor of the government; and
5. The contributions of the partners shall not be confiscated unless they fall under No. 3.

Question 7

When will parties to a contract not have a cause action against the other in cases of nullity of a contract?

Answer 7

Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract.

This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise.

Question 8

Is there a required form for the constitution of a partnership?

Answer 8

No. Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary.

Question 9

What companies are required to be registered with the SEC?

Answer 9

Art. 1772. Every contract of partnership having a capital of Three thousand pesos or more, in money or property, shall appear in a public instrument, which must be recorded in the Office of the Securities and Exchange Commission.

Question 10

What is the effect of a partnership that fails to register with the SEC despite having more than three thousand pesos in capital?

Answer 10

They shall still be liable to third persons, and may be liable to other sanctions under law.

Art. 1772 par. 2. Failure to comply with the requirements of the preceding paragraph shall not affect the liability of the partnership and the members thereof to third persons.

Note: Art. 1768. The partnership has a juridical personality separate and distinct from that of each of the partners, even in case of failure to comply with the requirements of Article 1772, first paragraph.

Question 11

What is the legal effect to a partnership if it fails to conduct an inventory of the immovable properties contributed to it?

Answer 11

It is considered void.

Art. 1773. 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. (1668a)

Keywords: immovable property, inventory, signed, attached to public instrument.

Question 12

When is an inventory not required?

Answer 12

When inventory not required:

1. Immovable property is not contributed;
2. Property contributed is personal property.

Question 13

What are the relations created by a contract of partnership?

Answer 13

A contract of partnership gives rise to at least four (4) distinct juridical relations, namely:

1. Relations among the partners themselves;
2. Relations of the partners with the partnership;
3. Relations of the partnership with third persons with whom it contracts; and
4. Relations of the partners with such third persons.

Question 14

When does a partnership begin?

Answer 14

Art. 1784. A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated.

Notes:

• A partnership is a consensual contract; hence it generally exists from the very moment of the celebration of the contract by the partners.
• The birth and life of a partnership is predicated on the mutual desire and consent of the parties. Unlike a corporation, no time limit is prescribed by law for the life of partnership.

Question 15

May partners agree on a future date to commence the partnership?

Answer 15

Yes. The rule on the commencement of partnership under Art. 1784 is not absolute.

• The partners may stipulate some other date for the commencement of the partnership;
• An agreement to create partnership is valid. An agreement to create a partnership at a future time is different from an actually consummated partnership. So long as the agreement remains executory, the partnership is inchoate, not having called into being by the concerted action necessary under the partnership agreement.

Question 16

Is a partnership required to have a firm name?

Answer 16

Yes. Art. 1815. Every partnership shall operate under a firm name, which may or may not include the name of one or more of the partners.

Those who, not being members of the partnership, include their names in the firm name, shall be subject to the liability of a partner. (n)

Question 17

What is the effect of including an non-partner’s name in the firm name?

Answer 17

Art. 1815 par. 2. Those who, not being members of the partnership include their names in the firm name, shall be subject to the liability of a partner.

Question 18

When may the surname of a limited partner appear in the name of the partnership?

Answer 18

Art. 1846. The surname of a limited partner shall not appear in the partnership name unless:

1. It is also the surname of a general partner, or
2. Prior to the time when the limited partner became such, the business had been carried on under a name in which his surname appeared.

A limited partner whose surname appears in a partnership name contrary to the provisions of the first paragraph is liable as a general partner to the partnership creditors who extend credit to the partnership without actual knowledge that he is not a general partner.

Question 19

When will the profits of a partnership be confiscated in favor of the State?

Answer 19

When the partnership is unlawful, and it is dissolved by judicial decree.

Art. 1770 par. 2. When an unlawful partnership is dissolved by judicial decree, the profits shall be confiscated in favor of the State, without prejudice to the provisions of the Penal Code governing the confiscation of the instruments and effects of a crime.

Question 20

Can the name of the deceased partner be used in a partnership?

Answer 20

In cases of law firms, yes. Under Rule 3.02 of the Code of Professional Responsibility, Rule 3.02 - In the choice of a firm name, no false, misleading or assumed name shall be used. The continued use of the name of a deceased partner is permissible provided that the firm indicates in all its communications that said partner is deceased.

Question 21

May a partner use any name for a firm name?

Answer 21

No. It must not be contrary to public order or morals. RA 8293 [Intellectual Property Code] SECTION 165. Trade Names or Business Names. ‑ 165.1. A name or designation may not be used as a trade name if by its nature or the use to which such name or designation may be put, it is contrary to public order or morals and if, in particular, it is liable to deceive trade circles or the public as to the nature of the enterprise identified by that name.

Question 22

Does the partnership have a separate juridical personality?

Answer 22

Yes. Under Art. 1768. The partnership has a juridical personality separate and distinct from that of each of the partners, even in case of failure to comply with the requirements of Article 1772, first paragraph. (n)

Question 23

Do all associations or societies have a separate juridical personality?

Answer 23

No. Under Art. 1775. Associations and societies, whose article are kept secret among the members, and wherein any one of the members may contract in his own name with third persons, shall have no juridical personality, and shall be governed by the provisions relating to co-ownership.

Question 24

Is a partner a co-owner to the partnership?

Answer 24

Yes. Under Art. 1811. A partner is a co-owner with his partners of specific partnership property.

Question 25

What are the incidents of co-ownership by partners in a partnership?

Answer 25

Art. 1811. A partner is co-owner with his partners of specific partnership property.

The incidents of this co-ownership are such that:

(1) A partner, subject to the provisions of this Title and 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 other purpose without the consent of his partners;
(2) A partner’s right in specific partnership property is not assignable except in connection with the assignment of rights of all the partners with the same property;
(3) A partner’s right in specific partnership property is not subject to attachment or execution, except on 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;
(4) A partner’s right in specific partnership property is not subject to legal support under Article 291.

Question 26

Under the Tax Code, what does the term “corporation” mean, and what does the term “general professional partnership” mean?

Answer 26

Sec. 22 (B) The term ‘corporation’ shall include one person corporations, partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government. ‘General professional partnerships’ are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.

Question 27

What is the tax liability of members of a general professional partnership?

Answer 27

SEC. 26. Tax Liability of Members of General Professional Partnerships. - A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities.

For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation.

Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.

Question 28

What are the requisites to consider a partnership as a juridical personality?

Answer 28

To be considered a juridical personality, a partnership must fulfill these requisites:

(1) two or more persons bind themselves to contribute money, property or industry to a common fund; and
(2) intention on the part of the partners to divide the profits among themselves. [Tocao v CA, 342 SCRA 20 (2000)]

Question 29

Is a public instrument necessary in order to constitute a partnership?

Answer 29

Not in all cases. A partnership may constituted in any form; a public instrument is only necessary only where there immovable property or real rights are contributed thereto. [Tocao v CA, 342 SCRA 20 (2000)]

Question 30

May there be an oral contract of partnership?

Answer 30

Yes. Since a contract of partnership is consensual, an oral contract of partnership is as good as a written one. Where no immovable property or real rights are involved, what matters is that the parties have complied with the requisites of a partnership [Tocao v CA, 342 SCRA 20 (2000)]

Question 31

Does the absence of the registration record of the partnership in the Securities and Exchange Commission nullify the partnership?

Answer 31

The fact that there appears to be no record in the Securities and Exchange Commission of a public instrument embodying the partnership agreement pursuant to Article 1772 of the Civil does not cause the nullification of the partnership. Under Art. 1768, “The partnership has a juridical personality separate and distinct from that of each of the partners, even in cases of failure to comply with the requirements of Article 1772, first paragraph.” [Tocao v CA, 342 SCRA 20 (2000)]

Question 32

Is the receipt of a percentage of net profits conclusive evidence that the recipient is a partner?

Answer 32

No, the receipt of percentage of net profits constitutes only prima facie evidence that the recipient is a partner in the business. It may, therefore, be rebutted by evidence. [Tocao v CA, 342 SCRA 20 (2000)]

Question 33

What is the best evidence of the existence of the partnership (which was not yet terminated but in winding up stage)?

Answer 33

“The best evidence of the existence of the partnership, which was not yet terminated (though in the winding up stage), were the unsold goods and uncollected receivables, which were presented to the trial court. Since the partnership has not been terminated, the petitioner and private complainant remained as co-partners.” [Tocao v CA, 342 SCRA 20 (2000)]

Question 34

To what extent are members co-owners in a partnership?

Answer 34

In a partnership, the members become co-owners of what is contributed to the firm capital and all property that may be acquired thereby and through the efforts of the members. The property stock of the partnership forms a community of goods, a common fund, in which each party has a proprietary interest. [Mendiola v CA, 497 SCRA 346 (2006)]

Question 35

Is there a partnership where the members are not co-owners of the property contributed to the partnership and property subsequently acquired?

Answer 35

No. The New Civil Code regards a partners as a con-owner of specific partnership property. Each partner possesses a joint interest in the whole partnership property. If the relation does not have this feature, it is not one of partnership. [Mendiola v CA, 497 SCRA 346 (2006)]

Question 36

When will a partnership be considered null and void?

Answer 36

• A partnership will be considered null and void when it does not have a lawful object. [Arbes v Polistico, 53 Phil. 489 (1929)]
• Under Art. 1770 par. 1 NCC. A partnership must have a lawful object or purpose, and must be established for the common benefit or interest of the partners. [as cited by Arbes v Polistico, 53 Phil. 489 (1929) but old civil code]

Question 37

What will happen the the money contributed by a partner in a void partnership (by reason of illegality of object)?

Answer 37

• The partner will be able to recover his contribution.
• In the case of an unlawful partnership, is that for the recovery of the amounts paid in by the members from those in charge of the administration of said partnership, and it is not necessary for the said partners to base their action on the existence of the partnership, but on the fact of having contributed some money to the partnership capital. [Arbes v Polistico, 53 Phil. 489 (1929)]

Question 38

What will happen to the profit of the partnership in a void partnership?

Answer 38

• The partner will not be able to recover the profits. They will donate it to charitable institutions. Arbes v. Polistico citing art. 1666 old CC, “When the dissolution of an unlawful partnership is decreed, the profits shall be given to the charitable institutions of the domicile of the partnership, or, in default of such, to those of the province.”[Arbes v Polistico, 53 Phil. 489 (1929)]
• Art. 1770 par. 2. NCC. When an unlawful partnership is dissolved by a judicial decree, the profits shall be confiscated in favor of the State, without prejudice to the provisions of the Penal Code governing the confiscation of the instruments and effects of a crime.

Question 39

Why was it declared by the Court that no real property was in fact contributed in this partnership?

Answer 39

• It was decreed that no real property was in fact contributed because in the partnership documents, the partnership was established “to operate a fishpond,” not to “engage in a fishpond business.” Moreover, non of the partners contributed either a fishpond or a real right to any fishpond. Their contributions were limited to the sum of P1,000 each. [Agad v Mabato, 23 SCRA 1223 (1968)]
• The operation of the fishpond mentioned was the purpose of the partnership. Neither said fishpond nor a real right thereto was contributed to the partnership or became part of the capital thereof, even if a fishpond or a real right thereto could become part of its assets. [Agad v Mabato, 23 SCRA 1223 (1968)]

Question 40

Given that no real property was contributed, does the failure to register at the SEC render the partnership void?

Answer 40

No, the failure to register to the SEC does not render the partnership void. Under Art. 1768 NCC, “The partnership has a juridical personality separate and distinct from that of each of the partners, even in case of failure to comply with the requirements of Article 1772, first paragraph.” (Art. 1772 par 1 refers to SEC registration). [Agad v Mabato, 23 SCRA 1223 (1968)]

Question 41

Why did the petitioners in Torres v CA argue that the partnership was void in this case? Why was it their defense?

Answer 41

• The petitioners argued that the partnership agreement was void because of their failure to comply with the requirement of conducting, signing, and attaching the inventory of real properties to the public instrument of the partnership. [Torres v CA, 320 SCRA 428 (1999)]
• The petitioners used this argument as their defense because they did not want to bear the losses of the failed project constituted by the JVA or the partnership agreement entered into by the petitioners and respondents. However, the Court held that the partnership existed despite failure to comply with the inventory requirement. The Court cited that the purpose the inventory was to protect third persons, and this case does not involve third persons. Hence, cause of action may still lie between the parties. The alleged nullity of the partnership will not prevent courts from considering the Joint Venture Agreement an ordinary contract from which the parties’ rights and obligations to each other may be inferred and enforced. [Torres v CA, 320 SCRA 428 (1999)]

Question 42

What is the purpose of the requirement to attach an inventory in case real property is donated?

Answer 42

Art. 1773 was intended primarily to protect third persons. Thus, the eminent Arturo M. Tolentino states that under the aforecited provision which is a complement of Article 1771, “the execution of a public instrument would be useless if there is no inventory of the property contributed, because without its designation and description, they cannot be subject to inscription in the Registry of Property, and their contribution cannot prejudice third persons. This will result in fraud to those who contract with the partnership in the belief [in] the efficacy of the guaranty in which the immovables may consist. Thus, the contract is declared void by the law when no such inventory is made.” IN THIS CASE there is no third party that may be prejudiced. [Torres v CA, 320 SCRA 428 (1999)]

Question 43

What did the Court say about the partnership in Torres v CA? Was it void per se?

Answer 43

No the partnership was not void per se. Because no third party was involved in this case, then the the court is not prevented from treating the JVA as an ordinary contract. [Torres v CA, 320 SCRA 428 (1999)]

Question 44

What is the effect of the failure to register the partnership with the SEC?

Answer 44

Mere failure to register the contract of partnership with the SEC does not invalidate a contract that has the essential requisites of a partnership. [Angeles v Secretary of Justice, 465 SCRA 106 (2005)]

Question 45

What is the purpose of this registration requirement?

Answer 45

The purpose of registration of the contract of partnership is to give notice to third parties. Failure to register the contract of partnership does not affect the liability of the partnership and of the partners to third persons. Neither does such failure to register affect the partnership’s judicial personality. A partnership may exist even if the partners do not use the words “partner” or “partnership.” [Angeles v Secretary of Justice, 465 SCRA 106 (2005)]

Question 46

What are the implications of the provision under Art. 1768 of the NCC that a partnership “has a juridical personality separate and distinct from that of each of the partners.”

Answer 46

Since under Art. 1768 of the Civil Code, a partnership “has a juridical personality separate and distinct from that of each of the partners,” this implies that the partners cannot be held liable from the obligations of the partnership unless it is shown that the legal fiction of a different juridical personality is being used for fraudulent, unfair, or illegal purposes. [Aguila v CA, 319 SCRA 246 (1999)]

Question 47

Under what circumstances will the partners be held liable for the obligations of a partnership?

Answer 47

Partners will only be held liable when the legal fiction of the partnership is being used for fraudulent, unfair, or illegal purposes. [Aguila v CA, 319 SCRA 246 (1999)]

Question 48

What are the two kinds of partnership under the Tax Code?

Answer 48

• Partnerships under the Tax Code are either “‘taxable partnership” or “exempt partnerships.” [Tan v Del Rosario, 237 SCRA 324 (1994)]
• Ordinarily, partnerships, no matter how created or organized are subject to income tax (and thus alluded to as “taxable partnerships”) which are by law assimilated to be within the context of, and so legally contemplated as, corporations. [Tan v Del Rosario, 237 SCRA 324 (1994)]

Question 49

Where does “General Professional Partnership” fall under the classification of partnerships in the Tax Code?

Answer 49

General Professional Partnerships fall under the exempt partnerships. In this case, the partners themselves, not the partnership (although it is still obligated to file an income tax return [mainly for administration and date]), are liable for the payment of income tax in their individual, capacity computed their respective and distributive shares of profits. In the determination of the tax liability, a partner does so as an individual, and there is no choice on the matter. In fine, under the Tax Code on income taxation, the general professional partnership is deemed to be no more than a mere mechanism or a flow-through entity in the generation of income by, and the ultimate distribution of such income to, respectively, each of the individual partners. [Tan v Del Rosario, 237 SCRA 324 (1994)]

Question 50

When is there a partnership?

Answer 50

• A partnership exists when two or more persons agree to place their money, effects, labor, and skill in lawful commerce or business, with the understanding that there shall be a proportionate sharing of the profits and losses between them. [Litonjua v Litonjua, 477 SCRA 576 (2005)]
• A contract of partnership is defined by the Civil Code as one where two or more persons bound themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves. [Litonjua v Litonjua, 477 SCRA 576 (2005)]

Question 51

What is the effect of the failure to cause the inventory of the real properties contributed in the partnership?

Answer 51

• Art. 1773. 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. [Litonjua v Litonjua, 477 SCRA 576 (2005)]
• The contract-validating inventory requirement under Article 1773 of the Civil Code applies as long as real property or real rights are initially brought into the partnership. In short, it is really of no moment which of the partners contributed immovables. In context, the more important consideration is that real property was contributed, in which case an inventory of the contributed property duly signed by the parties should be attached to the public instrument, else there is legally no partnership to speak of. [Litonjua v Litonjua, 477 SCRA 576 (2005)]