II. PARTNERSHIP Flashcards
II. PARTNERSHIP
A. General Provisions
1. Definition – Civil Code, art. 1767
Rule: Two or more people can join forces (partnership) to:
Contribute: Share money, property, or their skills (industry)
Combine: Put their contributions together (common fund)
Share: Split the profits among themselves
Example:
Three friends (A, B, and C) decide to open a restaurant (partnership).
A invests money, B contributes kitchen equipment, and C brings their cooking skills (industry).
They combine their contributions (common fund) to run the restaurant.
If the restaurant makes a profit, they share it among themselves (divide the profits).
II. PARTNERSHIP
A. General Provisions
- Rules to Determine Existence – Civil Code, art. 1769
This article basically clarifies what doesn’t automatically create a partnership:
Sharing profits occasionally: Just sharing profits with someone doesn’t make them your business partner (unless they’re getting paid like an employee, renting property, etc.).
Joint ownership: Owning something together, even if you share profits from it, doesn’t necessarily mean you’re partners in a business.
Receiving part of the income: Getting a share of a business’s income doesn’t automatically make you a partner, especially if it’s payment for something specific (debt, wages, rent, etc.).
Example:
You and your friend co-own a building (co-ownership). You rent out the building and split the profits. This doesn’t necessarily make you business partners unless you’re running a business together, not just managing the property.
Remember: Sharing profits might be a sign of a partnership, but it’s not always the case. This article helps you understand what other factors are important to consider.
II. PARTNERSHIP
A. General Provisions
- Separate Personality – Civil Code, art. 1768
Rule: Partnership as a Separate Person
This article states that a partnership, even if not formally established according to all legal requirements, has its own legal existence (juridical personality) separate from the individual partners.
This means the partnership can:
Own property and enter into contracts in its own name.
Sue and be sued as a separate entity.
Be held liable for its debts and obligations, independent of the partners’ personal assets (depending on the type of partnership).
Example:
Two friends, Alice and Bob, start a bakery together but fail to officially register their partnership. The bakery (the partnership) signs a lease agreement for a storefront. Even though the partnership wasn’t formally established, it can still be held legally responsible for fulfilling the lease agreement, separate from Alice and Bob’s personal finances.
Issues often arise here when:
Debts are incurred: If the partnership cannot pay its debts, creditors might try to seize the partners’ personal assets to recover the money, depending on the specific partnership type and applicable laws.
Contracts are breached: If the partnership breaches a contract, the other party might sue the partnership itself, or potentially, the individual partners, depending on the specifics of the situation and partnership type.
II. PARTNERSHIP
A. General Provisions
- Partnership by Estoppel – Civil Code, art. 1825
Sm1 is held as Partner .. misrep, reliance in gf
Rule: Becoming a Partner “By Accident” (Partnership by Estoppel)
This article describes a situation where someone can be held liable as a partner in a business, even if they’re not an actual partner (partnership by estoppel).
This happens if:
They misrepresent themselves: The person, either through their actions or words, makes others believe they are a partner.
Someone relies on it: A third party, like a creditor, trusts this representation and extends credit (loans goods, or services) to the business based on the belief that the person is a partner.
Consequences:
Liability: The person who misrepresented themselves can be held liable for the partnership’s debts, similar to an actual partner, depending on the situation (point 1).
Sharing responsibility: If they didn’t directly benefit from the misrepresentation (point 2), they might share the liability with others who also participated in making it seem like they were a partner.
Example:
Alice and Bob are partners in a clothing store. Charlie, Alice’s close friend, frequently helps out at the store, manages social media, and even negotiates with some suppliers. While Charlie isn’t officially a partner, his involvement might lead people to believe he is. If Charlie allows this perception to continue (doesn’t correct it) and the store takes out a loan under the impression that Charlie is a partner, Charlie could be held liable for part of the debt, even though he’s not a real partner.
Confusion often arises because:
People might not realize their actions (or inaction) can make them appear like a partner.
It’s crucial to distinguish between actual partnership and partnership by estoppel. The former involves sharing profits and management, while the latter is based on misrepresentation and reliance.
Understanding this concept helps individuals avoid unintended legal consequences.
II. PARTNERSHIP
A. General Provisions
- Kinds of Partnership – Civil Code, arts. 1776-1785
Types of Partnerships: Understanding the Rules
These articles define two main classifications of partnerships based on their object (what they deal with) and liability (partner responsibility):
- Based on Object:
Universal partnership: Covers all present property or profits (Articles 1776, 1777).
Universal partnership of all present property: Partners contribute everything they own to a common fund, sharing profits and future acquisitions (Article 1778).
Universal partnership of profits: Partners share all profits earned through their work during the partnership (Article 1780). Their existing personal property remains separate, only the usufruct (right to use) goes to the partnership.
Particular partnership: Deals with specific things, their use, or a specific undertaking (like a project or profession) (Article 1783). - Based on Liability:
These articles don’t explicitly define general or limited partnerships, but other legal provisions generally establish that:
General partnership: All partners share unlimited personal liability for the partnership’s debts (meaning their personal assets can be used to pay them off).
Limited partnership: Has at least one general partner with unlimited liability and one or more limited partners whose liability is limited to their investment in the partnership.
Confusion often arises:
Universal vs. particular partnerships: People might misunderstand the scope of what’s included in each type. Remember, universal partnerships involve all present property or profits, while particular partnerships are specific and limited.
Personal property in universal partnerships of profits: Individuals might think they contribute their existing property to this type, but only the usufruct (right to use) goes to the partnership, not the ownership.
Example:
Alice and Bob enter a partnership without specifying the type. They contribute money to open a restaurant (particular partnership). Later, they decide to share all future profits they earn, not just from the restaurant (universal partnership of profits). This scenario highlights the importance of clearly defining the partnership type and its scope to avoid confusion and potential legal issues.
II. PARTNERSHIP
B. Obligations of Partners Among Themselves (Civil Code, arts. 1784-1809)
Obligations of Partners: A Summary
These articles outline the various obligations partners have towards each other:
Financial Contributions:
Each partner must contribute what they promised, which could be money, property, or their work (Articles 1784, 1786, 1787).
If a partner fails to contribute their share or takes money from the partnership, they might be liable for interest and damages (Article 1788).
Sharing Profits and Losses:
Partners typically share profits and losses according to their contributions or a specific agreement (Article 1797).
An industrial partner (contributes work only) isn’t liable for losses but receives a share of profits based on fairness (Article 1797).
Management and Decision-Making:
Partners can agree on who manages the partnership and how decisions are made (Articles 1800-1803).
By default, all partners can act for the partnership, but major changes to shared property might require everyone’s consent (Articles 1801, 1803).
Information and Conduct:
Partners must share information about the partnership with each other and avoid using partnership property for personal gain without consent (Articles 1805, 1806, 1807).
Capitalist partners (contribute money) generally can’t compete with the partnership’s business (Article 1808).
Resolving Disputes:
Partners have the right to a formal accounting under certain circumstances, such as wrongful exclusion from the business or unfair profit distribution (Article 1809).
Example:
Alice and Bob are partners in a bakery. They agree that Alice contributes money and manages the shop, while Bob contributes his baking skills. They share profits and losses equally.
Obligation: Alice must manage the shop and use partnership funds responsibly.
Obligation: Bob must contribute his baking skills and not open a competing bakery.
Right: Both Alice and Bob have the right to see the partnership’s financial records and request a formal accounting if necessary.
Understanding these obligations helps ensure a fair and productive partnership for all involved.
II. PARTNERSHIP
C. Property Rights of Partners (Civil Code, arts. 1810-1814)
Property Rights of a Partner: A Breakdown
These articles explain what a partner owns and can do within the partnership:
- Ownership of Specific Partnership Property:
Partners co-own specific assets used for the business, like equipment or a building (Article 1811).
Each partner has an equal right to use these assets for business purposes, but not for personal use without consent (Article 1811).
This ownership right generally cannot be:
Sold to someone else independently (Article 1811).
Seized to pay off a partner’s personal debts (Article 1811).
Used for spousal support (Article 1811).
- Interest in the Partnership:
This refers to a partner’s share of the profits and any remaining assets after the partnership dissolves (Article 1812). - Participation in Management:
Partners have the right to participate in managing the business unless otherwise agreed (Article 1810).
Important Note:
Selling your partnership interest (point 2) doesn’t dissolve the partnership or give the buyer any say in management (Article 1813). They only receive the profits you would have gotten.
Example:
Alice and Bob run a bookstore together. They co-own the store shelves (specific partnership property) and can both use them to display books. They also share the profits and any remaining assets (interest in the partnership) after the business closes. If Bob decides to sell his share to Charlie, Charlie wouldn’t be able to manage the store, but he would be entitled to receive Bob’s share of the profits
II. PARTNERSHIP
D. Obligations of Partnership/Partners to Third Persons (Civil Code, arts. 1815
1827)
Partnership and Third Parties: Key Points
These articles outline the obligations and liabilities of partnerships and partners towards third parties (people outside the partnership):
Partnership Liability:
All partners are personally liable (with all their assets) for the partnership’s debts and contracts entered into by authorized partners (Articles 1816, 1817).
Each partner acts as an agent for the partnership in its usual business dealings. Their actions bind the partnership, unless the third party knew they lacked authority (Article 1818).
The partnership is liable for any harm or losses caused by a partner’s actions within the scope of the business (Article 1822).
Partnership Property:
Partners co-own specific assets used for the business, but cannot sell them individually or use them for personal reasons without consent (Article 1811).
Partnership creditors have priority over individual partners’ creditors when claiming partnership assets (Article 1827). However, individual creditors can still claim a partner’s share in the partnership (after settling partnership debts).
Holding Yourself Out as a Partner:
If someone misrepresents themselves as a partner (intentionally or by allowing someone else to), they can be liable for the partnership’s debts to those who relied on the misrepresentation (Article 1825).
Common Issues:
Unclear partner authority: Disputes can arise if a partner acts beyond their authority, and the third party was unaware (Article 1818).
Misuse of partnership property: A partner using partnership assets for personal gain without consent can cause liability issues (Article 1811).
Competing interests of creditors: Balancing the claims of partnership creditors and individual partners’ creditors can be complex (Article 1827).
Example:
Alice and Bob run a bakery (partnership). Alice, authorized to manage the shop, orders ingredients from a supplier on credit (partnership debt). Both Alice and Bob are personally liable if the partnership fails to pay. If Alice, without Bob’s knowledge, uses bakery equipment to bake cakes for a personal event, the partnership could be liable if the equipment is damaged.
II. PARTNERSHIP
E. Dissolution and Winding Up (Civil Code, arts. 1828-1842)
Dissolution vs. Winding Up: A Breakdown of Partnership Termination
These articles outline the process of dissolution and winding up of partnerships:
Dissolution: This is the legal ending of the relationship between partners, but the business itself isn’t necessarily terminated (Article 1828). It can happen due to various reasons like:
Agreement between partners: Ending the partnership at a specified time, by mutual consent, or due to the death/insolvency of a partner (Articles 1830(1), (5), (6)).
Court order: If a partner is deemed unfit, behaves improperly, or the business becomes illegal (Articles 1831, 1830(3)).
Winding Up: This involves settling the partnership’s affairs and distributing remaining assets after dissolution (Article 1829). This includes:
Selling partnership property: Assets are sold to pay off debts and any remaining amount is distributed to partners (Article 1839).
Settling debts: Partnership creditors are paid first, then individual partners for their capital contributions and any profits (Article 1839).
Distributing remaining assets: Any leftover money is divided among partners based on their profit-sharing agreement (Article 1837).
Example:
Alice and Bob run a bakery (partnership). They decide to dissolve the partnership due to irreconcilable differences (Article 1830(1)(b)). This is the dissolution.
Winding Up Process:
They sell the bakery equipment and ingredients (partnership property).
They pay off all bakery debts (partnership creditors).
They each receive their initial investment back (capital contribution).
Any remaining profits are split between them based on their agreed-upon ratio.
Important Points:
Dissolution doesn’t automatically end partner liability: Partners are still personally liable for existing debts unless settled during winding up (Article 1835).
Continuing the business after dissolution: Remaining partners can continue under certain conditions, but they become a new entity separate from the original partnership (Article 1840).
Partner rights during winding up: Each partner has the right to an accounting of the partnership’s finances (Article 1842).
II. PARTNERSHIP
F. Limited Partnership (Civil Code, arts. 1843-1867)
Limited Partnerships Explained Simply
A limited partnership is a business structure with two types of partners:
General partners: Manage the business and have full liability (responsible for debts beyond invested capital).
Limited partners: Invest money but have limited liability (only liable up to their investment).
Formation:
Create a certificate: This document outlines the partnership details, including names, contributions, and profit-sharing.
File the certificate: Submit it to the Securities and Exchange Commission (SEC).
Key points:
Limited partners cannot take part in running the business, or they lose their limited liability protection (become general partners).
Profits and losses are shared based on the partnership agreement.
Limited partners can assign their interest to someone else, but the assignee doesn’t become a full partner.
Dissolution:
The partnership dissolves when a general partner dies, retires, etc., unless the agreement allows remaining partners to continue.
Assets are used to pay off debts, then remaining funds are distributed according to the agreement.
Common Issue:
Scenario: A limited partner starts giving orders to employees. They believe they are now a general partner and can take on more responsibility.
Answer (based on Article 1848):
This is incorrect. Engaging in business control makes a limited partner a general partner, exposing them to full liability.
Remember: Limited partners invest, not manage. For management involvement, become a general partner, but be aware of the full liability that comes with it.
- Juan, a popular social media influencer, frequently promotes his friend Maria’s small bakery business on his accounts. He often uses phrases like “our bakery” and “we’re launching a new product.” A supplier, believing Juan to be a partner, extends a large credit line to the bakery for equipment. The bakery defaults on the payment. Who might be held liable for the debt?
A) Only Maria, as the actual owner of the bakery
B) Only Juan, due to his misleading statements
C) Both Juan and Maria, with Juan’s liability limited to the amount of credit extended based on his representation
D) Neither Juan nor Maria, as social media statements are not legally binding
Answer: C) Both Juan and Maria, with Juan’s liability limited to the amount of credit extended based on his representation
Legal Reasoning: This scenario illustrates partnership by estoppel. Juan’s actions on social media, using terms like “our bakery,” could reasonably lead others to believe he’s a partner. The supplier relied on this representation when extending credit. Under the principle of partnership by estoppel, Juan could be held liable alongside Maria for the debt incurred based on the supplier’s reliance on Juan’s apparent status as a partner. However, Juan’s liability would typically be limited to the extent of the credit extended based on the misrepresentation he allowed to continue.
- A family-owned sari-sari store in Manila is run by a married couple, Pedro and Lisa. Their adult son, Carlo, occasionally helps at the store and sometimes negotiates with suppliers. Carlo never corrects suppliers who assume he’s a partner. The store faces a lawsuit from a supplier for unpaid goods. During the court proceedings, it’s revealed that Carlo signed some documents as a “co-owner.” Which of the following is most likely to be true?
A) Carlo has no liability as he’s just helping his parents
B) Carlo is fully liable as a general partner in the business
C) Carlo may be held liable as a partner by estoppel, but only for transactions where his representation was relied upon
D) The entire family is equally liable due to the nature of family businesses in the Philippines
Answer: C) Carlo may be held liable as a partner by estoppel, but only for transactions where his representation was relied upon
Legal Reasoning: This scenario demonstrates the complexity of partnership by estoppel in a family business context, which is common in the Philippines. Carlo’s actions - not correcting suppliers’ assumptions and signing documents as a “co-owner” - create a partnership by estoppel situation. Under Philippine law, Carlo could be held liable as a partner for transactions where suppliers or other parties relied on his apparent status as a partner. However, his liability would typically be limited to those specific transactions where his representation was a factor, not for all of the store’s debts. This case highlights the importance of clear communication about roles and responsibilities, even in informal family business settings.
- ABC Partnership, a popular restaurant chain in Manila, is dissolving due to disagreements among its three partners. Partner A wants to continue the business alone, while Partners B and C want to sell everything. During the winding up process, it’s discovered that Partner B had secretly taken out a loan in the partnership’s name without informing the others. Which of the following statements is most accurate?
A) The dissolution is invalid because of Partner B’s undisclosed loan
B) Partner A can automatically continue the business as a sole proprietorship
C) All partners remain liable for the secret loan, but they may have a claim against Partner B
D) Only Partner B is liable for the secret loan since the partnership is dissolving
Answer: C) All partners remain liable for the secret loan, but they may have a claim against Partner B
Legal Reasoning: This scenario illustrates the complexities of partnership dissolution and liability. According to Article 1835, partners remain personally liable for existing debts even after dissolution. The secret loan, although taken out by Partner B without the others’ knowledge, is still considered a partnership debt if it was incurred in the course of partnership business. Therefore, all partners are liable to creditors for this debt. However, the other partners may have a claim against Partner B for breach of fiduciary duty or may seek indemnification from B for any losses they incur due to this undisclosed loan. This situation emphasizes the importance of transparency in partnerships and the ongoing liability partners face even during dissolution.
- XYZ Partnership, a small manufacturing business in Cebu, is dissolving due to the death of one partner. The surviving partners disagree on how to handle the winding up process. Partner X wants to quickly sell all assets at a discount to settle debts, while Partner Y wants to continue operations to maximize value before selling. A major client has a pending order. Which of the following is the most appropriate course of action according to Philippine partnership law?
A) Partner X can unilaterally sell all assets immediately to settle debts
B) Partner Y can continue business operations indefinitely to maximize value
C) The partnership must immediately cease all operations upon dissolution
D) The partners should complete existing obligations and wind up in a manner that maximizes partnership value
Answer: D) The partners should complete existing obligations and wind up in a manner that maximizes partnership value
Legal Reasoning: This scenario touches on several key aspects of partnership dissolution and winding up in Philippine law. According to Article 1829, winding up involves settling the partnership’s affairs after dissolution. While dissolution marks the end of the partnership relationship, it doesn’t immediately terminate all business activities. Article 1836 allows the partnership to complete transactions begun but not finished at dissolution.
In this case, the pending order from a major client would likely fall under this category. Completing this order could help maximize the partnership’s value, which aligns with the partners’ duty to wind up the partnership’s affairs in the best interest of all parties involved.
Furthermore, Article 1837 outlines that partners share in the profits or losses from completing unfinished transactions. This supports the idea that continuing some operations during winding up can be appropriate if it benefits the partnership.
The correct approach balances the need to wind up the partnership with the obligation to maximize its value and fulfill existing commitments. Hastily selling assets at a discount (Partner X’s approach) could violate the duty to maximize value, while indefinitely continuing operations (Partner Y’s approach) would go against the purpose of winding up. The most appropriate action is to complete existing obligations, like the pending order, and conduct the winding up process in a manner that best serves the interests of the partnership and its creditors.
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