Partnership Flashcards
Partnership Definition
A contract whereby two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing profits among themselves or to exercise a profession
Characteristics of a Partnership
- Consensual- perfected by mere consent of the parties
- Bilateral- entered into between two persons or more persons (also multilateral)
- Nominate- designated by a specific name and have specific rules applicable
- Principal- existence does not depend on another contract
- Onerous- certain contributions have to be made to become partner
- Preparatory- can enter into other contracts after entered into initial contract
Applicable Principles
Affectio Societatis- the desire to formulate an ACTIVE union with people among whom there exist mutual confidence and trust.
Delectus Personae- partner has the right to choose those whom he wants to be associated with the partnership. Admission of third person as a partner requires unanimous consent of all the partners
Purpose of a Partnership
Can either be 1) For the intention of dividing the profits among themselves, or 2) in order to exercise a profession. Nevertheless. it is required that a partnership must have a lawful object or purpose.
Partnership vs. Corporation: Creation
Partnership: Voluntary agreement of the parties
Corporation: Created by the state in the form of a special charter or by a general enabling law
Partnership vs. Corporation: Number of Organizers
Partnership: Two or more
Corporation: Not more than 15
Partnership vs. Corporation: Existence
Partnership: Generally no time limit except through will of parties
Corporation: Perpetual Existence as per RCC
Partnership vs. Corporation: Liability of Owners
Partnership: May extend to personal property
Corporation: Liable only up to their capital contribution
Partnership vs. Corporation: Transferability of Interest
Partnership: Needs unanimous consent of partners
Corporation: Does not need consent of stockholders
Partnership vs. Corporation: Abilit of owners to bind firm
Partnership: Partners are agents of the partnership
Corporation: Official acts are through the Board of Directors
Partnership vs. Corporation: Remedies in case of mismanagement
Partnership: A partner can sue the other partner who mismanages
Corporation: Stockholder cannot sue directly at the director but has to be under name of corporation through derivative suit
Partnership vs. Corporation: Nationality
Partnership: National of the country where it was created and dependent on percentage of ownership
Corporation: Under which law it was created as to whether domestic or foreign
Partnership vs. Corporation: Legal Personality
Partnership: from the time the contract begins
Corporation: from the issuance of the Certificate of Incorporation
Partnership vs. Corporation: Right of Succession
Partnership: None
Corporation: Yes, and does not dissolve corporation
Partnership vs. Corporation: Right of Succession
Partnership: None
Corporation: Yes, and does not dissolve corporation
Scenarios when there is no partnership
- Between persons who are not partners as to each other are not partners to third persons except partnership by estoppel;
- Co-ownership or co-possession of itself whether they do or not share any profits made by the use of the property.
- Sharing of gross returns whether or not the persons sharing them have joint or common right or interest in any property from which returns are derived
Formal Requirements
General Rule: May be constituted in any form
Exceptions: Void whenever immovable property is contributed and no inventory is made on the property, signed by the parties, and attached to a public instrument
What happens when capital is P3000 or more.
Contract must appear in a public instrument, which must be recorded in the SEC. It does not affect the validity of the partnership but only as to third persons
Kinds of Partnerships as to Object
- Universal
a. Universal Partnership of All Profits
b. Universal Partnership of All Present Property - Particular
Universal Partnership of All Profits
- Only the USUFRUCT of the properties of the partners become common property; naked ownership still remains by each of the partner
- ALL profits acquired by industry or work of the partners become common property
Universal Partnership of All Present Property
- All the properties actually belonging to the partners are contributed both ownership and naked ownership
- Only the profits of the contributed property becomes common property
- Profits from other sources may become partnership property if there is a stipulation to that effect
Ambiguity in terms of Universal Partnership
If it does not specify the nature, it is assumed to be a Universal Partnership of profits
Persons not allowed to form Universal Partnership
Those who cannot donate to each other, namely;
1. Husband and Wife
2. Those guilty of Adultery and concubinage
3. Those guilty of the same criminal offense if the partnership was entered into the consideration of the same
Particular Partnership
Where the objects are:
1. Determinate thing, their use or fruits
2. Specific Undertaking
c. Exercise of a profession or occupation
Kinds of Partnership as to Liability
- General- all partners are general partners whose liability extends to their individual properties after the assets of the partnership
- Limited- at least on partner is liable only up to their extent of his contribution
Kinds of Partnership as to term
- Partnership with a fixed term or particular undertaking- upon arrival of the fixed term or fulfillment of particular undertaking, partnership will be dissolved, if continued it will be a partnership at will
- Partnership at will- no fixed term or particular undertaking
Other Kinds of Partnerships
- Ordinary Partnership- actually exists among the partners and third persons
- Partnership by Estoppel- in reality not a partnership but considered as one with respect to those who are precluded from denying its existence
- Partnership by Prescription- established by the lapse of time
- De Jure Partnership- exists both in fact and in law
- De Facto Partnership- exists in fact but not in law
- Commercial Partnership- partnership taxable as a corporation
- General Professional Partnership- partnership formed in the exercise of a profession. It is a tax exempt entity
Kinds of Partners as to Contribution
- Capitalist
- Industrial
- Capitalist-Industrial
Kinds of Partners as to Liability
- General
- Limited
- General-Limited
Other kinds of partners
- Silent- who does not participate in management of partnership
- Secret- not known as a partner to third persons
- Dormant- both silent and secret partner
- Ostensible- direct opposite of dormant partner
- Managing- undertakes management of the partnership
- Liquidating- undertakes winding-up of the partnership after dissolution
- Incoming- admitted after constitution of partnership
- Nominal- not actually a partner but who may become liable to third person
- Quasi- no longer a partner but has left his capital as a loan
- Retiring- decided to leave partnership after reaching age
- Substitute Limited- person assigned all the right of limited partner
Obligations of a Partner to Partnership and Other Partners
- To give his contribution
- To give additional contribution in case of imminent loss
- Prohibition to engage in other businesses
- Credit to the firm the payment made by a debtor who owes both the partnership and managing partner; and
- Other obligations of partners (check p. 253 of book)
Situations where the loss of the property is borne by the partner
- Thing contributed is specific and determinate and not fungible and only their use and fruits may be for the common benefit.
- There is a stipulation he shall bear the loss of the thing brought
Situations where the loss of the property is borne by the partner
- Things contributed are Fungible, Cannot be kept without deteriorating, or contributed to be sold.
- There was appraisal in inventory and no stipulation that partner will bear the loss.
Prohibition of Industrial Partner to engage in other business
Cannot engage in business in any industry for himself except when capitalist partners permit him to do so
Prohibition of Capitalist Partner to engage in other business
Cannot engage in business in same industry which may result in competition. Exceptions:
1. When expressly stipulated
2. Other partners allowed him to do so
3. When partnership is already non-existent
4. When general-limited partner becomes limited partner in competitive enterprise
Effect of non-compliance in engaging in business
- Bring to the partnership all profits illegally obtained
- Liable personally for all the losses
- May be ousted for the loss of trust and confidence
What happens when managing partner collects from a common debtor?
- If managing partner issued a receipt in the name of the partnership, payment shall be applied to partnership credit
- If issued in the name of the managing partner, payment shall be applied proportionate to the amount of the debt except when the debt to the partner is more onerous, the debtor may choose to apply the payment to just the partner.
Obligations of Partners to Third Parties
- Operate under a Firm Name
- Liability after exhaustion of partnership assets
- Authority to act for and on behalf of the partnership
- Conveyance of Real Property
- Solidary liability for torts/quasi-delicts
- Solidary Liability for misappropriation
- Partnership by Estoppel
What happens when strangers include their name in the firm
Liable as partners because of estoppel but do not have the rights of partners- to protect customers from being misled. Limited partner who includes his name in the firm name will be liable as general partner
What happens after exhaustion of partnership assets?
All partners including industrial partners shall be liable pro rata with all their property and after all partnership assets have been exhausted.
Type of Authorities of the partner to act on behalf of the partnership
- Express
- Implied
- Apparent
Actions where consent of all partners is necessary
- Assign partnership property in trust for creditors or on the assignees promis\e to pay the debts of partnership
- Dispose of the goodwill of the business
- Do any act that would make it impossible to carry out business partnership
- Confess a judgement
- Enter into a compromise
- Submit a partnership claim or liability to arbitration
- Renounce a claim of the partnership
Rights of a Partner
- Rights to share in the profits
- Property rights
Distribution of the Profits Hierarchy
- In accordance with agreement
- If no agreement, in accordance with capital contribution
- Equally
Distribution of Losses Hierarchy
- In accordance with agreement as to losses
- In accordance with agreement as to profits
- If no agreement, in accordance with capital contribution but industrial partner not liable for losses
- Equally
Pactum Leonina
A stipulation excluding a partner from a share in the profits
What is partnership interest?
A partners share in the profits and surplus
Effect of conveyance of a partner’s whole interest
- Does not in itself dissolve the partnership. Dissolved only if there is a stipulation to that effect.
- The conveyee does not necessarily become a partner
Rights of the Assignee
- To get the profits of the assignor-partner would have obtained
- Avail of the usual remedies in case of fraud and mismanagement
- Receive assignor’s interest in event of dissolution
Rules on one Managing partner in the articles of partnership
May execute all acts of administration in good faith even with opposition from other partners.
When can a single managing partner’s act be revoked if in the articles of partnership
- Just or lawful cause; and
- by a vote of the partners representing the controlling interest
When can a single managing partner’s act be revoked if assigned after partnership has been constituted
May be revoked with the partners representing controlling interest even without just or lawful cause
Rules on Multiple Managing Partner
- with stipulation that no managing partner may act without the consent of the others.
- With specification of duties, each managing partner can perform within their respective duties
- Without specification or without stipulation, each partner may separately execute all acts of administration.
What happens when managing partners oppose
The matter shall be decided by a majority of the managing partners as per head count; if there is a tie, then controlling interest of ALL the partners shall prevail.
Rules on no Managing partner but has stipulation that partners cannot act without support of the partners
concurrence of all shall be necessary for the validity of the acts and the absence of any one of them cannot be alleged, except if there is imminent danger of grave injury to the partnership
No agreement as to the management of the partnership
ALL partners shall be considered agents and whatever one does will bind the partnership.
What is dissolution of a partnership
Change of relation of the partners caused by any partner ceasing to be associate in the carrying on as distinguished from winding up
Causes for Dissolution
- Extrajudicial Causes: without intervention of the court
- Judicial Causes: where dissolution of the partnership is decreed by the court
What are the extrajudicial causes for dissolution?
- Without violation of agreement between partners
- In contravention of the agreement between partners by the express will of any partner
- By operation of law
Examples of when a partnership is dissolved without violation of agreement between partners
- By termination of the agreement of the definite term
- By the express will of any partner (must act in good faith)
- By the express will of all the partners.
- By the expulsion of any partner from the business
Examples of when a partnership is dissolved by operation of law
- By any event which makes it unlawful.
- When a specific thing which the partner promises to deliver perishes before delivery
- Death of any partner
- Insolvency of any partner in the partnership
- Civil interdiction by any of the partner
What are the judicial causes that dissolves a partnership
- A partner has been declared insane
- Partner becomes incapable of performing his part of the contract.
- Partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the business
- A partner willfully or persistently commits a breach of partnership agreement
- Partnership can only be carried at a loss
- Other circumstances deemed equitable
Effects of Dissolution
- The mutual agency is terminated.
- Contracts related to winding up of affairs are still binding even upon dissolution
- The partnership may still continue after dissolution but a new one is create.
What are the rules when it comes to Notice given by the partner
- If cause is Acts, Insolvency and death, Notice should be given by the partners to terminate the mutual agency.
- If the cause is not AID- mutual agency is terminated and dissolution is binding without notice
Winding up or Liquidation
Process of liquidating all partnership assets and distributing the proceeds to satisfy the claims against the partnership.
Who is the Liquidator
- A party who has not wrongfully caused the dissolution
- Legal representative of the last surviving partner
- Court
Order of Distribution of Asset
- Those owing to creditors other than partners.
- Those owing to partners other than capital and profits
- Those owing to partners in respect of capital
- Those owing to partners in respect of profits
Claims against a partner, if he has become insolvent
- Owing to separate creditors
- Owing to partnership creditors
- Owing to partners by way of contribution
Limited Partnership
Formed by two or persons having as members one or more general partners and one or more limited partners.
Contents of a certificate in formation of LTD partnership
- name of partnership, adding limited or LTD in the firm name
- Character of the business
- Location of the principal place
- Name and place of residence of each member
- The term for which the partnership exists
- The amount of cash and a description of and the agreed value of the property
- The additional contributions if any to be made by each limited partner
- Time agreed when contribution will be made by limited partner
- The share of profits or other compensation by way of income each limited partner shall receive.
- The right of a limited partner to substitute an assignee as contributor in his place
Substitute Limited Partner
A person admitted to all the rights of a limited partner who has died or assigned his interest in a partnership; Provided:
1. Consent of all partners
2. The assignor gives the assignee the right
Limitations on a limited partner
- A limited partner cannot be an industrial partner
- Surname of limited partner shall not appear in partnership name unless name of general partner.
- Cannot take part in management
Order of Distribution of Asset of Limited Partnership
- Those owing to creditors other than partners.
- Those owing to limited partners other than capital and profits
3
4 - Those owing to partners in respect of capital
- Those owing to partners in respect of profits
