PARTNERSHIP

HISTORY

The earliest form of conducting business was the single entrepreneur ownership plan whereby
one individual owned the business, OWNED
had sole control of the same, SOLE CONTROL
reaped all the profits, and ALL PROFITS
suffered all the losses. ALL LOSSES

Under this system, the growth of an individual business was limited, owing especially to the limitation
of capital and sometimes also to the limitation of skill or knowledge.

To permit combinations of capital, or capital and experience, and

To secure economy by eliminating some of the overhead costs of individual enterprises, the
partnership plan of business association was developed

A means whereby the capital, goods, talents, and credit of two or more individuals might best be
combined to carry on a trade or business.

SOURCES OF LAW ON PARTNERSHIP

Old Civil Code

American Statutes
Uniform Partnership Act,
Uniform Limited Partnership Act
*due to numerous gaps in our present law
*more in keeping with modern business practices
Opinions of Civilians
Code of Commerce
Formulated by the Commission (Code Commission)

NEW CIVIL CODE - PARTNERSHIP

ARTICLE 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

Contract - meeting of minds between two persons whereby one binds himself, with respect to
the other, to give something or to render some services.

Profession a group of men pursuing a learned art as a common calling in the spirit of public
service no less a public service because it may incidentally be a means of livelihood.

The practice of a profession is not a business or an enterprise for profit. Partners Firm

The laws does not allow individuals to practice a profession as a corporate entity.
Personal qualification for such practice cannot be possessed by a corporation.

Partnership for the practice of law

not a natural or constitutional right
it is in a nature of privilege or franchise

CASE: In the Matter of Petition for Authority to Continues use of Firm Name Sycip, Salazar, etc./
Ozaeta, Romulo etc. 92 SCRA 1
CHARACTERISTICS ELEMENTS OF PARTNERSHIP

CONSENSUAL perfected by mere consent upon express or implied agreement of two or more persons

NOMINATE it has a special name or designation in our law

BILATERAL it is entered into by two or more persons and the rights and obligation arising therefrom are
always reciprocal

ONEROUS each parties aspires to procure for himself a benefit through the giving of something

COMMUTATIVE undertaking of each of the partners is considered as the equivalent of that of the others

PRINCIPAL it does not depend for tis existence or validity upon some other contracts

PREPARATORY its is entered into as a means to an end

A partnership contract, in it essence, is a contract of agency

ESSENTIAL FEATURES OF PARTNERSHIP

1. Valid Contract

A partnership may be created without any definite intention to create it.

It is the substance and not the name of the arrangement, which determines the legal relationship,
although the designation adopted by the parties should be considered as indicative of their intention.

In case there is no written agreement between the parties, the existence or non-existence of a partnership
must be determined from the conduct of the parties, any documentary evidence bearing thereon, and
the testimony of the parties.
(Greenstone vs. Clar. [Misc.], 69 N.Y.S. [2d] 548 [1947], cited in Barrett & Seago, p. 461.)

2. Parties legal capacity to enter into contract

As a general rule, any person may be a partner who is capable of entering into contractual relations.
Consequently, any person who cannot give consent to a contract cannot be a partner.

The following cannot give their consent to a contract of partnership:

(a) Unemancipated minors;9
(b) Insane or demented persons;
(c) Deaf-mutes who do not know how to write;
(d) Persons who are suffering from civil interdiction; and
(e) Incompetents who are under guardianship.

There is no prohibition against a partnership being a partner in another partnership.

The doctrine adopted by our Supreme Court is that, unless authorized by statute or by its charter, a
corporation is without capacity or power to enter into a contract of partnership.

Since in a partnership the corporation would be bound by the acts of persons who are not its duly appointed
and authorized agents and officers, which would be entirely inconsistent with the policy of the law that
the corporation shall manage its own affairs separately and exclusively.

a. A corporation, however, may enter into joint venture13 partnership with another where the nature of
the venture is in line with the business authorized by its charter.

b. Where the partnership agreement provides that the two partners will manage the partnership so
that the management of corporate interest is not surrendered, the partnership may be allowed.
c. Where the entry of the foreign corporation as a limited partner in a limited partnership (Chap. 4.) is
merely for investment purposes and it shall not take part in the management and control of the
business operation of the partnership, it shall not be deemed doing business in the Philippines, and
hence, it is not required to obtain a license to do business in the Philippines as required by Sections 123-
126 of the Corporation Code.

3. Mutual contribution of money, property or industry to a common fund

It must be pointed out that checks, drafts, promissory notes payable to order, and other mercantile
documents are not money but only representatives of money. Consequently, there is no contribution
of money until they have been cashed.

The property contributed may be real or personal, corporeal or incorporeal.

The word industry has been interpreted to mean the active cooperation, the work of the party
associated, which may be either personal manual efforts or intellectual, and for which he receives a
share in the profits (not merely salary) of the business.

A partnership may, therefore, exist even if it is shown that the partners have not contributed any capital of
their own to a common fund for the contribution may be in the form of credit or industry not necessarily
cash or fixed assets.

A limited partner in a limited partnership, however, cannot contribute mere industry or services.
(Art. 1845.)

Distinguished from a lessor of services in the sense that the former is independent of the other partners,
that is, he is not subject to the supervision of the other partners, while the lessor is under the
supervision of the lessee or employer.

In partnership, proof is necessary that there be contribution of money, property, or industry to a common
fund with the intention of dividing the income or profits obtained therefrom.

if the partnership agreement provides simply that one of the parties is to give and the other is to receive
a half interest in the profits of an enterprise
started by the former,
without anything being promised by the latter
toward the accomplishment of its object, NO ENFORCEABLE CONTRACT EXISTS

BUT if the latter takes part in carrying on the enterprise, and thus subjects himself to partnership
liability to outsiders, he furnishes sufficient consideration for the formers promise and acquires all the
rights of a co-partner.

CASE: Lim Tong Lim vs Philippine Fishing

Doctrine of Corporation by Estoppel
A partnership may, therefore, exist even if it is shown that the partners have not contributed any capital of
their own to a common fund for the contribution may be in the form of credit or industry not necessarily
cash or fixed assets.

ARTICLE 1768
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 par.

Entity separate from its aggregate individual partners.

CASE: Campos Rueda & Co vs Pacific Commercial

Insolvency of a partnership does not directly mean that partners are insolvent
As a consequence of the distinct legal personality possessed by a partnership entity, it may be declared
insolvent even of the partners are not.
CASE: Aguila Jr vs CA
In view of the separate juridical personality possessed by a partnership for the partners cannot be held
liable for the obligations of the partnership unless it is shown that the legal fiction of a different judicial
personality is being used for a fraudulent, unfair or illegal purpose.

CASE: Pascual vs CIR

It was held that two isolated transactions whereby two persons purchased two (2) parcels of land and then
another three (3) parcels of land and sold the same a few years thereafter, did not thereby make them
partners. There must be a clear intent to form a partnership.

Fiduciary Relationship involving trust

PARTNERSHIP CO-OWNERSHIP
fiduciary relationship non fiduciary relationship
REMEDY
dissolution action,
termination for non-performance
accounting of a contract

CASE: Ona vs CIR

Facts: A and B are co-owners of inherited properties. They agreed to use the said common properties and
the income derived therefrom as a common fund with the intention to produce profi ts for them in proportion
to their respective shares in the inheritance as determined in a project of partition.

Issue: What is the effect of such agreement on the existing co-ownership?

Held: The co-ownership is automatically converted into a partnership. From the moment of partition, A and
B, as heirs, are entitled already to their respective definite shares of the estate and the income thereof, for
each of them to manage and dispose of as exclusively his own without the intervention of the other heirs,
and, accordingly, he becomes liable individually for all taxes in connection therewith.

If, after such partition, an heir allows his shares to be held in common with his co-heirs under a
single management to be used with the intent of making profi t thereby in proportion to his share, there can
be no doubt that, even if no document or instrument were executed for the purpose, for tax purposes, at
least, an unregistered17 partnership is formed.

In the Ona case (supra.), where after an extrajudicial settlement the coheirs used the inheritance or the
incomes derived therefrom as a common fund to produce profi ts for themselves, it was held that they were
taxable as an unregistered partnership.

A partnership, whether registered or not, other than a general professional partnership, is now
considered for tax purposes a corporation and the partners are considered stockholders. (see Sec. 26,
The National Internal Revenue Code.) Before the amendment of Section 26, only unregistered partnerships
were taxable as corporations

CASE: Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666 [1939]

Facts: A, B, etc. put up money to buy a sweepstakes ticket for the sole purpose of dividing equally the prize
which they may win as they did in fact the amount of P50,000.00. If a partnership had been formed by A,
B, etc. then it was liable for income tax pursuant to law then in force; if merely a community of property,
then such co-ownership was not liable, not having a legal personality of its own.

Issue: Did A, B, etc. form a partnership or merely a community of property?

Held: A, B, etc. formed a partnership. The partnership was not only formed, but upon the organization
thereof and the winning of the prize, it appeared that B personally appeared in the office of the Philippine
Charity Sweepstakes, in his capacity as co-partner, and as such collected the prize. All these circumstances
repel the idea that A, B, etc. organized and formed a community of property only.
In the Gatchalian case (supra.) where 15 persons contributed small amounts to purchase a two-peso
sweepstakes ticket with the agreement that they would divide the prize. The ticket won the third prize of
P50,000. The 15 persons were held liable for income tax as an unregistered partnership.

It is likewise different from Reyes vs. Commissioner of Internal Revenue (24 SCRA 198 [1968]) where father
and son purchased a lot and building, entrusted the administration of the building to an administrator, and divided
equally the net income,
and from Evangelista vs. Collector of Internal Revenue (102 Phil. 140 [1957]) where three sisters bought
four pieces of real property which they leased to various tenants and derived rentals therefrom. Clearly, the petitioners
in these two cases had formed an unregistered partnership.
(Obillos, Jr. vs.Commissioner of Internal Revenue, 139 SCRA 436 [1985].)