Business Laws and

Regulations
UNIT 1: The Law on Partnership

Chapter 1: General Provisions

Article 1767. By the contract of partnership, two or more persons bind themselves to contribute
money, property, labor, 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 their
profession.
Article 1768. The partnership has a judicial personality separate and distinct from that of each of
the partners, even in case of failure to comply with the requirements of Article 1772. Partnership
may acquire and possess all kinds of properties, incur obligations, and file cases or become
defendants in cases filed in courts.
Article 1769. In determining whether a partnership exists, these rules shall apply:
(1) Except as provided by Article 1825, persons who are not partners as to each other are
not partners as to each other are not partners as to third persons;
(2) Co-ownership or co-possession does not of itself establish a partnership, whether such
co-owners or co-possessors do or do not share any profits made by the use of the
property.
(3) The sharing of gross returns does not of itself establish a partnership, whether or not
the persons sharing them have a joint or common right or interest in any property
from which the returns are derived.
(4) 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 installment 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, through 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. (n)
Article 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 the prejudice to the
provisions of the Penal Code governing the confiscation of the instruments and effects of a
crime.
Article 1771. As a general rule, a contract of partnership may be made orally or in writing,
unless real property rights are contributed, in which case, it should be in a public
instrument/notarized.

Article 1772. When cash or property worth P3,000 or more is contributed as capital, the Articles
of Partnership shall be in a public instrument and registered with SEC. If said requirements are
not complied with, it will not affect the liability of the partnership and its partners to third
parties. If the partnership is not written in a public instrument, the remedy of the partner is to
compel the execution of a public instrument through an action for a specific performance.
Article 1773. If real property regardless of value is contributed by any of the partners, the
contract of the partnership must be in a public instrument and attached to it should be an
inventory of the property contributed, duly signed by the parties. (title or deed of sale is
accepted)
Article 1774. Real properties or any interest therein may be acquired in the partnership name.
Title so acquired can be conveyed only in the name of the partnership.
Article 1775. The associations whose articles are kept secret among the members and where
they contract their own name with third persons are not partnerships because they do not have
juridical personality, and are governed by the provisions on co-ownership.

How to establish a partnership?

1. Valid contract
2. Legal capacity of the persons forming the partnership
3. Mutual contribution of money, property, or industry to a common business
4. A lawful business
5. Primary purpose is to obtain profits and to divide the same among the parties
Note: It is not necessary that the intention to divide the profits among the partners be in equal
shares.

Partnership as a contract
(7) Characteristics:
 Consensual – it is perfected by mere consent, when two or more persons agree
expressly or impliedly, except if the real property is contributed wherein, it
becomes a formal or solemn contract that requires the contract of partnership to
be notarized and an inventory of real property attached to the said public
instruments.
 Bilateral – it is entered between two or more persons with reciprocal rights and
obligations.
 Principal – does not depend for its validity or existence upon some other contract.
 Commutative – the undertaking of one partner is regarded as the equivalent of the
other partners.
 Preparatory – it is entered into so that such persons may lawfully engage in
business to realize profits which will then be divided among themselves.
  Onerous – where partners contribute something so that they may share in the
profits of business.
 Nominate – it has a special name or designation under the law.

Parties, Object and Form

Parties.
 Any person capacitated to a contract may enter into a contract of partnership.
 Persons who are suffering from civil interdiction, minors, insane or demented persons,
deaf-mutes who do not know how to read and write, and incompetents who are under
guardianship cannot enter into a partnership. (Article 1327. Voidable Contract)
 The capacity of the following persons to enter into a contract of partnership is limited:
(1) Those who are prohibited from giving each other any donation or an
advantage cannot enter into a universal partnership.
(2) A corporation which cannot enter into a partnership in the absence of express
authorization by statue or charter, but may.
Objects.
 Essential element together with the common benefit or interest of the partners.
 Unlawful object or purpose – void ab initio (no legal effect)
Article 1770. If partnership is unlawful or illegal it will be dissolved by judicial decree and
the profits if there is will be confiscated by the state.
 Universal partnership – refers to all the present property or to all profits or a particular
partnership which has for its object determinate things, their use or fruits, or specific
undertaking, or the exercise of a profession or vocation.

Article 1778. In a universal partnership of all present property, the partners contribute all the
properties that belong to them to a common fund together with the profits they may acquire from
said properties. The properties included are all those owned by the partners at the time of the
constitution of the partnership.
Article 1779. They may also agree to include all other profits they may subsequently receive but
the property that the partners may acquire subsequently by inheritance, legacy, or donation
cannot be included in their agreement, except the fruits thereof.
Article 1780. A universal partnership of profits comprises all that the partners may acquire by
their industry or work during the existence to the partnership. Only the usufruct (legal right of
using and enjoying the fruits and profits of something belonging to another) over the property of
the partners passes to the partnership.
Article 1781. When the articles of universal partnership does not specify the nature of the
partnership, the presumption is that the partners intended only a universal partnership of profits.
Article 1782. Persons who are prohibited by law to give donations to each other, such as
husband and wife, cannot form a universal partnership but they can form a particular partnership,
the limited partnership.
Article 1783. Professional partnership is the one formed by professionals who join together to
practice their profession.
Delectus Personae – the right of a person to choose whom he wants to associate with.

Duration of Partnership
 Partnership commences on the date agreed upon by the partners, upon the happening of a
condition agreed upon by the partners, or in the absence of an agreement, upon the
execution of the contract.
 Formation and dissolution of which depends on the mutual desire and consent of the
parties.
 Any one of the partners may, at his sole pleasure, dictate the dissolution of the
partnership, even in bad faith, subject to liability for damages.
Article 1785. A partnership term may be extended expressly or impliedly, when the partnership
is for a fixed term or particular undertaking and is continued, without any express agreement,
after the termination of the fixed term or particular undertaking.
BIR has no right to close an unlawful partnership, Judge dapat ang maissue. Only the court can
order the closure of a partnership.

Rules to Determine Existence

When the intent of the parties is clear, such intent shall govern. When it does not clearly
appear, the following rules apply:
 Persons who are not partners to each other are not partners as to third persons unless there
is estoppel (legal bar to denying a fact because of one’s previous actions or words to the
contrary).
 Co-ownership or co-possession does not establish a partnership, even when there is
sharing of profits in the use of the property.
 Sharing of gross returns does not establish a partnership, even when the parties have a
joint or common interest in any property from which the returns are divided.
  The receipt by a person of a share in the profits of a business is prima facie (based on
what is known or seen) evidence that he is a partner, which may be contradicted by proof
that such profits were received in payment of a debt, wages, rents, annuity, interest on a
loan.
Kinds of Partnership
As to legality:
 Partnership de jure – complied with all the requisites for its lawful establishment.
 Partnership de facto – failed to comply.
As to object:
 Universal partnership – all property of partners are contributed to the common fund,
except for those that are inherited, received as legacy, and those that are donated.
 Particular partnership – partners may decide what property they will contribute to the
common fund.
As to liability of the partners:
 General partnership – consisting of general partners who are liable pro rata
(proportionately) and subsidiarily or at times solidarily with their separate property for
partnership obligations.
 Limited partnership – formed by 2 or more persons having as members one or more
general partners and one or more limited partners who are not personally liable for the
partnership obligations.
As to publicity:
 Secret partnership – one where the existence of certain persons as partners is not made
known.
 Open/Notorious partnership – existence is made known to the public by the partners.
As to purpose:
 Commercial/Trading partnership – exists for the transaction of business.
 Professional/Non-trading partnership – exists for the exercise of profession
As to duration:
 Fixed term – one where the life or period of existence f the partnership has been agreed
upon by partners.
 Particular undertaking – one where it will exist until the purpose is accomplished.
 Partnership at will – does not fix its term. The birth and life of this partnership is
predicated on the mutual desire and consent of the partners. The right to choose with
whom a person wishes to associate himself is the very foundation and essence of this
partnership.
Kinds of Partners
 Capitalist – contributes money or property
 Industrial – contributes skills, or services
 General – liability to third persons extends to his separate property
 Limited – liability to third persons is limited to his capital contribution
 Managing – designated to manage the affairs or business
 Liquidating – takes charge of winding up the partnership affairs
 Partner by estoppel – not really a partner but is liable as such for the protection of
innocent third persons
 Continuing partner – continues the business after the dissolution of partnership by the
admission of a new partner, etc.
 Surviving – remains a partner after dissolution by the death of any partner
 Sub-partner – not a member nor a partner, he only contracts with a partner concerning the
share of the latter
 Ostensible – takes active part of the business, known by the public
 Secret – take active part on the business but unknown to the third persons
 Silent – does not take active part, maybe known to be a partner by third persons
 Dormant – does not take active part, not known or held out as a partner
 Original – a partner since the constitution of the partnership
 Incoming – about to join or to be taken as a member into an existing partnership
 Retiring – withdrawing from the partnership.

Partnership as Distinguished from Other Contracts

Partnership distinguished from joint venture
 Partnership Joint Venture

-Operates with a firm name and legal -Operates without a firm name and
personality. legal personality.

-Relates to a various transactions of a -Limited to a single transaction.

certain kind.

Note: A corporation may not enter into a partnership but may enter into joint
ventures.

Partnership distinguished from co-ownership

Partnership Co-ownership

-created by either an express or -created by law and may exist even

implied contract. without a contract.

-has a separate juridical personality -has no separate juridical personality.

-purpose: obtain profits - purpose: common enjoyment of a

thing or right

-duration: no limitation -duration: agreement to keep a thing

undivided for more than 10 years is
not allowed, but may be extended.

-there is mutual agency -no mutual representation

-death or incapacity dissolves the -death or incapacity does not dissolve

partnership the co-ownership

-a partner cannot dispose of his -co-owners can dispose of his share

interest without the consent of others. without the consent of others.

Partnership distinguished from a corporation

 Partnership Corporation

-created by agreement -created by operation of law (Revised

Corporation Code)

-involves at least two persons -can exist with a single stockholder

-personality commences from the -personality commences from the

moment of execution of contract issuance of the certificate of
incorporation by the SEC.

-exercise any power authorized by -exercise powers only conferred by the

partners RCC or by its articles of incorporation

-management not agreed upon: every -management not agreed upon: vested
partner may act for the partnership in board of directors or trustees

-partners are generally liable for -stockholders are liable only to the
partnership debts extent of their shares in a corporation

-a partner cannot dispose of his interest -stockholder has the right to transfer
without the consent of others. his shares without the consent of others

-may be dissolved anytime -may only be dissolved with the

consent of the State.

Partnership distinguished from conjugal partnership of gains

 Partnership Conjugal partnership of gains

-created by voluntary agreement -arises in case the spouses, of

between two or more partners of opposite sex, agree before marriage.
either sex

-governed by agreement of partners -governed by law (Family Code of

the Phil.)

-commencement date: may be agreed -commencement date: on the date of

upon the celebration of marriage and any
stipulation to the contrary is void

-share in profits may be stipulated -share in profits is equal

(demanded/required), in the absence
of which, the share of partners is in
proportion of contribution

-management is shared by all -administration belongs to the

partners spouses jointly, but the decision of
the husband prevails in case of
disagreement

-partner can dispose of interest even -spouse cannot dispose of interest

without the consent of others during the marriage, even with
consent.

Partnership distinguished from association

Partnership Association

-has juridical personality - has no juridical personality

-organized for profit -not always organized for profit

-capital is contributed -capital is not contributed, fees are

collected from members

-partnership is primarily liable, and -members are liable individually for

partners are liable only subsidiarily the debts that they authorized or
ratified.

-share in profits may be stipulated -share of profits is equal

Article 1784. A partnership begins from the moment of the execution of the contract, unless it is
otherwise stipulated.
Article 1785. When a partnership for a fixed term or particular undertaking is continued after the
termination of such term or particular undertaking without any express agreement, the rights and
duties of the partners remain the same as they were at such termination, so far as is consistent
with a partnership at will.

Chapter 2: Rights and Obligations

4 Kinds of Relationship in a Partnership
1. Among the partners
2. Between the partners and the partnership
3. Between the partnership and the third persons
4. Between the partners and third persons

Lesson 1: Rights and Obligations of the Partnership

Right to Contribution
- The money or property contributed, or their use or fruits becomes the property of the
partnership.
Article 1786. If a partner promised to contribute specific property, he is oblige to preserve said
property with the diligence of a good father of a family pending delivery to the partnership.
(same sa article 1163 ka oblicon) If he fails to contribute the property that he promised, he
becomes ipso jure liable as a debtor of the partnership, without the need of any demand, and the
other partners can file an action against him for specific performance with damages. Because of
the delay, he is also liable to the partnership for the fruits of the property from the time it should
have been contributed up to the time of actual delivery. Demand is not necessary to put him in
delay, as an exception to the general rule. He is likewise liable for eviction in case the
partnership is deprived of the property contributed.
Article 1787. When what is to be contributed by the partner consists of goods, there should be an
appraisal of the value of said goods in accordance with the agreement of the partners to
determine how much has been contributed by the partners and if there is no agreement, the
appraisal shall be done by experts chosen by the partners and according to the current prices.
Article 1788. Every partner is required to contribute on the date due the amount he has promised
to contribute to the partnership and to reimburse any amount he may have taken from the
common fund and converted to his own use. In case he fails to pay his contribution on time, or if
he takes an amount for his personal use from the common fund, he shall pay interest. He is also
obliged to indemnify the partnership for the damages caused to the partnership for his delay in
the contribution or by reason of his having converted any sum from the common fund for his
personal benefit. His liability shall begin from the time he converted the amount to his own use.
Chapter 3: DISSOLUTION AND WINDING UP