Basic Financial Accounting Notes Partnership

Download as pdf or txt
Download as pdf or txt
You are on page 1of 4

Basic Financial Accounting - Partnership

October , 2024
Source: Instructional Material

PARTNERSHIP DEFINED

A partnership is defined in Article 1767 of the Civil Code of the Philippines as “a contract
whereby two or more persons bind themselves to contribute money, property or industry into a
common fund with the intention of dividing profits among themselves.”

CHARACTERISTICS AND ELEMENTS OF A PARTNERSHIP

1. Mutual contribution – by its definition, the partners must contribute money, property and/or
industry to the common fund.

2. Mutual agency. Any partner can bind the other partners to a contract if he is acting within the
express or implied authority. may act as agent of the partnership in conducting its affairs.

3. Unlimited liability. The personal assets of any partner may be used to satisfy the
partnership creditors’ claims upon liquidation, if partnership assets are not enough to settle the
liabilities to outsiders.

4. Limited life. A partnership may be dissolved at any time by admission, death, incapacity, or
withdrawal of any partner or by expiration of the term specified in the partnership agreement.

5. Division of profits and losses. It is the reason why a partnership was formed. The element
that distinguishes the partnership contract from a voluntary religious or social organization. A
stipulation which excludes one or more partners from any share in the
profits or losses is void.

6. Legal entity. A partnership has legal personality separate and distinct from that of each the
partners.

7. Co-ownership of contributed assets. Property contributed to the partnerships are owned


by the partnership by virtue of its separate legal personality. Assets contributed by each partner
are joint assets of all partners.

8. Income tax. Partnerships, other than general professional partnerships (GPP) are subject to
the same tax of a corporation, 30% income tax. GPP are those organized for the exercise of
professions like CPA’s lawyers, engineers, etc. are exempt from income tax.

ADVANTAGES OF A PARTNERSHIP

1. It is easy to organize and less expensive than a corporation, as it is formed by a mere


agreement between two or more persons.

2. The unlimited liability of the partners makes it attractive to creditors.

3. With two or more partners will be a better opportunity to obtain additional funds than does a
single proprietorship.

4. More partners of different skills and expertise makes it possible to manage all the partnership
activities.
DISADVANTAGES OF A PARTNERSHIP
1. It is less stable because it can easily be dissolved (limited life).

2. Business partners are jointly and individually liable for the actions of the other partners
(Mutual agency).

3. The liability of the partnership will extend to the personal property of the partners (unlimited
liability).

4. Since decisions are shared, disagreement among partners may lead to dissolution.

5. A partner has to consult the other partners before a decision can be arrived at.

KINDS OF PARTNERSHIPS

1. As to liability of partners

a. General partnership – one consisting of general partners who are liable to the extent
of their separate properties for partnership debts.

b. Limited partnership – one formed by two or more persons having as members one
or more general partners and one or more limited partners. The limited partners are not
personally liable for the obligations of the partnership.3 The word “LIMITED” or “LTD.” Is
added to the name of the partnership to inform the public that it is a limited partnership.
There should be at least one general partner in a limited partnership.

2. As to duration

a. Partnership at will – one for which no term is specified and is not formed for a
particular undertaking and which may be terminated any time by mutual agreement of
the partners or at the will of any one partner.

b. Partnership with fixed term – one in which the term for the existence of the
partnership is fixed or is agreed upon or one formed for a particular undertaking.

3. As to legality of existence

a. De jure partnership – one that has complied with all the requirements for its
establishments.

b. De facto partnership – one which has failed to comply with one or more of the legal
requirements for its establishment.

4. As to purpose or activity

a. Commercial or trading partnership – one whose main activity is the manufacture


and sale or the purchase and sale of goods.

b. Professional or Non-trading partnership – one formed for the exercise of


profession or for the purpose of rendering services.
5. As to object

a. Universal partnership

1. Universal partnership of all present property – one in which each partners


contribute to the partnership at the time of its constitution. The properties were
contributed to a common fund with the intention of dividing the same among
themselves including it’s profits which they may acquire therewith. All assets
contributed to the partnership and subsequent acquisitions become partnership
assets.

2. Universal partnership of all profit – one which the usufruct or use of assets
only was contributed to the partnership, either at the time of it’s formation and/or
during the life of the partnership by which the partner may acquire thru industry
or work. The original movable or immovable property contributed do not become
the common partnership assets.

b. Particular partnership – one which has for its object a determinate thing, their use or
fruits, or a specific undertaking or the exercise of a profession or vocation.

6. As to representation to others

a. Ordinary partnership – one which actually exists among the partners and to the third
parties.40

b. Partnership by estoppel – one which on reality is not a partnership but is considered


as one only in relation to those who, by their conduct or omissions are precluded to
deny or disprove it’s partnership existence.

7. As to publicity

a. Secret partnership – one wherein the existence of certain person as partners is not
made known to the public by any of the partners.
b.
b. Open partnership – one wherein the existence of certain persons as partners is
made known to the public by the members of the firm.

CLASS OF PARTNERS

1. As to contribution
a. Capitalist partner – one who contributes capital in cash (money) or property.
b. Industrial partner – one who contributes industry, labor, skill, talent or service.
c. Capitalist-industrial partner – one who contributes cash, property, and industry.

2. As to liability

a. General partner – one whose liability to third persons extends to his separate (private)
property.

b. Limited partner – one whose liability to third persons is limited only to the extent of
his capital contribution to the partnership.
3. As to management
a. Managing partner – one who manages actively the business of the partnership.
b. Silent partner - one who does not participate in the management of the partnership
affairs.

4. Other classifications
a. Liquidating partner – one who takes charge of the winding up of partnership affairs
upon dissolution.
b. Nominal partner – one who is not really a partner, not being a party to the
partnership agreement, but is made liable as a partner for the protection of innocent
persons.
c. Ostensible partner –.one who takes active part int the management of the firm and
is known to the public as a partner in the business.
d. Secret partner - one who takes active part in the management of the business but
whose connection with the partnership is concealed or unknown to the public.
e. Dormant partner – one who does not take active part in the management of the
business and is nit known to the public as a partner; he is both a silent a secret
partner.41

PARTNERSHIP CONTRACT
A partnership is created by an oral or a written agreement. Since partnerships are required to
be registered with the Securities and Exchange Commissions, it is necessary that the
agreement be in writing. In this case misunderstandings and disputes among the partners
relative to the nature and terms of the contract may be avoided or minimized. The written
agreement between or among the partners governing the formation, operation and dissolution
of the partnership is referred to as the Articles of Co-Partnership.

The Articles of Co-Partnership contains the following information:


1. The name of the partnership;
2. The names and address of the partners, classes of partners, stating whether the partner is a
general or a limited partner;
3. The effective date of contract;
4. The purpose or purposes and principal office of the business;
5. The capital of the partnership stating the contributions of individual partners, their description
and agreed values;
6. The rights and duties of each partner;
7. The manner of dividing net income or loss among the partners, including salary allowance
and interest on capital;
8. The conditions under which the partners may withdraw money or other assets for personal
use;
9. The manner of keeping the books of accounts;
10. The causes for dissolution; and
11. The provision for arbitration in settling disputes.

You might also like