Business Laws and Regulations

Prelim Reviewer

1. Definition of a partnership as defined by the New Civil Code

 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.
Two or more persons may also form a partnership for the exercise of a
profession. (1665a)

2. Essential requisites of a partnership

 Below are the five (5) essential features of a partnership contract:
 There must be a valid contract
 Two or more persons must have a legal capacity to enter into a contract
 There must be a mutual contribution of money, property, or industry to a
common fund
 The partnership should have a lawful object or purpose
 The partnership must be organized for gain or profit

3. Characteristics of a partnership
 Consensual – perfected by mere consent
 Commutative – the undertaking of each partner is considered as the
equivalent of that of the others
 Principal – does not depend on other contracts for its existence
 Bilateral – entered into by two or more persons whose rights and obligations
are reciprocal
 Onerous – each of the parties aspires to procure for himself a benefit
through the giving of something
 Nominate – has a special name or designation in law
 Preparatory – entered into as a means to an end

4. Perfection of a contract of partnership

 The contract of partnership is consensual because it is perfected by mere
consent.
  “yours is mine and what is mine is yours” (Google)

5. Kinds of partners
 Capitalist partner
► one who contributes money or property to the common fund
► Industrial partner
► one who contributes only his industry or personal service
 General partner
► one whose liability to third persons extends to his separate property
► he may be either a capitalist or industrial partner.
► also known as real partner;
 Limited partner
► one whose liability to third persons is limited to his capital
contribution.
► also known as special partner.
 Managing partner
► one who manages the affairs or business of the partnership.
► he may be appointed either in the articles of partnership or after the
constitution of the partnership.
► also known as general or real partner;
 Liquidating partner
► one who takes charge of the winding up of partnership affairs upon
dissolution
 Partner by estoppel
► one who is not really a partner, not being a party to a partnership
agreement, but is liable as a partner for the protection of innocent
third persons.
► He is one who is represented as being in fact a partner, but who is
not so as between the partners themselves.
► also known as partner by implication or nominal partner.
 Continuing partner
► one who continues the business of a partnership after it has been
dissolved by reason of the admission of a new partner, or the
retirement, death, or expulsion of one or more partners.
 Surviving partner
► one who remains after a partnership has been dissolved by the death
of any partner.
 Subpartner
► one who, not being a member of the partnership, contracts with a
partner with reference to the latter’s share in the partnership.
 Ostensible partner
► one who takes active part and known to the public as a partner in
the business, whether or not he has an actual interest in the firm.
► Thus, he may be an actual partner or a nominal partner. If he is not
actually a partner, he is subject to liability by the doctrine of estoppel.
 Secret partner
► one who takes active part in the business but is not known to be a
partner by outside parties nor held out as a partner by the other partners,
although he participates in the profits and losses of the partnership.
► He is an actual partner.
► He is also an active partner in the sense that he participates in the
management of the partnership affairs.
 Silent partner
► one who does not take any active part in the business although he
may be known to be a partner.
► Thus, he need not be a secret partner.
► If he withdraws from the partnership, he must give notice to those
persons who do business with the firm to escape liability in the future
 Dormant partner
► one who does not take active part in the business and is not known
or held out as partner.
► He would be both a silent and a secret partner.
► He would be both a secret and a silent partner.
► He may retire from the partnership without giving notice and cannot
be held liable for obligations of the firm subsequent to his withdrawal.
► His only interest in joining the partnership would be the sharing of
the profits earned.
  Original partner
► one who is a member of the partnership from the time of its
organization;
 Incoming partner
► a person lately, or about to be, taken into an existing partnership as
a member
 Retiring partner
► one withdrawn from the partnership;
► a withdrawing partner.

6. Types of partnership
 As to the extent of its subject matter.
 Universal partnership
 one which refers to all the present property or to all profits.
 Article 1777: A universal partnership may refer to all the present
property or to all the profits.
 Two kinds of universal partnership:
 Universal partnership of all present property
 Article 1778: A partnership of all present property is
that in which the partners contribute all the property
which actually belongs to them to a common fund, with
the intention of dividing the same among themselves,
as well as all the profits they may acquire therewith.
 Universal partnership of profits.
 Article 1780: A universal partnership of profits
comprises all that the partners may acquire by their
industry or work during the existence of the partnership.
Movable or immovable property which each of the
partners may possess at the time of the celebration of
the contract shall continue to pertain exclusively to
each, only the usufruct passing to the partnership.
  Particular partnership
 Article 1783: A particular partnership has for its object determinate
things, their use or fruits, or a specific undertaking, or the exercise
of a profession or vocation.

 As to liability of the partners.

 General partnership
 one consisting of general partners who are liable pro rata and
subsidiarily and sometimes solidarily with their separate property for
partnership debts;
 Limited partnership
 one formed by two or more persons having as members one or more
general partners and one or more limited partners, the latter not
being personally liable for the obligations of the partnership.

 As to its duration.
 Partnership at will
 one in which no time is specified and is not formed for a particular
undertaking or venture and which may be terminated at anytime by
mutual agreement of the partners, or by the will of any one partner
alone
 one for a fixed term or particular undertaking which is continued by
the partners after the termination of such term or particular
undertaking without express agreement.
 Partnership with a fixed term
 one in which the term for which the partnership is to exist is fixed or
agreed upon or one formed for a particular undertaking, and upon
the expiration of the term or completion of the particular enterprise,
the partnership is dissolved, unless continued by the partners.
 As to the legality of its existence.
 De jure partnership
 one which has complied with all the legal requirements for its
establishment
  De facto partnership
 one which has failed to comply with all the legal requirements for its
establishment.
 As to representation to others.
 Ordinary or real partnership
 one which actually exists among the partners and also as to third
persons
 Ostensible partnership or partnership by estoppel
 one which in reality is not a partnership, but is considered a
partnership only in relation to those who, by their conduct or
admission, are precluded to deny or disprove its existence. (Art.
1825.)
 As to publicity.
 Secret partnership
 one wherein the existence of certain persons as partners is not
avowed or made known to the public by any of the partners
 Open or notorious partnership
 one whose existence is avowed or made known to the public by the
members of the firm.
 As to purpose
 Commercial or trading partnership
 one formed for the transaction of business
 Professional or non-trading partnership
 one formed for the exercise of a profession.

7. Property rights of partners in the partnership

 PRINCIPAL RIGHTS OF A PARTNER:
► ART. 1810. The property rights of a partner are:
(1) His rights in specific partnership property;
(2) His interest in the partnership; and
(3) His right to participate in the management. (n)
 RELATED RIGHTS OF A PARTNER:
(a) the right to reimbursement for amounts advanced to the partnership
and to indemnification for risks in consequence of management (Art. 1796.);
 (b) the right of access and inspection of partnership books (Art. 1805.);
(c) the right to true and full information of all things affecting the
partnership (Art. 1806.);
(d) the right to a formal account of partnership affairs under certain
circumstances (Art. 1809.); and
(e) the right to have the partnership dissolved also under certain
conditions. (Arts. 1830-1831.)

8. Obligations of a partner in the partnership

 The obligation to contribute what had been promised.
 The obligation to deliver the fruits thereof.
 The obligation to warrant.
 To preserve said property with the diligence of a good father of a family pending
delivery to the partnership.
 To indemnify the partnership for any damage caused to it by the retention of the
same or by the delay in its contribution.

9. Obligation to render additional capital

 According to ART. 1791. If there is no agreement to the contrary, in case of an
imminent loss of the business of the partnership, any partner who refuses to
contribute an additional share to the capital, except an industrial partner, to save
the venture, shall be obliged to sell his interest to the other partners.
 GENERAL RULE: a capitalist partner is not bound to contribute to the
partnership more than what he agreed to contribute
 EXCEPTION: If there is a stipulation and in case of imminent loss and there is
no agreement to the contrary
 If he refuses to contribute, he shall be obliged to sell his interest to the other
partners.
 Requisites for application of rule:
 (a) There is an imminent loss of the business of the partnership;
 (b) The majority of the capitalist partners are of the opinion that an additional
contribution to the common fund would save the business;
 (c) The capitalist partner refuses deliberately (not because of his financial
inability to do so), to contribute an additional share to the capital; and
 (d) There is no agreement that even in case of an imminent loss of the business
the partners are not obliged to contribute.

10. Managing partner

 Those who manage actively the business or affairs of the partnership
 ART. 1792. If a partner authorized to manage collects a demandable sum, which
was owed to him in his own name, from a person who owed the partnership
another sum also demandable, the sum thus collected shall be applied to the two
credits in proportion to their amounts, even though he may have given a receipt
for his own credit only; but should he have given it for the account of the
partnership credit, the amount shall be fully applied to the latter.
The provisions of this article are understood to be without prejudice to the right
granted to the debtor by Article 1252, but only if the personal credit of the partner
should be more onerous to him. (1684)

11. Obligations of a managing partner

 ART. 1792. If a partner authorized to manage collects a demandable sum, which
was owed to him in his own name, from a person who owed the partnership
another sum also demandable, the sum thus collected shall be applied to the two
credits in proportion to their amounts, even though he may have given a receipt
for his own credit only; but should he have given it for the account of the
partnership credit, the amount shall be fully applied to the latter.
The provisions of this article are understood to be without prejudice to the right
granted to the debtor by Article 1252, but only if the personal credit of the partner
should be more onerous to him. (1684)
 REQUISITES FOR THE APPLICATION OF ART. 1792:
 1. There exist at least two debts, one where the collecting partner is creditor, and
the other, where the partnership is the creditor;
 2. Both debts are demandable;
 3. The partner who collects is authorized to manage and actually manages the
partnership.
 The law safeguards the interests of the partnership by preventing the possibility
of their being subordinated by the managing partner to his own interest to the
prejudice of the other partners.
 Good faith demands that the partner vested with the management of the
partnership attend more to the interest of the partnership than to his own and he
should not intentionally fail to effect the collection of the credit of the partnership
in order to effect the collection of his own.

12. General partner and Limited partner

General Limited
Creation As a rule, it may be Created by the partners
constituted in any form. after compliance with the
requirements of law
Contribution The general partners The limited partners
contribute money, property contribute cash or property
or industry. or both. They cannot
contribute industry or
service.
Membership All are general partners. At least 1 general part and
1 limited partner.
Extent of liability The partners are liable for The limited partners liable
partnership obligations. only to the extent of their
capital contribution.
Management right All are managers unless Limited partner has no
there is a stipulation to the participation in the
contrary. management.
Prohibition to engage in The capitalist partner No prohibition against
other business cannot engage for his own engaging in business.
account in any operation
which is of the kind of
business in which the
partnership is engaged,
unless there is a stipulation
to the contrary.
The industrial partner is
absolutely prohibited to
 engage in other business.
Assignment of interest Interest is not assignable Interest is assignable.
unless consented to by all
of the other partners.
Effect of death, It dissolves the As a rule, it will not
insolvency, retirement partnership. dissolve the partnership.
and insanity of a partner
Firm name It may or may not include The firm name must be
the name of one or more of followed by the word
the partners. "Limited". The surname of
a limited partner shall not
appear in the partnership
name.

13. Three (3) final stages of the life of partnership

 The 3 final stages of the life of partnership are:
 Dissolution - is the change in the relation of the partners caused by any
partner ceasing to be associated in the carrying on of the business (Art.
1828). It is that point of time the partners cease to carry on the business
together.
 Winding up - is the process of settling business affairs after dissolution.
 Termination - is the point in time after all the partnership affairs have
been wound up

14. 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.

15. Article 1768: The partnership has a 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 paragraph.
16. Article 1771: A partnership may be constituted in any form, except where
immovable property or real rights are contributed thereto, in which case a public
instrument shall be necessary.

17. Article 1777: A universal partnership may refer to all the present property or
to all the profits.

18. Article 1784: A partnership begins from the moment of the execution of the
contract, unless it is otherwise stipulated

19. Article 1786: Every partner is a debtor of the partnership for whatever he may
have promised to contribute thereto.
He shall also be bound for warranty in case of eviction with regard to specific and
determinate things which he may have contributed to the partnership, in the same
cases and in the same manner as the vendor is bound with respect to the vendee. He
shall also be liable for the fruits thereof from the time they should have been
delivered, without the need of any demand.

20. Article 1790: Unless there is a stipulation to the contrary, the partners shall
contribute equal shares to the capital of the partnership

21. Article 1797: The losses and profits shall be distributed in conformity with
the agreement. If only the share of each partner in the profits has been agreed upon,
the share of each in the losses shall be in the same proportion.
In the absence of stipulation, the share of each partner in the profits and losses shall
be in proportion to what he may have contributed, but the industrial partner
shall not be liable for the losses. As for the profits, the industrial partner shall
receive such share as may be just and equitable under the circumstances. If besides his
services he has contributed capital, he shall also receive a share in the profits in
proportion to his capital.

22. Article 1799: A stipulation which excludes one or more partners from any share
in the profits or losses is void.
23. Article 1811: A partner is co-owner with his partners of specific partnership
property. The incidents of this co-ownership are such that:
(1) A partner, subject to the provisions of this Title and to any agreement between the
partners, has an equal right with his partners to possess specific partnership property
for partnership purposes; but he has no right to possess such property for any other
purpose without the consent of his partners;
(2) A partner's right in specific partnership property is not assignable except in
connection with the assignment of rights of all the partners in the same property;
(3) A partner's right in specific partnership property is not subject to attachment or
execution, except on a claim against the partnership. When partnership property is
attached for a partnership debt the partners, or any of them, or the representatives of a
deceased partner, cannot claim any right under the homestead or exemption laws;
(4) A partner's right in specific partnership property is not subject to legal support
under Article 291.

24. Article 1824: All partners are liable solidarily with the partnership for everything
chargeable to the partnership under Articles 1822 and 1823.

25. Article 1828: The dissolution of a partnership is the change in the relation of
the partners caused by any partner ceasing to be associated in the carrying on as
distinguished from the winding up of the business.

26. Article 1843: A limited partnership is formed by two or more persons under the
provisions of the following article, having as members one or more general partners
and one or more limited partners. The limited partners as such shall not be bound
by the obligations of the partnership.