PARTNERSHIP Law on Business Organizations Reviewer
Art. 1767. By the contract of partnership failure to comply with the requirements of
two or more persons bind themselves to Article 1772, first paragraph.
contribute money, property, or industry to
a common fund with the intention of Partnership, a juridical person
dividing the profits among themselves. As an independent juridical person, a
partnership may enter into contracts,
Definition acquire and possess property of all kinds in
Partnership is a contract whereby two or its name, as well as incur obligations and
more persons bind themselves to bring civil or criminal actions. Thus, a
contribute money, property or industry to a partnership may be declared insolvent even
common fund with the intention of dividing if the partners are not. It may enter into
profits among themselves. contracts and may sue and be sued in its
firm name or by its duly authorized
Elements representative. It is sufficient that service
1. Intention to form a contract of of summons be served on any partner.
partnership Partners cannot be held liable for the
2. Participation in both profits and losses obligations of the partnership unless it is
3. Community of interests shown that the legal fiction of a different
juridical personality is being used for a
Basic Features fraudulent, unfair or illegal purpose.
1. Voluntary agreement
2. Association for profit Effect of failure to comply with statutory
3. Mutual contribution to a common fund requirements
4. Lawful purpose or object Under Art 1772
5. Mutual agency of partners Partnership still acquires personality despite
6. Articles must not be kept secret failure to comply with the requirements of
7. Separate juridical personality execution of public instrument and
registration of name in SEC.
Characteristics
1. Consensual – perfected by mere Under Arts 1773 and 1775
Partnership with immovable property
consent. contributed, if without requisite inventory,
2. Bilateral – formed by two or more signed and attached to public instrument,
shall not acquire any juridical personality
persons creating reciprocal rights and because the contract itself is void. This is
obligations. also true for secret associations or societies.
3. Preparatory - entered into as a means
to an end. To organize a partnership not an absolute
4. Nominate – has a special name or right
designation. It is but a privilege which may be enjoyed
5. Onerous – contributions in the form of only under such terms as the State may
either money, property and/or industry deem necessary to impose.
must be made.
6. Commutative – the undertaking of each Art. 1769. In determining whether a
partner is considered as the equivalent partnership exists, these rules shall apply:
of that of the others.
7. Principal – its existence or validity does 1. Except as provided by Article 1825,
not depend on some other contract. persons who are not partners as to
each other are not partners as to third
Principle of Delectus Personae (choice of persons.
persons) – a person has the right to select
persons with whom he wants to be 2. Co-ownership or co-possession does
associated with in partnership. not of itself establish a partnership,
whether such co-ownership or co-
Art. 1768. The partnership has a juridical possessors do or do not share any
personality separate and distinct from that profits made by the use of the property.
of each of the partners even in case of
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3. The sharing of gross returns does not Law on Business Organizations Reviewer
of itself establish a partnership,
whether or not the persons sharing partnership, they become subject to
them have a joint or common right or liabilities of partners (doctrine of
interest in any property from which the estoppel).Whether or not the parties call
returns are derived. their relationship or believe it to be a
partnership is immaterial. Thus, with the
4. The receipt by a person of a share of exception of partnership by estoppel, a
the profits of a business is prima partnership cannot exist as to third persons
facie evidence that he is a partner in the if no contract of partnership has been
business, but no such inference shall be entered into between the parties
drawn if such profits were received in themselves.
payment:
Co-ownership or co-possession
a. As a debt by installments or There is co-ownership whenever the
otherwise. ownership of an undivided thing or right
belongs to different persons.
b. As wages of an employee or rent to
a landlord. Clear intent to derive profits from
operation of business
c. As an annuity to a widow or Co-ownership does not of itself establish
representative of a deceased the existence of a partnership, although it is
partner. one of its essential elements. This is true
even if profits are derived from the joint
d. As interest on a loan, though the ownership. The profits must be derived
amount of payment vary with the from the operation of business by
profits of the business. the members of the association and
not merely from property ownership. The
e. As the consideration for the sale of law does not imply a partnership between
a goodwill of a business or other co-owners because of the fact that they
property by installments or develop or operate a common property,
otherwise. since they may rightfully do this by virtue of
their respective titles. There must be a clear
In general, to establish the existence of a intent to form a partnership.
partnership, all of its essential features or
characteristics must be shown as being Existence of fiduciary relationship
present. In case of doubt, art.1769 shall
apply. This article seeks to exclude from the Partners have a well-defined fiduciary
category of partnership certain relationship between them. Co-owners do
features enumerated herein which, by not. Should there be dispute; the remedy of
themselves, are not indicative of the partners is an action for dissolution,
existence of a partnership. termination and accounting. For co-owners
it would be one, for instance, for non-
Persons not partners as to each other performance of contract. People can
Persons who are partners as between become co-owners without a contract but
themselves are partners as to third persons. they cannot become partners without one.
Generally, the converse is true: if they are
not partners between themselves, they Persons living together without benefit
cannot be partners as to third persons. of marriage
Partnership is a matter of intention, each Property acquired governed by rules on co-
partner giving his consent to become ownership.
a partner. However, whether a partnership
exists between the parties is a factual Sharing of gross returns not even
matter. Where parties declare they are not presumptive evidence of partnership
partners, this, as a rule, settles the question The mere sharing of gross returns alone
between them. But where a person does not even constitute prima facie
misleads third persons into believing that evidence of partnership, since in a
they are partners in a non-existent partnership, the partners share profits after
satisfying all of the partnership’s liabilities.
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Reason for the rule Law on Business Organizations Reviewer
Partner interested in both failures and
successes; it is the chance of loss or gain asserting its termination. One who alleges
that characterizes a business. Where partnership cannot prove it merely by
the contract requires a given portion of evidence of an agreement using the term
gross returns to be paid over, the portion is “partner”. Non-use of the term, however,
paid over as commission, wages, rent, etc. is entitled to weight. The question of
whether a partnership exists is not always
Where there is evidence of mutual dependent upon the personal arrangement
management or understanding of the parties. Parties
Where there is further evidence of mutual intending to do a thing which in law
management and control, partnership may constitutes partnership are partners.
result.
Legal intention is the crux of partnership.
Receipt of share in the profits strong Parties may call themselves partners but
presumptive evidence of partnership their contract may be adjudged something
An agreement to share both profits quite different. Conversely, parties may
and losses tends strongly to establish the expressly state that theirs in not a
existence of a partnership. It is not partnership yet the law may determine
conclusive, however, just prima facie and otherwise on the basis of legal intent.
may berebutted by other circumstances. However, courts will be influenced to some
extent by what the parties call their
When no such inference will be drawn contract.
Under par. 4 of art. 1769, sharing of profits
is not prima facie evidence of partnership in Tests and incidents of partnership
the cases enumerated under subsections (a) In determining whether a partnership
– (e). In these cases, the profits are not exists, it is important to distinguish
shared as partner but in some other between tests or indicia and incidents of
respects or purpose. The basic test partnership. Only those terms of a contract
of partnership is whether the business is upon which the parties have reached an
carried on in behalf of the person sought to actual understanding, either expressly or
be held liable. impliedly, may afford a test by which to
ascertain the legal nature of the contract.
Sharing of profits as owner Some of the typical incidents of a
It is not merely the sharing of profits, but partnership are:
the sharing of them as co-owner of the 1. The partners share in profits and losses.
business or undertaking that makes one 2. They have equal rights in the mgt and
partner. Test: Does the recipient have an
equal voice as proprietor in the conduct and conduct of the partnership business.
control of the business? Does he own a 3. Every partner is an agent of the
share of the profits as proprietor of the
business producing them? One must have partnership, and entitled to bind the
an interest with another in the profits of a others by his acts. He may also be liable
business as profits. for the entire partnership obligations.
4. All partners are personally liable for
Burden of proof and presumption the debts of the partnership with their
The burden of proving the existence of a separate property except that limited
partnership rests on the party having the partners are not bound beyond the
affirmative of that issue. The existence of amount of their investment.
a partnership must be proved and will not 5. A fiduciary relation exists between
be presumed. The law presumes that those the partners.
acting as partners have entered into a 6. On dissolution, the partnership is not
contract of partnership. Where the law terminated, but continues until the
presumes the existence of partnership, the winding up of partnership is completed.
burden of proof is on the party denying its Such incidents may be modified by
existence. When a partnership is shown to stipulation of the partners.
exist, the presumption is that it continues
and the burden of proof is on the person Similarities between a partnership and a
corporation
1. Both have juridical personality separate
and distinct from that of the individuals
composing it;
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2. Both can only act through its agents; Law on Business Organizations Reviewer
3. Both are organizations composed of an
Right to return of contribution where
aggregate of individuals; partnership is unlawful
4. Both distribute profits to those who Partners must be reimbursed the amount of
their respective contributions. The partner
contribute capital to the business; who limits himself to demanding only the
5. Both can only be organized where there amount contributed by him need not resort
to the partnership contract on which to
is a law authorizing is organization; base his claim or action. Since the purpose
6. Partnerships are taxable for which the contribution was made has
not come into existence, the manager or
as corporations. administrator must return it, and he who
has paid his share is entitled to recover it.
Art. 1770. A partnership must have a lawful
Right to receive profits where partnership
object or purpose, and must be established is unlawful
for the common benefit or interest of the Law does not permit action for obtaining
earnings from an unlawful partnership
partners. When an unlawful partnership is because for that purpose, the partner will
have to base his action upon the
dissolved by a judicial decree, the profits partnership contract, which is null and
shall be confiscated in favor of the without legal existence by reason of its
unlawful object; and it is self-evident that
State, without prejudice to the provisions what does not exist cannot be a cause
of action. Profits earned do not constitute
of the Penal Code governing the or represent the partner’s contribution. He
confiscation of the instruments and effects must base his claim on the contract which is
void. It would be immoral and unjust for the
of a crime. Object or purpose of partnership law to permit a profit from an industry
prohibited by it. T he courts will refuse to
The provision of the 1st paragraph recognize its existence, and will not lend
reiterates 2 essential elements of a their aid to assist either of the parties
contract of partnership: thereto in an action against each other.
1. Legality of the object; and Therefore, there cannot be no accounting
2. Community of benefit or interest of the demanded of a partner for the profits which
may be in his hands, nor can recovery be
partners. The parties possess absolute had.
freedom to choose the transaction or
transactions they must engage in. The Effect of partial illegality of partnership
only limitation is that the object must business
be lawful and for the common benefit Where a part of the business is legal and
of the members. The illegality of the part illegal, a n account of that which is
object will not be presumed; it must legal may be had. Where, w/o the
appear to be of the essence of the knowledge or participation of the partners,
relationship. the firm’s profits in a lawful business has
been increased by wrongful acts, the
Effects of an unlawful partnership innocent partners are not precluded as
1. The contract is void and the partnership against the guilty partners from recovering
their share of the profits.
never existed in the eyes of the law;
2. The profits shall be confiscated in favor Effect of subsequent illegality of
partnership business
of the government; Contract will not be nullified. Where the
3. The instruments or tools and proceeds business for which the partnership is
formed is legal when the partnership is
of the crime shall also be forfeited in entered into, but afterward becomes illegal,
favor of the government; an accounting may be had as to the
4. The contributions of the partners shall business transacted prior to such time.
not be confiscated unless they fall
under #3.
A partnership is dissolved by operation of
law upon the happening of an event which
makes it unlawful. A judicial decree is
not necessary to dissolve an unlawful
partnership. However, advisable that
judicial decree be secured. 3rd persons who
deal w/ partnership w/o knowledge of
illegal purpose are protected.
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Community of interest between the Law on Business Organizations Reviewer
partners for business purposes
The salient features of an ordinary is in writing or at least evidenced by some
partnership are a community of interest in note or memorandum.
profits and losses, a community of interest
in the capital employed, and a community Partnership implied from conduct
of power in administration. This community Binding effect
of interest is the basis of the partnership Existence of partnership may be implied
relation. However, although every from the acts or conduct of the parties, as
partnership is founded on a community of well as from other declarations, and such
interest, e very community of interest does implied contract would be as binding as a
not necessarily constitute a partnership. written and express contract.
Property used in the business may belong
to one or more partners, so that there is no Ascertainment of intention of parties
joint property, other than joint earnings. In determining whether a particular
To state that partners are co-owners of a transaction constitutes a partnership, as
business is to state that they have the between the parties, the intention as
power if ultimate control. But partners may disclosed by the entire transaction, and
agree upon concentration of management, as gathered from the facts and from the
leaving some of their members entirely language employed by the parties as well
inactive or dormant. Only one of these as their conduct, should be ascertained.
features, profit-sharing, seems to be
absolutely essential. But a mere sharing of Conflict between intention and terms
profits of itself does not of necessity of contract
constitute a partnership. The court must If the parties intend a general partnership,
consider all the essential elements in light they are general partners although their
of the facts of the particular case before purpose is to avoid the creation of such a
deciding whether a partnership exists. relation.
Art. 1771. A partnership may be constituted Art. 1772. Every contract of partnership
in any form, except where immovable having a capital of three thousand pesos or
property or real rights are contributed more, in money or property, shall appear in
thereto, in which case a public instrument a public instrument, which must be
shall be necessary .Form of partnership recorded in the Office of the Securities and
contract Exchange Commission. Failure to comply
with the requirements of the preceding
General rule paragraph shall not affect the liability of the
No special form required for validity or partnership and the members thereof to
existence of the contract of partnership. third persons. Registration of partnership
Contract maybe made orally or in writing
regardless of the value of the contributions. Partnership with capital of P3, 000 or more
Requirements:
Where immovable property or real rights 1. The contract must appear in a public
are contributed
Execution of public instrument necessary instrument;
for validity of contract of partnership. To 2. It must be recorded or registered w/
affect 3rd persons, the transfer of real
property to the partnership must be duly the SEC. However, failure to comply w/
registered in the Registry of Property. the above requirements does not
prevent the formation of the
When partnership agreement covered by partnership or affect its liability and
the Statute of Frauds that of the partners to 3rd persons. But
An agreement to enter in a partnership at a any partner is granted the right bylaw
future time, which by its terms is not to be to compel each other to execute the
performed w/in a year from the making contract in a public instrument.
thereof is covered by the Statute of Frauds.
Such agreement is unenforceable unless it Purpose of registration
Registration is necessary as a condition for
the issuance of licenses to engage in
business and trade. In this way, the tax
liabilities of big partnerships cannot be
evaded and the public can determine more
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accurately their membership and capital Law on Business Organizations Reviewer
before dealing with them.
inventory of immovable property
When partnership considered registered contributed because w/o its description and
The objective of the law is to make the designation, the instrument cannot be
recorded instrument open to all and to give subject to inscription in the Registry
notice thereof to interested parties. This of Property, and the contribution cannot
objective is achieved from the date the prejudice 3rd persons.
partnership papers are presented to and
left for record in the Commission. This is the Art. 1774. Any immovable property or an
effective date of registration. If the interest therein may be acquired in the
certificate of recording is issued on a partnership name. Title so acquired can be
subsequent date, its effectively retroacts to conveyed only in the partnership name.
date of presentation. Acquisition or conveyance of property by
partnership
Art. 1773. A contract of partnership is void,
whenever immovable property is Since partnership has juridical personality of
contributed thereto, if an inventory of said its own, it may acquire immovable property
property is not made, signed by the parties, in its own name. Title so acquired can
and attached to the public instrument. be conveyed only in the partnership name.
Partnership with contribution of immovable
property Art. 1775. Associations and societies, whose
articles are kept secret among the
Where immovable property contributed, members, and wherein any one of the
failure to comply w/ the following members may contract in his own name
requisites will render the partnership with third persons, shall have no juridical
contract void: personality, and shall be governed by the
1. The contract must be in a public provisions relating to co-ownership. Secret
partnerships without juridical personality
instrument;
2. An inventory of the property Partnership relation is created only by the
voluntary agreement of the partners. It is
contributed must be made, signed by essential that the partners are fully
the parties, and attached to the public informed not only of the agreement but of
instrument. Art. 1773 is intended all matters affecting the partnership. Secret
primarily to protect 3rd persons. W/ partnerships are not by nature
regard to 3rdpersons, a de facto partnerships. Secret partnerships shall be
partnership or partnership by estoppel governed by the provisions relating to co-
may exist. There is nothing to prevent ownership.
the court from considering the
partnership agreement an ordinary Importance of giving publicity to articles
contract from which the parties’ rights of partnership
and obligations to each other may be It is essential that the arts of partnership be
inferred and enforced. given publicity for the protection not only of
the members themselves but also 3rd
When inventory is not required persons from fraud and deceit. A member
An inventory is required only whenever who transacts business for the secret
immovable property is contributed. If not partnership in his own name becomes
contributed or if personal property, no personally bound to 3rd persons unaware of
inventory required. the existence of such association.
Partnership liability may still
Importance of making inventory of real result, however, in cases of estoppel.
property in a p a r t n e r s h i p
An inventory is very important in Art. 1776. As to its object, a partnership is
a partnership to how much is due from each either universal or particular. As regards the
partner to complete his share in the liability of the partners, a partnership may
common fund and how much is due to each be general or limited. Classifications of
of them in case of liquidation. The partnership
execution of a public instrument of
partnership would be useless if there is no 6
As to extent of its subject matter Law on Business Organizations Reviewer
1. Universal partnership. (Art. 1777)
not avowed or made known to the public by
a. Universal partnership of all present any of the partners.
property. (Art. 1778) Open or notorious partnership: one whose
existence is avowed or made known to the
b. Universal partnership of profits. public by the members of the firm.
(Art. 1780)
As to purpose
2. Particular partnership. (Art. 1783) Commercial or trading partnership: one
formed or the transaction of business.
As to liability of the partners
General partnership: one consisting of Professional or non-trading partnership:
general partners who are liable pro rata and one formed for the exercise of a profession.
subsidiary and sometimes solidarily w/ their
separate property for partnership debts. Kinds of partners
Under the Civil Code
Limited partnership: one formed by two or 1. Capitalist partner: one who contributes
more persons having as members one or
more general partners and one or more money or property to the common
limited partners, the latter not being fund.
personally liable for the obligations of the 2. Industrial partner: one who contributes
partnership. only his industry or personal service.
3. General partner: one whose liability to
As to duration 3rd persons extends to his separate
Partnership at will: one in w/c no time is property.
specified and is not formed for a particular 4. Limited partner: one whose liability to
undertaking or venture and w/c may be 3rd persons is limited to his capital
terminated at any time by mutual contribution.
agreement of the partners, or by the will of 5. Managing partner: one who manages
any one partner alone; or one for a fixed the entity.
term or particular undertaking w/c is 6. Liquidating partner: one who takes
continued after the end of the term or charge of the winding up of partnership
undertaking w/o express agreement. affairs upon dissolution.
Partnership with a fixed term: one w/c the 7. Partner by estoppel: one who is not
term for w/c the partnership is to exist is really a partner but is liable as a partner
fixed or agreed upon or one formed for for the protection of innocent 3rd
a particular undertaking. persons. He is one represented as being
a partner but who is not so between
As to the legality of its existence the partners themselves.
De jure partnership: one w/c has complied 8. Continuing partner: one who continues
w/ all the legal requirements for the business of a partnership after it
its establishment. has been dissolved by reason of the
De facto partnership: one w/c has failed to admission of a new partner, or the
comply w/ all the legal requirements for its retirement, death or expulsion of one
establishment. or more partners.
9. Surviving partner: one who remains
As to representation to others after a partnership has been dissolved
Ordinary or real partnership: one w/c by the death of any partner.
actually exists among the partners and also 10. Subpartner: one who, not being
as to 3rd persons. a member of the partnership, contracts
Ostensible partnership or partnership or w/ a partner w/reference to the latter’s
partnership by estoppel: one w/c in reality share in the partnership.
is not a partnership, but is considered a
partnership only in relation to those who, Other classifications
by their conduct or admission, are 1. Ostensible partner: one who takes
precluded to deny or disprove its existence.
active part and known to the public as a
As to publicity partner.
Secret partnership: one wherein the 2. Secret partner: one who takes active
existence of certain persons as partners is part in the business but is not known to
be a partner by outside parties nor held
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out as a partner by the other partners. Law on Business Organizations Reviewer
He is an actual partner.
3. Silent partner: one who does not take Property w/c belonged to each of them at
any active part in the business although the time of the constitution of the
he may be known to be a partner. partnership;
4. Dormant partner: one who does not Profits w/c they may acquire from the
take active part in the business and is property contributed.
not known or held out as a partner. He
would be both a silent and a secret Contribution of future property
partner. General rule: future properties cannot be
5. Original partner: one who is a member contributed. The very essence of the
of the partnership from the time of its contract of partnership that the properties
organization. contributed be included in the partnership
6. Incoming partner: a person lately, or requires the contribution of things
about to be, taken into an existing determinate. The position of a partner is
partnership as a member. like that of a donor, and donations
7. Retiring partner: one withdrawn from cannot comprehend future property. Thus,
the partnership; a withdrawing partner. property subsequently acquired by
Art. 1777. A universal partnership may 1.inheritance; 2. Legacy; or 3. Donation
refer to all the present property or to cannot be included by stipulation except
all the profits. the fruits thereof. Hence, any stipulation
including property so acquired is void.
Art. 1778. A partnership of all present Profits from other sources (not from
property is that in which the partners properties contributed) will become
contribute all the property which actually common property only is there’s a
belongs to them to a common fund, with stipulation.
the intention of dividing the same among
themselves, as well as all the profits they Art. 1780. A universal partnership of profits
may acquire therewith. comprises all that the partners may acquire
by their industry or work during
Art. 1779. In a universal partnership of all the existence of the partnership. Movable
present property, the property which or immovable property which each of the
belongs to each of the partners at the time partners may possess at the time of the
of the constitution of the partnership celebration of the contract shall continue to
becomes the common property of all the pertain exclusively to each, only the
partners, as well as all the profits which usufruct passing to the partnership.
they may acquire there with. A stipulation
for the common enjoyment of any other Universal partnership of profits explained
profits may also be made; but the property A universal partnership of profits is one w/c
which the partners may acquire comprises all that the partners may acquire
subsequently by inheritance, legacy or by their industry or work during the
donation cannot be included in such existence of the partnership and the
stipulation, except the fruits thereof. usufruct of movable or immovable property
w/c each of the partners may possess at the
Universal partnership of all present time of the celebration of the contract.
property explained
A universal partnership of profits is one w/c Ownership of present and future property
comprises all that the partners may The partners retain their ownership over
acquire by their industry or work during the their present and future property. What
existence of the partnership and the passes to the partnership are the profits or
usufruct of movable or immovable property income and the use or usufruct of the same.
w/c each of the partners may possess at the Consequently, upon dissolution, such
time of the celebration of the contract. In property is returned to the partners who
this kind of partnership, the following own it.
become the common property of all the
partners: Profits acquired through chance
Since the law only speaks of profits w/c
the partners may acquire by their industry
or work, profits acquired purely by chance
are not included.
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Fruits of property subsequently acquired Law on Business Organizations Reviewer
Fruits of property subsequently acquired by
the partners do not belong to Art. 1783. A particular partnership has for
the partnership. Such profits, however, may its object determinate things, their use or
be included by express stipulation. fruits, or a specific undertaking, or the
exercise of a profession or vocation.
Art. 1781. Articles of universal partnership,
entered into without specification of its Particular partnership explained
nature, only constitute a universal A particular partnership is one w/c is
partnership of profits. neither a universal partnership of present
property nor a universal partnership of
Presumption in favor of universal profits. The fundamental difference
partnership of profits between a universal partnership and a
Reason for presumption: universal particular partnership lies in the scope of
partnership of profits imposes less their subject matter or object. In the
obligations on the partners, since they former, the object is vague and
preserve the ownership of their separate indefinite, contemplating a general business
property. w/ some degree of continuity, while in the
latter, it is limited and well-defined, being
Art. 1782. Persons who are prohibited from confined to an undertaking of a
giving each other any donation or single, temporary, or ad hoc nature.
advantage cannot enter into a universal
partnership. Limitations upon the right to Business of partnership need not be
form a partnership continuing in nature
The carrying on of a business of a
Persons who are prohibited by law to give continuing nature is not essential to
donations cannot enter into a universal constitute a partnership. An agreement to
partnership for the reason that each of the undertake a particular piece of work or a
partners virtually makes a donation. To single transaction or a limited number of
allow it would be permitting them to do transactions and immediately divide the
indirectly what the law expressly prohibits. resulting profits would seemt o fall w/in the
A partnership formed in violation of this meaning of the term “partnership” as used
article is null and void. Consequently, no in the law.
legal personality is acquired. A husband and
wife, however, may enter into a particular Rule under American law
partnership or be members thereof. The above is not true under the Uniform
Relevant provisions: Partnership Act w/c does not include joint
ventures w/c exists for a single transaction
Art. 87: Donations between spouses during or a limited number of transactions.
marriage void, except moderate gifts on
occasion of family rejoicing. Also applies Joint venture
to those living together as husband and While a joint venture is not a formal
wife w/o valid marriage. partnership in the legal or technical sense,
Art. 739: The following donations are void: both are governed, subject to certain
Those made between persons who are qualifications, practically by the same rules
guilty of adultery or concubinage at the or principles of partnership. This is logical
time of the donation (no need for since in a joint venture, like in
conviction; preponderance of evidence only a partnership, there is a community of
required); interest in the business and a mutual right
Those made between persons found guilty of control and an agreement to share jointly
of the same criminal offense, in profits and losses.
inconsideration thereof;
c.)Those made to a public officer or his wife, Corporation as a partner
descendants and ascendants, by reason of While under the Philippine Civil Code, a
his office. joint venture is a form of partnership w/ a
legal personality separate and distinct from
the parties composing it, and should thus
be governed by the law of partnership,
the Supreme Court has recognized the
distinction between these two business
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forms, and has held that although a Law on Business Organizations Reviewer
corporation cannot enter into a partnership
contract, it may, however, engage in a joint have contributed it up to actual delivery
venture if the nature of the venture is without necessity of any demand;
authorized by its charter. 4. Shall preserve said properties with the
diligence of a good father of a family
Art. 1784. A partnership begins from the pending their delivery to the
moment of the execution of the contract, partnership;
unless it is otherwise stipulated. (1679) 5. And shall indemnify the partnership for
any damage caused it by the retention
Art. 1785. When a contract for a fixed term of said properties or by the delay in
or particular undertaking is continued after their contribution.
the termination of such term or particular
undertaking without any express Art. 1787. When the capital or part thereof
agreement, the rights and duties of the which a partner is bound to contribute
partners remains the same as they were at consists of goods, their appraisal must be
such termination, so far as is consistent made in the manner prescribed in the
with a partnership at will. contract of partnership, and in the absence
of stipulation, it shall be made by experts
A continuation of the business by the chosen by the partners, and according to
partners or such of them as habitually acted current prices, the subsequent changes
therein during the term, without any thereof being for the account of the
settlement or liquidation of the partnership partnership.
affairs, is prima facie evidence of a
continuation of the partnership. Art. 1788. A partner who has undertaken to
contribute a sum of money and fails to do
Partnership at will is one in which no term so becomes a debtor for the interest and
of existence has been fixed and which may damages from the time he should have
be terminated at the will of any partners. complied with his obligation.
Art. 1786. Every partner is a debtor of the The same rule applies to any amount he
partnership for whatever he may have may have taken from the partnership
promised to contribute thereto. coffers, and his liability shall begin from the
time he converted the amount to is own
He shall also be bound for warranty in case use.
of eviction with regard to specific and
determinate things which he may have Liability of partner for estafa
contributed to the partnership, in the same Failure to return the money taken, there is
cases and in the same manner as the the element of fraudulent appropriation of
vendor is bound with respect to the vendee. the money delivered to a partner with
He shall also be liable for the fruits thereof specific instructions for the use of the
from the time they should have been partnership, then estafa is committed under
delivered, without the need of any demand. the Revised Penal Code.
Obligations of partners to contribute: Art. 1789. An industrial partner cannot
1. Shall deliver at the beginning of the engage in any business for himself, UNLESS
the partnership expressly permits him to do
partnership or, if a different date has so; and if he should do so, the capitalist
been agreed upon, at the stipulated partners may either exclude him from the
time the properties he agreed to firm or avail themselves of the benefits
contribute; which he may have obtained in violation of
2. Shall answer for eviction, in case the this provision, with a right to damages in
partnership is deprived of the either case.
ownership of any specific property he
contributed; Industrial partner is one who contributes
3. Shall answer to the partnership for the his industry or labor in the partnership.
fruits of the properties whose delivery
he delayed from the date he should Industrial partner barred from engaging in
business
10
To prevent any conflict of interest between Law on Business Organizations Reviewer
the industrial and the partnership, and to
insure faithful compliance by said partner compensate them with the profits and
with his prestation. benefits which he may have earned for the
partnership by his industry. However, the
Art. 1790. Unless there is a stipulation to courts may equitably lessen this
the contrary, the partners shall contribute responsibility if through the partner’s
equal shares to the capital of the extraordinary efforts in other activities of
partnership. the partnership, unusual profits have been
realized.
Art. 1791. If there is no agreement to the
contrary, in case of an imminent loss of the Partner liable for damages caused the
business of the partnership, any partner partnership
who refuses to contribute an additional Art. 1794 follows the general rule of
share to the capital, except an industrial contracts that where a person is at fault in
partner, to save the venture, shall be the fulfillment of his obligations he shall be
obliged to sell his interest to the other liable for the payment of damages. The
partners. partner’s fault, however, must be
determined in accordance with the
Art. 1792. If a partner authorized to circumstances of person, time and place.
manage collects a demandable sum, which
was owed to him in his own name, from a Liquidation necessary to ascertain
person who owned the partnership another damages
sum also demandable, the sum thus It is first necessary that a liquidation of the
collected shall be applied to the two credits business thereof be made to the end that
in proportion to their amounts, even the profits and losses may be known and
though he may have given a receipt for his the causes of the latter and the
own credit only; but should he have given it responsibility of the defendant as well as
for the account of the partnership credit, the damages which each partner may have
the amount shall be fully applied to the suffered, may be determined.
latter.
Art. 1795. The risk of specific and
The provisions of this article are understood determinate things, which are not fungible,
to be without prejudice to the right granted contributed to the partnership so that only
to the debtor by Art. 1252, but only if the their use and fruits may be for the common
personal credit of the partner should be benefit, shall be borne by the partner who
more onerous to him. owns them.
Requisites: If the things contributed are fungible, or
1. Two existing debts cannot be kept without deteriorating, or if
2. Both debts must be demandable they were contributed to be sold, the risk
3. The one who collected the debt is a shall be borne by the partnership. In the
absence of stipulation, the risk of things
partner who is authorized to manage brought and appraised in the inventory,
and is actually managing the shall also be borne by the partnership, and
partnership in such case the claim shall be limited to the
value at which they were appraised.
Art. 1793. A partner who has received, in
whole or in part, his share of a partnership Risk of Specific and determinate things
credit, when the other partners have not The risk of specific and determinate things
collected theirs, shall be obliged, if the which are not fungible, like a boat, only the
debtor should thereafter become insolvent, use of which is contributed, shall be borne
to bring to the partnership capital what he by the partner as the ownership thereof is
received even though he may have given not transferred to the partnership. This
receipt for his share only. follows the general rule that the thing
perished with the owner.
Art. 1794. Every partner is responsible to
the partnership for damages suffered by it Things fungible or perishable
through his fault, and he cannot If the things contributed are fungible or
cannot be kept without deteriorating
11
(perishable) like wine, oil, etc., even if they Law on Business Organizations Reviewer
are contributed only for the use of the
partnership, the risk of loss shall be for the also receive a share in the profits in
account of the partnership for the latter proportion to his capital.
cannot make use of them without their
getting consumed or presumed. Rules in profit sharing:
1. The partners share the profits in
Things contributed to be sold
If the things contributed are to be sold, the accordance with the ratio established
partnership bears the risk of loss, for by their contract.
obviously the partnership is the intended 2. If there is no such stipulation in the
owner; otherwise, the firm cannot make the partnership contract, then:
sale. 1. If all are capitalist partners they
Things brought and appraised in inventory have the profits in proportion to
The partnership bears the risk of loss of their capital contributions;
things brought and appraised in the 2. If there are capitalist as well as
inventory as this has the effect of an implied industrial partners, the industrial
sale thus making the partnership the owner partner get a share each that is
of said things. just and equitable while the
capitalist partners divide the
Art. 1796. The partnership shall be remainder in proportion to their
responsible to every partner for the capital contributions; and
amounts he may have disbursed on behalf 3. If there is a capitalist-industrial
of the partnership and for the partner, he gets a share in the
corresponding interest, from the time the profits as an industrial partner and
expenses are made; it shall also answer to an additional share in proportion to
each partner for the obligations he may his capital contribution to be
have contracted in good faith in the interest determined as in (b), above.
of the partnership business, and for the risk
inconsequence of its management. Rules in loss sharing:
1. The stipulation in the partnership
Responsibility of the partnership to a
partner agreement regarding loss sharing must
If a partner has advanced funds for the be followed.
partnership, he is entitled to recover the 2. If there is no such agreement, but the
amounts advanced by him with interest. contract provides for a profit sharing
This must be so for the reason that a ration, the profit sharing ratio shall also
partner is a mere agent of the partnership be the loss sharing ration.
and under the rules of agency, an agent 3. In the absence of loss sharing and profit
who advances funds for his principal may sharing stipulations in the contract,
recover the same interest. then the loss shall be borne by the
partners in proportion to their capital
Art. 1797. The profits and losses shall be contributions; but a purely industrial
distributed in conformity with the partner is exempted from participation
agreement. If only the share of each partner in the loss.
in the profits has been agreed upon, the
share of each in the losses shall be in the Share of industrial partner in profits and
same proportion. losses
In the absence of stipulation, the share of Unless agreed upon, the industrial partner
each partner in the profits and losses shall shall receive such share in the profits as
be in proportion to what he may have may be just and equitable under the
contributed, but the industrial partner shall circumstances. As for the losses, the
not be liable for the losses. As for the industrial partner is not liable. However,
profits, the industrial partner shall receive under Art. 1816, if the partnership has a
such share as may be just and equitable contractual debt and it cannot pay, the
under the circumstances. If besides his industrial partner equally with the capitalist
services he has contributed capital, he shall partners, can be compelled by the creditor
to pay his pro rata share out of his own
property or assets.
Art. 1798. If the partners have agreed to
entrust to a third person the designation of
12
the share of each one in the profits and Law on Business Organizations Reviewer
losses, such designation may be impugned
only when it is manifestly inequitable. In no partner’s capital contribution.
case may a partner who has begun to
execute the decision of the third person, or Appointed as manager after the
who has not impugned the same within a constitution of the partnership
period of three months from the time he Partner appointed in arts of partnership
had knowledge thereof, complain of such may execute all acts of administration
decision. notwithstanding the opposition of the other
partners, unless he should act in bad faith.
The designation of profits and losses cannot His power is revocable only upon just and
be entrusted to one of the partners. lawful cause and upon the vote of the
partners representing the controlling
Reason for the provision interest.
Admittedly, the designation of profits and Reason: revocation represents change in
losses cannot be entrusted to one of the terms of contract.
partners as the fulfillment of a contract In case of mismanagement: Usual remedies
cannot be left to one of the contracting allowed by law including dissolution.
parties. It may, however, be entrusted to a
third person by common interest. Appointment as manager after the
constitution of the partnership
Art. 1799. A stipulation which excludes one Appointment may be revoked at any time
or more partners from any share in the for any cause what so ever.
profits or losses is void.
Reason: revocation not founded on a
Stipulation to exclude a partner from change of will on the part of the partners.
profits and losses is void Appointment not condition of contract. It is
The law does not allow a provision in the merely a simple contract of agency, which
contract of partnership excluding one or may be revoking at any time. It is believe
more partners from sharing in the profits that the vote for revocation must also
and losses. The reason is that a partnership represent the controlling interest.
is organized for the common benefit or
interest of the partners. Scope of the power of the managing
partner
Reason for exclusion of industrial partner General rule: partner appointed as manager
An industrial partner is not liable for losses has all the powers of a general agent as well
because if the partnership fails to realize as all the incidental powers necessary to
any profits, the industrial partner would carry out the object of the partnership in
have contributed his labor in vain. the transaction of its business.
Furthermore, the industrial partner cannot Exception: When powers of manager is
withdraw the work already done by him for specifically restricted. A managing partner
the partnership. may not bind the partnership by contract
foreign to its business.
Art. 1800. The partner who has been
appointed manager in the articles of the Compensation for service rendered
partnership may execute all acts of the Partner Generally not entitle to
administration despite the opposition of his compensation, In the absence of an
partners, unless he should act in Bad faith., agreement to the contrary, each member of
and his powers is irrevocable without the the partnership assumes the duty to give his
just or lawful cause. The vote of the time, attention, and skill to the
partners representing the controlling management of its affairs, as may be
interest shall be necessary for such reasonably necessary to the success of the
revocation of power. A power granted after common enterprise; and for this service a
the partnership has constituted may share of the profits is his only
revoked at any time. Each partner has a compensation. In managing partnership
right to an equal voice in the conduct of the affairs, a partner is practically taking care of
partnership business. This right is not his own interest or managing his own
dependent on the amount or size of the business. In the absence of any prohibition
in the arts. Of partnership for the payment
of salaries to general partners, there is
13
nothing to prevent the partners to enter Law on Business Organizations Reviewer
into a collateral verbal agreement to that
effect. respective duties;
EXCEPTIONS: In proper cases, the law may 3. There is no stipulation that one of them
imply a contract for compensation;
1. A partner engaged by his co-partners to shall not act without the consent of all
the others.
perform services not required of him in
fulfilment of the duties and in capacity ART. 1802 In case it should have been
other than that of a partner. stipulated that none of the managing
2. When there is extraordinary neglect on partner shall act without the consent of the
the part of one partner to perform his others, the concurrence of all shall be
duties, imposing entire burden on necessary for validity of the acts, and the
remaining partner. absence or disability of any one of them
3. One partner may employ the other cannot alleged, unless there is imminent
to do work for him outside of and danger of grave or irreparable injury to the
independent of the co-partnership. partnership.
4. Partners exempted by terms of
partnership from rendering services When unanimity of action stipulated
may demand pay for services rendered. concurrence necessary for validity of acts
5. Where one partner is entrusted with The partners may stipulate that none of the
management and devotes his whole managing partners shall act without the
time and devotion at the instance of the consent of the others. In such a case, the
other partners who are attending to unanimous consent of all the managing
their individual business and giving no partners shall be necessary for the validity
time or attention to the partnership of their acts. This consent is
business. so indispensable that neither absence nor
disability of any one of them may allege as
Art. 1801. If two or more partners have excuse to dispense with requirement.
been intrusted with the management of the Exception: When there is imminent danger
partnership without the specification of of grave or irreparable injury to the
their respective duties or without the partnership then a partner may act alone
stipulation that one of them shall not act without consent of partner who is absent or
without the consent of all others, each one under disability.
separately execute all acts of
administration, but if anyone of them Consent of managing partners not
should oppose the act of each other, the necessary in routine transactions
decision of the majority shall prevail. In the The requirement of written authority refers
case of tie the partners owning the evidently to formal and unusual written
controlling interest shall decide the matter. contracts.
Where respective duties of two or more
managing partners not specifies. Art. 1803. When the manner of
management has not agreed upon, the
Each one may separately perform acts of following rules shall observed:
administration
1. If one or more of the managing partners 1. All partners shall be considered agents
and whatever any one of them may do
shall oppose the acts of the others, then alone shall bind the partnership without
the decision of the majority of the prejudice to the provision of article
managing partners shall prevail. Right to 1801
oppose can be exercise only by those
entrusted with mgt. 2. None of the partners may, without the
2. In case of tie, matter shall be decided by consent of others, make any important
the vote of the partners owning the alteration in the immovable property of
controlling interest. the partnership, even if it may be useful
to the partnership, but if there ids
REQUISITES FOR APPLICATION OF RULE refusal of the consent by the other
1. Two or more partners have been partners is manifestly prejudicial to the
interest of the partnership, the court’s
appointed as managers; intervention may be sought.
2. There is no specification of their
14
Rules when manner of the management Law on Business Organizations Reviewer
that has not agreed upon all partners
considered as managers and agents not become a member of the partnership,
All partners shall have equal rights in the even if the other partners know about the
mgmt. and conduct of partnership affairs. agreement. Not being a member of
All of them shall considered mgrs. and the partnership, he does not acquire the
agents and whatever any one of them may rights of a partner nor is he liable for its
do alone shall bind the partnership. If there debts.
is timely opposition, however, the matter
shall decided by majority vote. In case Reason for the rule
of tie, vote of partners representing Partnership is based on mutual trust and
controlling interest. confidence among the partners. Inclusion of
new partner would be a modification of the
Unanimous consent required for alteration original contract of partnership requiring
of immovable property unanimous consent of all the partners.
The consent need not be express. It may Prohibition applies even if person
presume from the fact of knowledge of the associated is already a partner.
alteration without interposing any
objection. Prohibition only applies Art. 1805. The partnership books shall be
to immovable property because of the kept, subject to any agreement between the
greater importance of this kind of property, partners, at the principal place of the
and the alteration thereof must be business of the partnership, and every
important. This would be an act of strict partner shall at any reasonable hour have
dominion. If refusal to give consent is access to and may inspect and copy any of
manifestly prejudicial to the interest of them.
the partnership, court intervention maybe
sought. Consent may presume from silence Keeping of partnership books
(lack of opposition despite knowledge).If Partner with duty to keep partnership
alteration is necessary for preservation of books
the property, consent of the other partners The duty to keep true and correct books
not required. showing the firm’s accounts, such books
being at all times open to inspection of all
Art. 1804. Every partner may associate members of the firm, primarily rests on the
another person with him in his share, but managing or active partner. It is presume
the associates shall not admitted into the that the partners have knowledge of the
partnership without the consent of all other contents of the partnership books and that
partners, even of the partner having an said books state accurately the state
associate should be a manager of of accounts, but errors can corrected.
subpartnership nature
Rights with the respect to partnership
The partnership formed between a books
member of a partnership and a third Books should kept at the principal place of
Person for a division of the profits coming to business as each partner has the right to
him from the partnership enterprise is free access to them and to inspect or copy
termed subpartnership. any of them at any reasonable time, even
It is a partnership within a partnership and after dissolution. Inspection rights not
is distinct and separate from the main or absolute can restrained from using info
principal partnership. for other than partnership purpose.
Right of the person associated with the Access to partnership books
partnership’s share Rights can exercise at any reasonable hour.
Subpartnership agreements do not This means reasonable hours on business
affect the composition, existence, or days throughout the year and not merely
operations of the firm. The subpartners are during some arbitrary period of a few days
partners interest, chosen by the managing partners.
However, in the absence of the mutual Art. 1806. Partners shall render on demand
assent of all the parties, a subpartner does true and full information of all things
affecting the partnership to any partner or
the legal representative of any deceased
15
partner or of any partner under legal Law on Business Organizations Reviewer
disability. Duty to render information, there
must be no concealment between partners i.e. the winding up of partnership affairs
in all matters affecting the partnership. is completed.
Information must use only for partnership
purpose. Not just on demand but partner Duty to account for secret and similar
also has duty of voluntary disclosure. profits
However, duty to render info does notarise The duty of a partner to account as a
with respect to matters appearing fiduciary operates to prevent from making a
in partnership books since each partner has secret profit out of the operation of the
the right to inspect those. Good faith not partnership and from carrying on the
only requires that a partner should not business for his private advantage or
make a false statement but also that he a business in competition w/ the firm
should abstain from any false concealment. w/o consent of other partners. Violation
may be ground for dissolution.
Art. 1807. Every partner must account the
partnership for any benefit, and hold as Duty to account for earnings accruing even
trustee for it any profits derived from him after termination of partnership
without the consent of the partners from If a partner uses info obtained by him from
any transaction connected with the the partnership for his own account w/o the
formation, conduct, or liquidation of the consent of the other partners, he is liable to
partnership or from any use by him of his account for any benefit he might obtain.
property.
Duty to make full disclosure of information
The relation between the partners belonging to partnership
is essentially fiduciary involving trust and A partner is also subject to the fiduciary
confidence, each partner considered in law, duty of undivided loyalty and complete
as he is, in fact, the confidential agent of the disclosure of info of all things affecting the
others. The duties of a partner are partnership. By Information is meant
analogous to those of a trustee. information, which can be used for the
purposes of the partnership. Info cannot
Duty to act for common benefit use for a partner’s private gain – even if
Cannot use and apply exclusively to own after termination.
individual benefit partnership assets or
results of knowledge and info gained in Duty not to acquire interest or right
character of partner. Managing partners adverse to partnership
particularly owe a fiduciary duty to inactive If partner does, he holds it in trust for the
partners. benefit of the partnership and must account
to the firm for the profits of the transaction,
Duty begins during the formation of unless it appears that the others consented
partnership
Principle of good faith applies not only Art. 1808. The Capitalist partners cannot
during partnership but during the engage for their own account in any
negotiations leading to the formation of the operation, which is of the kind of business
partnership. Also, a person who agreed w/ in which the partnership is engaged, unless
another to form a partnership has the there is a stipulation to the contrary. Any
obligation to account for commissions and capitalist partner violating this prohibition
discounts received in acquiring property for shall bring to the common funds any profit
the future partnership. accruing to him from his transactions, and
shall personally bear all the losses.
Duty continues even after the dissolution
of the partnership Prohibition against partner engaging the
Duty of partner to act w/ utmost good faith business
towards his co-partners continues Prohibition relative – Prohibition against
throughout the entire life of the partnership capitalist partner to engage in business is
even after dissolution for whatever reason relative, unlike the industrial partner who is
or whatever means, until the relationship is absolutely prohibited from engaging in any
terminated, business for himself. Capitalist partner is
only prohibited from engaging for his own
account in any operation which is the same
16
Law on Business Organizations Reviewer
as or similar to the business in which the Art. 1810. The property rights of a partner
partnership is engaged and which is are:
competitive w/ said business 1. His rights in specific partnership
VIOLATION – Obligation to bring to
common fund any profits derived and in property;
case of losses, he shall bear them alone.
Partners, however, by stipulation may 2. His interest in the partnership;
permit it. The law permits him to carry on a
business not connected or competing with 3. His right to participate in the
that of the partnership. Law is silent on management, extent of property rights
whether he can engage in same line of of a partner.
business for the account of another.
Prohibition still applies because of fiduciary Principal Rights
position imposing duties of utmost good 1. Rights in specific partner property;
faith. He may not carry on any other 2. Interest in partnership;
business in rivalry w/ the partnership. 3. Right to participate in management.
Reason for prohibition RELATED RIGHTS
Fiduciary nature of relationship imposes 1. Right to reimbursement for amounts
obligation of utmost good faith. Rule
prevents use of info obtained in course advanced to partnership and to
of transaction of partnership business or indemnification for risks inconsequence
because of connection w/ firm regarding of management (art. 1796).
business secrets and clientele of firm to its 2. Right of access and inspection of
prejudice. partnership books (art. 1805).
3. Right to true and full information of all
Art. 1809. Any partner shall have the right things affecting partnership (art. 1806).
to a formal account as partnership affairs: 4. Right to formal account of partnership
affairs under certain circumstances (art.
1. If he is wrongfully excluded from the 1809).
partnership business or possession of 5. Right to have partnership dissolved also
its property by his co-partner; under certain conditions (arts. 1830-
1831).
2. If the right exists under the terms of any
agreement; Partnership property and partnership
3. Provided by article 1807; capital distinguished
4. Whenever other circumstances render Partnership Partnership
it just and reasonable, Right of the
partner to a formal account. property capital
General rule: During existence of Changes Variable: its Constant: it
partnership, a partner is not entitled to a
formal account of partnership affairs. value value may remains
Reason: rights of partner amply protected in
arts1805 and 1806. In addition, it would vary from day unchanged
cause much inconvenience and unnecessary
waste of time. today w/ as the
Exception: In the special and unusual changes in amount is fix
situations enumerated under art. 1809.
Right of partner to demand an accounting market value by
w/o bringing about dissolution is
a necessary corollary to right to share in agreement
profits. A formal account is a necessary
incident to the dissolution of the of the
partnership.
partners,
and is not
affected by
fluctuations
in the value
of the
partnership
property,
although it
may be
increased
and
decreased by
17
Assets Includes not unanimous Law on Business Organizations Reviewer
Included only the consent of
original the partners. partners;
capital The
contributions, aggregate 2. A partner’s right in specific partnership
but also all of the property is not assignable except in
property individual connection with the assignment of rights of
subsequently contributions all the partners in the same property;
acquired made by the
because of partners in 3. A partner’s right in specific partnership
the establishing property is not subject to attachment or
partnership or continuing execution, except on a claim against the
or w/ the partnership;
partnership partnership.
funds, 4. A partner’s right in specific partnership
including property is not subject to legal support
partnership under art. 291 nature of a partner’s right in
name and specific partnership property
goodwill.
Art. 1811 contemplates tangible property
Ownership of certain property but not intangible things. A partner is a co-
Property use by the partnership – Where owner w/ his partners of specific
there is no express agreement that property partnership property, but the rules on co-
used by a partnership constitutes ownership do not necessarily apply. The
partnership property, such use does not legal incidents of this tenancy in partnership
make it partnership property, and whether are distinctively characteristic of the
it is so depends on the intention of the partnership relation. They are as follows:
parties, w/c may be shown by proving an
express agreement or acts of particular Equal rights of possession - Ordinarily, a
conduct. The intent of the parties is the partner has an equal right to possess
controlling factor. specific partnership property for
Property acquired by a partner with partnership purposes. None of the partner
partnership funds – Unless a contrary scan possesses and uses the
intention appears, property acquired by a specific partnership property other than for
partner in his own name w/ partnership partnership purposes w/o the consent
funds is partnership property. However, of the other partners. Should any of them
if the property was acquired after use the property for his own benefit, he
dissolution but before the winding up of the must account, like a stranger, to the others
partnership affairs, it would be his separate for the profits derived there from or the
property but he would be liable to account value of his wrongful possession or
to the partnership for the funds used in its occupation. A partner wrongfully excluded
acquisition. from possession of partnership property
by a co-partner has a right to formal
Art. 1811. A partner is co-owner with his account and may even apply for a
partners of specific partnership property. judicial decree of dissolution. On the death
The incidents of this co-ownership are such of a partner, his right in specific partnership
that; property vests in the surviving partners. By
agreement, the right to possess specific
1. A partner, subject to the provision of this partnership property may surrender. In the
title and any agreement between the absence of special agreement, however,
partner, has an equal right with his partners neither partner separately owns, or has the
to possess specific partnership property for exclusive right of possession of any
partnership purposes; but he has no right to partnership property or any proportional
possess such property for any other part thereof. Each has dominion over
purpose without the consent of his the entire partnership property. The
possession of partnership property by one
partner is the possession of all until his
possession becomes adverse. A partner
cannot initiate title by adverse possession
until and unless he makes an adverse claim.
18
Right not assignable - A partner cannot Law on Business Organizations Reviewer
separately assign his right to specific
partnership property but all of them can partnership and not to the partners.
assign their rights in the same property. However, their interest in the partnership
is. The method of reaching a judgment
Reasons for non-assignability: debtor’s interest in partnership property is
1. It prevents interference by outsiders in specifically set forth in art.1814.
partnership affairs; Art. 1812. A partner’s interest in the
2. It protects the right of other partners partnership is his share of the profits and
surplus.
and partnership creditors to have
partnership assets applied to firm Share of profits and surplus – The partner’s
debts; interest in the partnership consists of his
3. It is often impossible to determine the share in the undistributed profits during the
extent of a partner’s beneficial interest life of the partnership as a going concern
in a particular partnership asset. Reason and his share in the undistributed surplus
for impossibility: Each partner, having a after its dissolution.
beneficial interest in the partnership
property considered as a whole, has a Profits: the excess of returns over
beneficial interest in each part. Where, expenditure in a transaction or series of
however, none of the above reasons transactions; or the net income of the
apply, an authorized assignment by a partnership for a given period.
partner of his right in specific
partnership property is void, but it may Surplus: the assets of the partnership after
be regarded as a valid assignment of partnership debts and liabilities are paid
the partner’s interest in the partnership. and settled and the rights of the partners
The law allows a retiring partner to among themselves are adjusted. It is the
assign his rights in partnership property excess of assets over liabilities. If the
to the partner(s) continuing the liabilities are more than the assets, the
business. difference represents the extent of the loss.
Right limited to share of what remains Art.1813. A conveyance by a partner by his
after partnership debts has been paid whole interest in the partnership does not
Strictly speaking, no particular partnership of itself dissolve the partnership, or, against
property or any specific or an aliquot part the other partners in the absence of
thereof can be considered the separate or agreement, entitle the assignee, during the
individual property of any partner. The continuance of the partnership, to interfere
whole of partnership property belongs to in the management or administration of the
the partnership considered as a juridical partnership business or affairs, or to require
person, and a partner has no interest in it any information or account of the
but his share of what remains after all partnership transactions, or to inspect the
partnership debts are paid. Consequently, partnership books; however it merely
specific partnership property is not subject entitles the assignee to receive the
to attachment, execution, garnishment, or accordance with his contract, the profits to
injunction, w/o the consent of all the which the assigning partner would
partners except on a claim against the otherwise be entitled.
partnership. For the same reason that the
property belongs to the partnership, the In case of fraud in the management of the
partners cannot claim any right under the partnership, the assignee may avail himself
homestead or exemption laws when it is of the usual remedies. In case of dissolution
attached for partnership debts. However, a of the partnership, the assignee is entitle to
judgment creditor may levy upon a receive his assignor’s interest and may
partner’s interest in the partnership itself require an account from the date only of
because it is actually his property, by means the last account agreed to by all partners.
of a “charging order.” The right of Effect of assignment of partner’s whole
the partners to specific partnership interest in partnership.
property is not subject to legal support
since the property belongs to the A partner’s right in specific partnership
property is not assignable but he may assign
19
his interest in the partnership to any of his Law on Business Organizations Reviewer
co-partners or to a third Person irrespective
of the consent of the other partners, in the preferred rights of the partnership creditors
absence of agreement to the contrary. on due application to a competent court by
any judgement creditor of the partner, the
Rights withheld from assignee court which entered the interest of the
1. To interfere in the management. debtor partner with payment of the
2. To require any information or account. unsatisfied amount of such judgement debt
3. To inspect any of the partnership books. with the interest thereon; and may then or
later appoint a receiver of his share of the
No one can be compelled to be partners w/ profits, and of any other money due or to
someone else. The assignment does not fall due to him in respect of the partnership,
divest the assignor of his status and rights and make all other orders, directions and
as a partner nor operate as dissolution. accounts and inquiries which the debtor
The law, however, provides the non- partner might have made, or which
assigning collaborates w/ a ground circumstances of the case may require. The
for dissolving the partnership if they interest charged may redeem at any time
so desire. before foreclosure, or in any case of a sale
being directed by the court, may be
Remedy of other partners purchase without thereby causing
Dissolution of partnership not intended – dissolution:
Many partnership agreements are made
merely as security for loans, the assigning 1. With separate property, by any one or
partner never intending to destroy the more of the partners;
partnership relation. If the assigning partner
neglects his duties after assignment, 2. With partnership property, by any one
the other partners may dissolve the or more of the partners with the
partnership under art. 1830. consent of all the partners a whose
Dissolution of partnership intended – A interest are not so charged or sold,
partner’s conveyance of his interest in the nothing in this title shall be held to
partnership operates as dissolution of the deprive a partner of his right, if any,
partnership only when it is clear that the under the exemption laws, as regards
parties contemplated and intended the his interest in the partnership.
entire withdrawal from the partnership of
such partner and the termination of the Application for a charging order after
partnership as between the partners. securing judgement on his credit
While a separate creditor of a partner
Rights of assignee of partner’s interest cannot attach or levy upon specific
1. To receive in accordance w/ his contract partnership property for the satisfaction of
his credit because partnership assets are
the profits accruing to the assigning reserved for partnership creditors, he can
partner; secure a judgment on his credit and then
2. To avail himself of the usual remedies apply to the proper court for a “charging
provided by law in the event of fraud in order”, subjecting the interest of the debtor
the management; partner in the partnership w/ the payment
3. To receive the assignor’s interest in case of the unsatisfied amount of such judgment
of dissolution; w/ interest thereon w/ the least
4. To require an account of partnership interference w/ the partnership business
affairs, but only in case the partnership and the rights of the other partners.
is dissolved, and such account shall By virtue of the charging order, any amount
cover the period from the date only of or portion thereof w/c the partnership
the last account agreed to by all would otherwise pay to the debtor-partner
partners. The purchaser of a partner’s should instead be given to the judgment
interest may apply to the court for creditor. This remedy, however, is w/o
dissolution after the termination of the prejudice to the preferred rights of
specified term or undertaking or at any partnership creditors whose claims should
time if the partnership is one at will. be satisfied first.
Art. 1814. Without prejudice to the Availability of other remedies
Art. 1814 have made this an exclusive
20
remedy so that a writ of execution will not Law on Business Organizations Reviewer
be proper. However, if the judgment debt
remains unsatisfied, the court may resort to synonymous with “company,” “house,” and
other courses of action notwithstanding the “concern.”
issuance of the charging order.
Importance of having a firm name
Redemption or purchase of interest A partnership must have a firm name under
charged which it will operate. A firm name is
Redemptioner – The interest of the debtor- necessary to distinguish the partnership,
partner so charged may be redeemed or which has a distinct and separate juridical
purchased w/ the separate property of any personality from the individuals composing
one or more of the partners, or w/ the partnership and from other
partnership property but w/ the consent of partnerships and entities.
all the partners whose interests are not so
charged or sold. Right of the partners to choose firm name
The partners enjoy the utmost freedom in
Redemption Price – The value of the selection of the partnership name.
the partner’s interest in the partnership has As a general rule, they may adopt any firm
no bearing on the redemption price w/c is name desired.
likely to be lower since it will be dependent
on the amount of the unsatisfied judgment Use of misleading name – The partners
debt. cannot use a name that is identical or
deceptively confusingly similar to that
Right of redeeming non-debtor partner – of any existing partnership or corporation or
There deeming non-debtor partner does to any other name already protected by law
not acquire absolute ownership over the or is patently deceptive, confusing or
debtor-partner’s interest but holds it in contrary to existing laws, as to mislead the
trust for him consistent w/ principles of public by passing itself off as another
fiduciary relationship. partnership or corporation, or its goods or
services as those of such other company.
Rights of partner under exemption laws
A partner cannot claim any right under the Liability inclusion of name in the firm name
homestead laws or exemption laws when – Persons who, not being partners, include
specific partnership property is attached for their names in the firm name do not acquire
partnership debt. W/ respect, however, to the rights of a partner but shall be subject
the partner’s interest in the partnership as to the liability of a partner insofar as 3rd
distinguished from his interest in specific Persons without notice are concerned. Such
partnership property, the partner may avail persons become partners by estoppel. Art.
himself of the exemption laws after 1815 does not cover the case of a limited
partnership debts have been paid. A partner who allows his name to be included
partner’s interest or share in the in the firm name, orof a person continuing
partnership property is really his property. the business of a partnership after
dissolution, who uses the name of the
Art. 1815. Every partnership shall operate dissolved partnership or the name of
under a firm name, which may or may not a deceased partner as part thereof.
include the name of one or more of the
partners, those who, not being members of Art. 1816. All partners, including industrial
the partnership, include their names in the ones, shall be liable pro rata with all their
firm name, shall be subject to liability of a property and after all the partnership assets
partner have been exhausted, for the contracts
which may be entered into in the name and
Requirement of the firm name for the account of the partnership, under its
Meaning of word “firm” – The name, title, signature and by a person authorized to act
or style under which a company transacts for the partnership. However, any partner
business; a partnership of two or more may enter into a separate obligation to
persons; a commercial house. In its perform a partnership contract.
common acceptation, the term implies a
partnership. The term is also used as Article 1816 distinguished from article
1787
21
Article 1816 applies in cases where third Law on Business Organizations Reviewer
party creditors are concerned as it falls
under the heading of section 3. “Obligations Art. 1818. Every partner is an agent of the
of the Partners with Regard to Third partnership for the purpose of its business,
Persons.” Article 1797 applies only where and the act of every partner, including the
the issue is among the partners as it falls execution in the partnership name of any
under the heading of Section 1, Chapter 2, instrument, for apparently carrying on in
which states: “Obligations of the Partners the usual way the business of the
Among Themselves.” The pro rata liability partnership of which he is a member binds
of partners to third persons under Article the partnership, unless the partner so
1816 being a clear mandate of the law, any acting has in fact no authority to act for the
stipulation changing or modifying such partnership in the particular matter, and
liability is void except as among the the person with whom he is dealing has
partners. knowledge of the fact that he has no
such liability.
Refers to partnership obligations
Article 1816 which refers to the payment of An act of a partner which is not apparently
partnership obligations arising from for the carrying on of business of the
contracts clearly imposes subsidiary and partnership in the usual way does not bind
joint (pro rata) liability for contractual debts the partnership unless authorized by the
owing to third persons upon all the other partners.
partners, including industrial partners who
ordinarily are not liable for losses. The Except when authorized by the other
liability is subsidiary because the partners partners or unless they have abandoned the
cannot be made answerable with their business, one or more but less than all the
separate property unless the partnership partners have no authority to:
property has first been exhausted.
1. Assign the partnership property in trust
Pro rata liability – Literally, pro rata liability for creditors or on the assignee’s
means proportionate distribution of promise to pay the debts of the
liability. In the law of obligations, the partnership.
concurrence of two or more debtors in one
and the same obligation makes it prima 2. Dispose of the goodwill of the business.
facie a joint (pro rata) obligation, and the
debts is presumed divided into as many 3. Do any other act which would make it
equal shares as there are debtors and each impossible to carry on the ordinary
one of them is bound to pay only his share. business of a partnership.
Art. 1817. Any stipulation against the 4. Confess a judgment.
liability laid down in the preceding article
shall be void, except as among the partners. 5. Enter into a compromise concerning a
partnership claim or liability.
Industrial partner cannot exempt himself
from liability to third persons 6. Submit a partnership claim or liability to
Each one of the industrial partners is liable arbitration.
to third persons for the debts of the firm
and if he has paid such debts out of his 7. Renounce a claim of the partnership.
private property during the life of the
partnership, when its affairs are settled he No act of a partner in contravention of a
is entitled to credit for the amount so paid, restriction on authority shall bind the
and if its results that there is not enough partnership to persons having knowledge of
property in the partnership to pay him, then the restriction.
the capitalist partners must pay him. Our
conclusion is that neither on principle nor Art. 1819. Where title to real property is in
on authority can the industrial partner be the partnership name, any partner may
relieved from liability to third persons for convey title to such property by a
the debts of the partnership. conveyance executed in the partnership
name; but the partnership may recover
such property unless the partner's act binds
the partnership under the provisions of the
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first paragraph of article 1818, or unless Law on Business Organizations Reviewer
such property has been conveyed by the
grantee or a person claiming through such partnership, except in the case of fraud on
grantee to a holder for value without the partnership, committed by or with the
knowledge that the partner, in making the consent of that partner.
conveyance, has exceeded his authority.
Notice to partner is notice to partnership
Where title to real property is in the name Clearly a third person desiring to give notice
of the partnership, a conveyance executed to a partnership of some matter pertaining
by a partner, in his own name, passes the to the partnership business need not
equitable interest of the partnership, communicate with all of the partners. If
provided the act is one within the authority notice is delivered to a partner, that is an
of the partner under the provisions of the effective communication to the partnership.
first paragraph of Article 1818.
Knowledge before becoming partner
Where title to real property is in the name Where the knowledge or notice had been
of one or more but not all the partners, and received by the partner before he became a
the record does not disclose the right of the partner, and his partners are ignorant of
partnership, the partners in whose name this, and he is not the partner acting in the
the title stands may convey title to such particular matter, there is no doubt that
property, but the partnership may recover there has been neither knowledge of nor
such property if the partners’ act does not notice to the partnership.
bind the partnership under the provisions
of the first paragraph of Article 1818, unless Art. 1822. Where, by any wrongful act
the purchaser or his assignee, is a holder for or omission of any partner acting in the
value, without knowledge. ordinary course of the business of the
partnership or with the authority of co-
Where the title to real property is in the partners, loss or injury is caused to any
name of one or more or all the partners, or person, not being a partner in the
in a third person in trust for the partnership, or any penalty is incurred, the
partnership, a conveyance executed by a partnership is liable therefor to the same
partner in the partnership name, or in his extent as the partner so acting or omitting
own name, passes the equitable interest of to act.
the partnership, provided the act is one
within the authority of the partner under Partner liable for wrongful act of a partner
the provisions of the first paragraph of The partners are liable for the negligent
Article 1818. operation of a vehicle by a partner, acting in
the course of business, which results in a
Where the title to real property is in the traffic accident.
name of all the partners a conveyance
executed by all the partners passes all their If he is driving a partnership-owned vehicle
rights in such property. for purposes of his own, the acting partner
alone is liable it is not a partnership tort.
Art. 1820. An admission or representation
made by any partner concerning Partnership may proceed against negligent
partnership affairs within the scope of his partner
authority in accordance with this Title is Where a partnership is liable to a third
evidence against the partnership. person, there is a right of indemnity against
the partner whose negligence caused the
Art. 1821. Notice to any partner of any injuries.
matter relating to partnership affairs, and
the knowledge of the partner acting in the Art. 1823. The partnership is bound to
particular matter, acquired while a partner make good the loss:
or then present to his mind, and the
knowledge of any other partner who 1. Where one partner acting within the
reasonably could and should have scope of his apparent authority receives
communicated it to the acting partner, money or property of a third person
operate as notice to or knowledge of the and misapplies it.
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2. Where the partnership in the course of Law on Business Organizations Reviewer
its business receives money or property
of a third person and the money or and if he has made such representation or
property so received is misapplied by consented to its being made in a public
any partner while it is in the custody of manner he is liable to such person, whether
the partnership. the representation has or has not been
made or communicated to such person so
Partnership bound by partner’s breach of giving credit by or with the knowledge of
trust the apparent partner making the
The partnership is liable for the conversion representation or consenting to its being
(misappropriation) of money or property made:
entrusted to the partnership by a third
person. The effect under Article 1824 is the 1. When a partnership liability results, he
same whether by the partnership and is liable as though he were an actual
subsequently misappropriated by a partner. member of the partnership.
Art. 1824. All partners are liable solidarily 2. When no partnership liability results, he
with the partnership for everything is liable pro rata with the other persons,
chargeable to the partnership under if any, so consenting to the contract or
Articles 1822 and 1823. representation as to incur liability,
otherwise separately.
Law imposes solidary liability
The law imposes solidary liability upon the When a person has been thus represented
partners and the partnership in cases of to be a partner in an existing partnership, or
torts and acts of conversion by a partner as with one or more persons not actual
provided in Art. 1824. It may be stated that partners, he is an agent of the persons
the liability of a partner for a debt of the consenting to such representation to bind
partnership depends upon whether the them to the same extent and in the same
debts is contractual or it arises from tort or manner as though he were a partner in fact,
conversion. If it arises from contract, the with respect to persons who rely upon the
liability is subsidiary and pro rata; if it arises representation. When all the members of
from tort or conversion, the liability is the existing partnership consent to the
solidary. representation, a partnership act or
obligation results; but in all other cases it is
Business partners solidarily liable the joint act or obligation of the person
Arts. 1711 and 1712 of the New Civil Code acting and the persons consenting to the
and Sec. 2 of the Workmen’s Compensation representation.
Act reasonably indicate that in
compensation cases, the liability of business Estoppel – A preclusion, in law, which
partners should be merely joint and not prevents a man from alleging or denying a
solidary, and one of them happens to be fact, in consequence of his own previous
insolvent, the amount awarded to the act, allegation, or denial of a contrary tenor.
dependents of the deceased employee
would only be partially satisfied, which is Person bound by his representation
evidently contrary to the intent and A person who hold himself out as a partner
purpose of the law to give full protection to in a business, or consents to his being so
the employee. held out, is liable on contracts made with
third persons who deal with the persons
Art. 1825. When a person, by words spoken carrying on the business on the faith of the
or written or by conduct, represents representation. He is stopped to deny the
himself, or consents to another apparent agency.
representing him to anyone, as a partner in
an existing partnership or with one or more Art. 1826. A person admitted as a partner
persons not actual partners, he is liable to into an existing partnership is liable for all
any such persons to whom such the obligations of the partnership arising
representation has been made, who has, on before his admission as though he had been
the faith of such representation, given a partner when such obligations were
credit to the actual or apparent partnership, incurred, except that this liability shall be
satisfied only out of partnership property,
unless there is a stipulation to the contrary.
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Incoming partner liable for existing Law on Business Organizations Reviewer
obligations
A newly admitted partner is liable for b. By the express will of any partner,
obligations of the partnership at the time of who must act in good faith, when
his admission. The obligation of the no definite term or particular is
incoming partner shall be satisfied only out specified.
of partnership property. This is not a harsh
rule because the incoming partner c. By the express will of all the
“partakes of the benefit of the partnership partners who have not assigned
property, and an established business. He their interests or suffered them to
has every means of obtaining full be charged for their separate debts,
knowledge of protecting himself, because either before or after the
he may insist on the liquidation or termination of any specified term or
settlement of existing partnership debts. On particular undertaking.
the other hand, the creditors have no
means of protecting themselves. d. By the expulsion of any partner
from the business bona fide in
Art. 1827. The creditors of the partnership accordance with such a power
shall be preferred to those of each partner conferred by the agreement
as regards the partnership property. between the partners
Without prejudice to this right, the private
creditors of each partner may ask the 2. In contravention of the agreement
attachment and public sale of the share of between the partners, where the
the latter in the partnership assets. circumstances do not permit a
dissolution under any other provision of
Art. 1828. The dissolution of a partnership this article, by the express will of any
is the change in the relation of the partners partner at any time.
caused by any partner ceasing to be
associated in the carrying on as 3. By any event which makes it unlawful
distinguished from the winding up of the for the business of the partnership to
business. be carried on or for the members to
carry it on in partnership.
Art. 1829. On dissolution the partnership is
not terminated, but continues until the 4. When a specific thing which a partner
winding up of partnership affairs is had promised to contribute to the
completed. partnership, perishes before the
delivery; in any case by the loss of the
“Dissolution,” “Winding up,” and thing, when the partner who
“Termination” explained contributed it having reserved the
Dissolution, winding up, and termination ownership thereof, has only transferred
should not be confused because they are to the partnership the use or enjoyment
distinct terms in law. Dissolution of the same; but the partnership shall
“designates the point in time when the not be dissolved by the loss of the thing
partners cease to carry on the business when it occurs after the partnership has
together: termination is the point in time acquired the ownership thereof.
when all partnership affairs are wound up;
winding up is the process of settling 5. By the death of any partner.
partnership affairs after dissolution.”
6. By the insolvency of any partner or of
Art. 1830. Dissolution is caused: the partnership.
1. Without violation of the agreement 7. By the civil interdiction of any partner.
between the partners:
8. By decree of court under the following
a. By the termination of the definite article.
term or particular undertaking
specified in the agreement. Causes of dissolution in general
Generally, a partnership may be dissolved
by causes: (1) without violation of the
25
agreement between the partners; or (2) in Law on Business Organizations Reviewer
contravention of the agreement. Other
specific causes are; (3) an event which agreement, or otherwise so conducts
makes the business of the partnership himself in matters relating to the
unlawful; (4) loss of a specific thing which a partnership business that it is not
partner had promised to contribute to the reasonably practicable to carry on the
partnership; (5) the death of a partner; (6) business in partnership with him.
the insolvency of any partner or of the
partnership itself; (7) civil interdiction of 5. The business of the partnership can
any partner; and lastly (8) by judicial only be carried on at a loss.
decree.
6. Other circumstances render a
Partnership ceased upon expiration of dissolution equitable.
term; no more juridical personality
A partnership having ceased to exist since On the application of the purchaser of a
1959, the partnership has no more juridical partner's interest under Article 1813 or
personality nor capacity to sue and be sued. 1814:
(Reynolds Philippine Corporation vs. Court
of appeals, G.R. No. 36187, Jan. 17, 1989) 1. After the termination of the specified
term or particular undertaking.
Effect of Withdrawal before expiration of
the term 2. At any time if the partnership was a
Under Article 1830, even if there is a partnership at will when the interest
specified term, one partners cause its was assigned or when the charging
dissolution by expressly withdrawing eve n order was issued.
before the expiration of the period, with or
without justifiable cause. Of course, if the Who may petition for dissolution
cause is not justified or no cause was given, Dissolution of a partnership may be decreed
the withdrawing partner is liable for by the court on application either (1) by a
damages but in no case can he be partner or, in case he has assigned his
compelled to remain in the firm. With his interest, (2) by his assignee.
withdrawal, the number of members is
decreased, hence, the dissolution. And in Art. 1832. Except so far as may be
whatever way we view the situation, the necessary to wind up partnership affairs or
conclusion is inevitable that the partners to complete transactions begun but not
were to be guided in the liquidation of the then finished, dissolution terminates all
partnership by the provisions of its duly authority of any partner to act for the
registered articles of partnership. (Roxas vs. partnership:
Maglana, G.R. L-30616, Dec. 10, 1990)
1. With respect to the partners
Art. 1831. On application by or for a partner
the court shall decree a dissolution a. When the dissolution is not by the
whenever: act, insolvency or death of a
partner.
1. A partner has been declared insane in
any judicial proceeding or is shown to b. When the dissolution is by such act,
be of unsound mind. insolvency or death of a partner, in
cases where article 1833 so
2. A partner becomes in any other way requires.
incapable of performing his part of the
partnership contract. 2. With respect to persons not partners,
as declared in article 1834.
3. A partner has been guilty of such
conduct as tends to affect prejudicially General Rule
the carrying on of the business. If the cause of dissolution is not by act,
death, or insolvency of a partner, the
4. A partner willfully or persistently authority ceases immediately.
commits a breach of the partnership Exception
For the purposes of winding-up partnership
affairs.
26
Art. 1833. Where the dissolution is caused Law on Business Organizations Reviewer
by the act, death or insolvency of a partner,
each partner is liable to his co-partners for place if more than one) at which
his share of any liability created by any the partnership business was
partner acting for the partnership as if the regularly carried on.
partnership had not been dissolved unless:
The liability of a partner under the first
1. The dissolution being by act of any paragraph, No. 2, shall be satisfied out of
partner, the partner acting for the partnership assets alone when such partner
partnership had knowledge of the had been prior to dissolution:
dissolution.
1. Unknown as a partner to the person
2. The dissolution being by the death or with whom the contract is made.
insolvency of a partner, the partner
acting for the partnership had 2. So far unknown and inactive in
knowledge or notice of the death or partnership affairs that the business
insolvency. reputation of the partnership could not
be said to have been in any degree due
General Rule to his connection with it.
If the cause of dissolution is the death, act,
or insolvency of a partner, authority of a The partnership is in no case bound by any
partner to bind ceases upon the knowledge act of a partner after dissolution:
of the dissolution.
1. Where the partnership is dissolved
If dissolution is caused by act of one of because it is unlawful to carry on the
parties, co-partners are also liable to business, unless the act is appropriate
contribute towards a liability as if no for winding up partnership affairs.
dissolution has happened, provided that
there is no notice or the partner does not 2. Where the partner has become
have knowledge of the dissolution. insolvent.
Art. 1834. After dissolution, a partner can 3. Where the partner has no authority to
bind the partnership, except as provided in wind up partnership affairs; except by a
the third paragraph of this article: transaction with one who —
1. By any act appropriate for winding up a. Had extended credit to the
partnership affairs or completing partnership prior to dissolution and
transactions unfinished at dissolution. had no knowledge or notice of his
want of authority.
2. By any transaction which would bind
the partnership if dissolution had not b. Had not extended credit to the
taken place, provided the other party to partnership prior to dissolution,
the transaction: and, having no knowledge or notice
of his want of authority, the fact of
a. Had extended credit to the his want of authority has not been
partnership prior to dissolution and advertised in the manner provided
had no knowledge or notice of the for advertising the fact of
dissolution. dissolution in the first paragraph,
No. 2 (b).
b. Though he had not so extended
credit, had nevertheless known of Nothing in this article shall affect the
the partnership prior to dissolution, liability under article 1825 of any person
and, having no knowledge or notice who after dissolution represents himself or
of dissolution, the fact of consents to another representing him as a
dissolution had not been advertised partner in a partnership engaged in carrying
in a newspaper of general on business.
circulation in the place (or in each
General Rule
Dissolution terminates the authority of the
partners to bind partnership.
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Exceptions Law on Business Organizations Reviewer
Any act appropriate for winding-up
partnership affairs or completing assignee, upon cause shown, may obtain
transactions unfinished at dissolution winding up by the court.
If third persons that transacted had no Who may wind up Partnership Affairs?
actual knowledge of the dissolution. Partner designated in the agreement.
*Persons extending credit prior to In absence of agreement, the part that did
dissolution are entitled to notice of no wrongfully dissolved the partnership.
dissolution. If they had no notice or
knowledge of dissolution, they may hold If all partners died, the legal representative
the retired partner for obligations made by of the last surviving partner provided that
continuing partners after dissolution. the partner is not insolvent.
Art. 1835. The dissolution of the Winding up of a dissolved partnership may
partnership does not of itself discharge the be done
existing liability of any partner. Extrajudicially by the partners themselves.
Judicially under the control of a competent
A partner is discharged from any existing court.
liability upon dissolution of the partnership *Managing partner or winding-up partner
by an agreement to that effect between has the right to sell firm property even after
himself, the partnership creditor and the the life of the partnership has expired.
person or partnership continuing the
business; and such agreement may be Art. 1837. When dissolution is caused in any
inferred from the course of dealing way, except in contravention of the
between the creditor having knowledge of partnership agreement, each partner, as
the dissolution and the person or against his co-partners and all persons
partnership continuing the business. claiming through them in respect of their
interests in the partnership, unless
The individual property of a deceased otherwise agreed, may have the
partner shall be liable for all obligations of partnership property applied to discharge
the partnership incurred while he was a its liabilities, and the surplus applied to pay
partner, but subject to the prior payment of in cash the net amount owing to the
his separate debts. respective partners. But if dissolution is
caused by expulsion of a partner, bona fide
General Rule under the partnership agreement and if the
Dissolution of a partnership does not itself expelled partner is discharged from all
discharge the existing liability of any partnership liabilities, either by payment or
partner. agreement under the second paragraph of
Exception article 1835, he shall receive in cash only
A partner can be discharged from any the net amount due him from the
existing liability upon dissolution of the partnership.
partnership provided that there is an
agreement between the partnership When dissolution is caused in contravention
creditor and the person or partners of the partnership agreement the rights of
continuing the business. the partners shall be as follows:
*Individual properties of the deceased
partner shall be liable to all obligations of 1. Each partner who has not caused
the partnership made while he was a dissolution wrongfully shall have:
partner.
a. All the rights specified in the first
Art. 1836. Unless otherwise agreed, the paragraph of this article.
partners who have not wrongfully dissolved
the partnership or the legal representative b. The right, as against each partner
of the last surviving partner, not insolvent, who has caused the dissolution
has the right to wind up the partnership wrongfully, to damages breach of
affairs, provided, however, that any the agreement.
partner, his legal representative or his
2. The partners who have not caused the
dissolution wrongfully, if they all desire
28
to continue the business in the same Law on Business Organizations Reviewer
name either by themselves or jointly
with others, may do so, during the If the partnership was dissolved in
agreed term for the partnership and for contravention of the agreement
that purpose may possess the 1. The remaining partners have the right
partnership property, provided they
secure the payment by bond approved to sell partnership property to pay the
by the court, or pay any partner who partnership’s liabilities and the surplus
has caused the dissolution wrongfully, is distributed to the remaining partners
the value of his interest in the as well.
partnership at the dissolution, less any 2. As against the guilty partner for the
damages recoverable under the second dissolution of the partnership, the
paragraph, No. 1 (b) of this article, and remaining partners have the right to
in like manner indemnify him against all recover damages for breach.
present or future partnership liabilities. 3. The remaining partners may also
continue the business up to end of the
3. A partner who has caused the stipulated term of the partnership.
dissolution wrongfully shall have:
Art. 1838. Where a partnership contract is
a. If the business is not continued rescinded on the ground of the fraud or
under the provisions of the second misrepresentation of one of the parties
paragraph, No. 2, all the rights of a thereto, the party entitled to rescind is,
partner under the first paragraph, without prejudice to any other right,
subject to liability for damages in entitled:
the second paragraph, No. 1 (b), of
this article. 1. To a lien on, or right of retention of, the
surplus of the partnership property
b. If the business is continued under after satisfying the partnership
the second paragraph, No. 2, of this liabilities to third persons for any sum
article, the right as against his co- of money paid by him for the purchase
partners and all claiming through of an interest in the partnership and for
them in respect of their interests in any capital or advances contributed by
the partnership, to have the value him.
of his interest in the partnership,
less any damage caused to his co- 2. To stand, after all liabilities to third
partners by the dissolution, persons have been satisfied, in the
ascertained and paid to him in cash, place of the creditors of the partnership
or the payment secured by a bond for any payments made by him in
approved by the court, and to be respect of the partnership liabilities.
released from all existing liabilities
of the partnership; but in 3. To be indemnified by the person guilty
ascertaining the value of the of the fraud or making the
partner's interest the value of the representation against all debts and
good-will of the business shall not liabilities of the partnership.
be considered.
Right of partner to rescind contract of
Rights of partners upon dissolution partnership
1. Dissolution is caused without violation If one is induced by fraud or
misrepresentation to become a partner, the
of the agreement. contract is voidable. If the contract is
2. In contravention of the agreement. annulled, the injured party is entitled to
restitution. Here, the fraud or
If partnership is dissolved without misrepresentation vitiates consent.
violation of the agreement However, until the partnership contract is
1. All partners may have the property sold annulled by a proper action in court, the
partnership relations exist and
for payment of partnership liabilities. the defrauded partner is liable for all
2. If there is surplus, after paying the obligations to third persons.
1. Right of injured partner where
liabilities of the firm, it shall be given in
cash to the partners. partnership contract rescinded
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2. Right of retention of partnership Law on Business Organizations Reviewer
property
7. The individual property of a deceased
3. Right to be subrogated in place of partner shall be liable for the
creditors of partnership contributions specified in No. 4.
4. Right to be indemnified by the guilty 8. When partnership property and the
partner against all liabilities of the individual properties of the partners are
partnership. in possession of a court for distribution,
partnership creditors shall have priority
Art. 1839. In settling accounts between the on partnership property and separate
partners after dissolution, the following creditors on individual property, saving
rules shall be observed, subject to any the rights of lien or secured creditors.
agreement to the contrary:
9. Where a partner has become insolvent
1. The assets of the partnership are: or his estate is insolvent, the claims
against his separate property shall rank
a. The partnership property. in the following order:
b. The contributions of the partners a. Those owing to separate creditors.
necessary for the payment of all the
liabilities specified in No. 2. b. Those owing to partnership
creditors.
2. The liabilities of the partnership shall
rank in order of payment, as follows: c. Those owing to partners by way of
contribution.
a. Those owing to creditors other than
partners. Rules for settling accounts between the
partners
b. Those owing to partners other than 1. The assets of the partnership
for capital and profits. 2. Liabilities of the partnership
3. Application of assets
c. Those owing to partners in respect 4. Contribution by the partners
of capital.
Assets of the partnership
d. Those owing to partners in respect 1. Partnership property
of profits. 2. The contributions of the partners
3. The assets shall be applied in the order necessary for the payment of all
of their declaration in No. 1 of this liabilities
article to the satisfaction of the
liabilities. Order of application of the assets
1. Those owing to partnership creditors
4. The partners shall contribute, as 2. Those owing to partners other than for
provided by article 1797, the amount
necessary to satisfy the liabilities. capital and profits such as loans given
by the partners or advances for
5. An assignee for the benefit of creditors business expenses
or any person appointed by the court 3. Those owing for the return of the
shall have the right to enforce the capital contributed by the partners
contributions specified in the preceding 4. The share of the profits, if any, due to
number. each partner
6. Any partner or his legal representative Order of application of partner who
shall have the right to enforce the become insolvent or his estate his
contributions specified in No. 4, to the insolvent, the claims against his separate
extent of the amount which he has paid property
in excess of his share of the liability. 1. Those owing to separate creditors
2. Those owing to partnership creditors
3. Those owing to partners by way of
contribution
30
Liability of deceased partner’s Law on Business Organizations Reviewer
individual property
The individual property of a deceased 6. When a partner is expelled and the
partner shall be liable for his share of the remaining partners continue the
contributions necessary to satisfy the business either alone or with others
liabilities of the partnership incurred while without liquidation of the partnership
he was a partner. affairs.
Art. 1840. In the following cases creditors of The liability of a third person becoming a
the dissolved partnership are also creditors partner in the partnership continuing the
of the person or partnership continuing the business, under this article, to the creditors
business: of the dissolved partnership shall be
satisfied out of the partnership property
1. When any new partner is admitted into only, unless there is a stipulation to the
an existing partnership, or when any contrary.
partner retires and assigns (or the
representative of the deceased partner When the business of a partnership after
assigns) his rights in partnership dissolution is continued under any
property to two or more of the conditions set forth in this article the
partners, or to one or more of the creditors of the dissolved partnership, as
partners and one or more third against the separate creditors of the retiring
persons, if the business is continued or deceased partner or the representative
without liquidation of the partnership of the deceased partner, have a prior right
affairs. to any claim of the retired partner or the
representative of the deceased partner
2. When all but one partner retire and against the person or partnership
assign (or the representative of a continuing the business, on account of the
deceased partner assigns) their rights retired or deceased partner's interest in the
in partnership property to the dissolved partnership or on account of any
remaining partner, who continues the consideration promised for such interest or
business without liquidation of for his right in partnership property.
partnership affairs, either alone or with
others. Nothing in this article shall be held to
modify any right of creditors to set aside
3. When any partner retires or dies and any assignment on the ground of fraud.
the business of the dissolved
partnership is continued as set forth in The use by the person or partnership
Nos. 1 and 2 of this article, with the continuing the business of the partnership
consent of the retired partners or the name, or the name of a deceased partner as
representative of the deceased part thereof, shall not of itself make the
partner, but without any assignment of individual property of the deceased partner
his right in partnership property. liable for any debts contracted by such
person or partnership.
4. When all the partners or their
representatives assign their rights in Dissolution of a partnership by change of
partnership property to one or more members
third persons who promise to pay the Causes
debts and who continue the business 1. New partner is admitted
of the dissolved partnership. 2. Partner retires
3. Partner dies
5. When any partner wrongfully causes a 4. Partner withdraws
dissolution and the remaining partners 5. Partner is expelled from partnership
continue the business under the 6. Other partners assign their rights
provisions of article 1837, second
paragraph, No. 2, either alone or with to sole remaining partner
others, and without liquidation of the 7. All the partners assign their rights in
partnership affairs.
partnership property to third persons.
*Any change in membership dissolves a
partnership and creates a new one
*When a business of a dissolved
partnership is continued by former or
31
Law on Business Organizations Reviewer
without new partners, the old creditors are person or partnership continuing the
creditors of the person or partnership that business, at the date of dissolution, in the
is continuing the business. absence of any agreement to the contrary.
Art. 1841. When any partner retires or dies, Right to demand an accounting of
and the business is continued under any of partnership affairs must be directed
the conditions set forth in the preceding against
article, or in article 1837, second paragraph, 1. Winding-up partners
No. 2, without any settlement of accounts 2. Surviving partners
as between him or his estate and the 3. The person the partnership continuing
person or partnership continuing the
business, unless otherwise agreed, he or his the business
legal representative as against such person
or partnership may have the value of his Art. 1843. A limited partnership is one
interest at the date of dissolution formed by two or more persons under the
ascertained, and shall receive as an ordinary provisions of the following article, having as
creditor an amount equal to the value of his members one or more general partners and
interest in the dissolved partnership with one or more limited partners. The limited
interest, or, at his option or at the option of partners as such shall not be bound by the
his legal representative, in lieu of interest, obligations of the partnership.
the profits attributable to the use of his
right in the property of the dissolved General partner Limited partner
partnership; Provided, That the creditors of Personally liable for Liability extends
the dissolved partnership as against the partnership only to his capital
separate creditors, or the representative of obligations contribution.
the retired or deceased partner, shall have Have equal right in No share in
priority on any claim arising under this management of management of
article, as provided article 1840, third partnership partnership.
paragraph. May contribute May contribute
money, property or money and property
Rights of retiring of properties of industry
deceased, partner when business Proper party to Not proper party to
continued proceedings proceedings
To have the value of the interest of Interest cannot be Interest is assignable
the retiring partner or deceased partner in assigned to make with assignee
the partnership determined as of the date new partner acquiring all rights of
of dissolution. the limited partner
His name may Name not included
To receive thereafter, as an ordinary in firm name
creditor, an amount equal to the value of appear in the firm
his share in the dissolved partnership with No prohibition
interest, or, at his option, in place of name
interest, the profits attributable to the use
of his right. Prohibited from
General Rule engaging in a
When partner retires from the partnership,
he is entitled to the payment of what may business like
be due to him after liquidation.
Exception partnership’s
No liquidation needed when there is
settlement as to what retiring partner shall His retirement, His retirement,
receive.
insolvency and insolvency and
Art. 1842. The right to an account of his
interest shall accrue to any partner, or his death dissolves the death does not
legal representative as against the winding
up partners or the surviving partners or the partnership dissolve the
partnership
Characteristics of limited partnership
1. Must be formed in accordance with the
requirements of the law.
2. There must be one or more general
partners who control the management
of the business.
3. There must be one or more limited
partners contributing to the capital and
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sharing in the profits but have nothing Law on Business Organizations Reviewer
to do with the management.
4. Obligations of the partnership must be l. The right, if given, of one or more of
paid out of common fund and in the the limited partners to priority over
separate properties of the general other limited partners, as to
partners. contributions or as to
compensation by way of income,
Art. 1844. Two or more persons desiring to and the nature of such priority.
form a limited partnership shall:
m. The right, if given, of the remaining
1. Sign and swear to a certificate, which general partner or partners to
shall state — continue the business on the death,
retirement, civil interdiction,
a. The name of the partnership, insanity or insolvency of a general
adding thereto the word "Limited". partner.
b. The character of the business. n. The right, if given, of a limited
partner to demand and receive
c. The location of the principal place property other than cash in return
of business. for his contribution.
d. The name and place of residence of 2. File for record the certificate in the
each member, general and limited Office of the Securities and Exchange
partners being respectively Commission.
designated.
A limited partnership is formed if there has
e. The term for which the partnership been substantial compliance in good faith
is to exist. with the foregoing requirements.
f. The amount of cash and a Qualifications of limited partnership
description of and the agreed value 1. The partners must sign and swear to a
of the other property contributed
by each limited partner. certificate of limited partnership
2. Must file for record the certificate in
g. The additional contributions, if any,
to be made by each limited partner the office of the Securities and
and the times at which or events on Exchange Commission
the happening of which they shall
be made. Art. 1845. The contributions of a limited
partner may be cash or property, but not
h. The time, if agreed upon, when the services.
contribution of each limited partner
is to be returned. Limited partners can only contribute money
and property and cannot contribute
i. The share of the profits or the other services to the partnership to protect
compensation by way of income persons dealing with the firms with frauds.
which each limited partner shall
receive by reason of his Art. 1846. The surname of a limited partner
contribution. shall not appear in the partnership name
unless:
j. The right, if given, of a limited
partner to substitute an assignee as 1. It is also the surname of a general
contributor in his place, and the partner.
terms and conditions of the
substitution. 2. Prior to the time when the limited
partner became such, the business has
k. The right, if given, of the partners to been carried on under a name in which
admit additional limited partners. his surname appeared.
A limited partner whose surname appears
in a partnership name contrary to the
provisions of the first paragraph is liable as
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a general partner to partnership creditors Law on Business Organizations Reviewer
who extend credit to the partnership
without actual knowledge that he is not a A limited partner is excluded from any
general partner. active voice in the control of the affairs of
the firm.
Limited partner’s surname is not included Limited partner cannot perform acts of
in the firm name provided these administration
circumstances Limited partners may not perform any act
1. If the surname of general partner is the of administration with respect to the
interests of the partnership, not even in the
same with limited partner’s capacity of agents of the managing
2. If the limited partner’s surname was partners.
ART. 1849. After the formation of a limited
included and was carried on the new partnership, additional limited partners may
partnership be admitted upon filling an amendment to
*If the limited partner’s surname was the original certificate in accordance with
included in the firm name, he is liable as a the requirements of Article 1865.
general partner.
The writing to amend a certificate
Art. 1847. If the certificate contains a false 1. Shall conform to the requirements of
statement, one who suffers loss by reliance
on such statement may hold liable any Article 1844 as far as necessary to set
party to the certificate who knew the forth clearly the change in the
statement to be false: certificate which it is desired to make.
2. Be signed and sworn to by all members,
1. At the time he signed the certificate. and an amendment substituting a
limited partner.
2. Subsequently, but within a sufficient ART. 1850. A general partner shall all have
time before the statement was relied the rights and powers and be subject to all
upon to enable him to cancel or amend the restrictions and liabilities of a partner in
the certificate, or to file a petition for its a partnership without limited partners.
cancellation or amendment as provided However, without the written consent or
in article 1865. ratification of the specific act by all the
limited partners, a general partner or all of
Liability for false statement in certificate the general partners have no authority to:
Under this provision, any partner to
the certificate containing a false statement 1. Do any act in contravention of the
is liable provided the following requisites certificate.
are present:
1. He knew the statement to be false at 2. Do any act which would make it
impossible to carry on the ordinary
the time he signed the certificate, business of the partnership.
or subsequently, but having sufficient
time to cancel or amend it or file a 3. Confess a judgement against the
petition for its cancellation or partnership.
amendment, he failed to do so.
2. The person seeking to enforce liability 4. Possess partnership property, or assign
has relied upon the false statement in their rights in specific partnership
transacting business with the property, for other than a partnership
partnership. purpose.
3. The person suffered loss as a result of
reliance upon such false statement. 5. Admit a person as a general partner.
ART. 1848. A limited partner shall become 6. Admit a person as a limited partner,
liable as a general partner unless, in unless the right so to do is given in the
addition to the exercise of his rights and certificate.
powers as a limited partner, he takes part in
the control of the business. 7. Continue the business with partnership
Limited partner has no control in business property on the death, retirement,
insanity, civil interdiction or insolvency
of a general partner, unless the right so
to do is given in the certificate.
34
Powers of general partner in limited Law on Business Organizations Reviewer
partnership
The general partner shall have all the right 3. Non-participation in the management
and powers and be subject to all the of the business.
restrictions and liabilities of a partner in a
partnership without limited partners. ART. 1853. A person may be a general
partner and a limited partner in the same
ART. 1851. A limited partner shall have the partnership at the same time, provided that
same rights as a general partner to: this fact shall be stated in the certificate
provided for in Article 1844.
1. Have the partnership books kept at the
principal place of business of the A person who is a general, and also at the
partnership, and at a reasonable hour same time a limited partner, shall have all
to inspect and copy any of them. the rights and powers and be subject to all
restrictions of a general partner; except
2. Have on demand true and full that, in respect to his contribution, shall
information of all things affecting the have the rights against the other members
partnership, and a formal account of which he would have had if he were not
partnership affairs whenever also a general partner.
circumstances render it just and
reasonable. ART. 1854. A limited partner also may loan
money to and transact other business with
3. Have dissolution and winding up by the partnership and unless he is also a
decree of court. general partner, receive on account of
resulting claims against the partnership,
A limited partner shall have the right to with general creditors, a pro rata share of
receive a share of the profit or other the assets. No limited partner shall in
compensation by way of income and to the respect to any such claim:
return of his contribution as provided in
Articles 1856 and 1857. 1. Receive or hold as collateral security
any partnership property.
Rights of limited partner
It has lesser rights than a general partner. It 2. Receive from a general partner or the
may exercise rights similar to a general partnership any payment, conveyance,
partner. or release from liability, if at the time
the assets of the partnership are not
ART. 1852. Without prejudice to the sufficient to discharge partnership
provisions of Article 1848, a person who has liabilities to persons not claiming as
contributed to the capital of a business general or limited partners.
conducted by a person or partnership
erroneously believing that he has become a The receiving of collateral security, or a
limited partner in a limited partnership, is payment, conveyance, or release in
not, by reason of his exercise of the rights violation of the foregoing provisions is a
of a limited partner, a general partner with fraud on the creditors of the partnership.
the person or in the partnership carrying on
the business, or bound by the obligations of Loans and business transactions with
such person or partnership; provided that limited partners
on ascertaining the mistake he promptly A limited partner is allowed to loan money
renounces his interest in the profits of the to the firm; transact other business with the
business, or other compensation by way of partnership, and receive a pro rata share in
income. the assets with general creditors.
Conditions for exemption from liability Limited partner not allowed to hold
1. Prompt renunciation of interest and/ or collateral security
A limited partner may not receive
income upon ascertaining the mistake. partnership property as collateral security.
2. Non-inclusion of limited partner’s name
35
in the firm name.
ART. 1855. Where there are several limited Law on Business Organizations Reviewer
partners the members may agree that one
or more of the limited partners shall have a the return of the contribution or for the
priority over other limited partners as to dissolution of the partnership.
the return of their contributions, as to their
compensation by way of income, or as to In the absence of any statement in the
any other matter. If such an agreement is certificate to the contrary or the consent of
made it shall be states in the certificate, and all members, a limited partner, irrespective
in the absence of such a statement all the of the nature of his contribution, has only
limited partners shall stand upon equal the right to demand and receive cash in
footing. return for his contribution.
ART. 1856. A limited partner may receive A limited partner may have the partnership
from the partnership the share of the dissolved and its affairs wound up when:
profits or the compensation by way of
income stipulated for in the certificate; 1. He rightfully but unsuccessfully
provided, that after such payment is made, demands the return of his contribution.
whether from the property of the
partnership or that of a general partner, the 2. The other liabilities of the partnership
partnership assets are in excess of all have not been paid, or the partnership
liabilities of the partnership except liabilities property is insufficient for their
to limited partners on account of their payment as required by the first
contributions and to general partners. paragraph, No. 1, and the limited
partner would otherwise be entitled to
ART. 1857. A limited partner shall not the return of his contribution.
receive from a general partner or out of
partnership property any part of his Conditions of a limited partner entitled to
contributions until: return of his contribution
1. All liabilities of the partnership have
1. All liabilities of the partnership, except
liabilities to general partners and to been paid or there are assets sufficient
limited partners on account of their to pay partnership liabilities.
contributions, have been paid or there 2. The consent of all the partners is
remains property of the partnership obtained.
sufficient to pay them. 3. The certificate is cancelled or so
amended as to set forth the withdrawal
2. The consent of all members is had, or reduction of the contribution.
unless the return of the contribution
may be rightfully demanded under the When limited partner may demand return
provisions of the second paragraph. 1. The partnership is dissolved
2. The date specified for its return has
3. The certificate is cancelled or so
amended as to set forth the withdrawal arrived
or reduction. 3. If no term is specified, after six months’
Subject to the provisions of the first notice in writing to all other partners.
paragraph, a limited partner may rightfully
demand the return of his contribution: Limited partner to receive cash
It will be noted that the limited partner has
1. On the dissolution of a partnership. a right to demand and receive cash only in
return for his contribution even when he
2. When the date specified in the contributed property.
certificate for its return has arrived.
ART. 1858. A limited partner is liable to the
3. After he has given six months’ notice in partnership:
writing to all other members, if no time
is specified in the certificate, either for 1. For the difference between his
contribution as actually made and that
stated in the certificate as having been
made.
2. For any unpaid contribution which he
agreed in the certificate to make in the
36
future at the time and on the Law on Business Organizations Reviewer
conditions stated in the certificate.
return of his contribution, to which his
A limited partner holds a trustee for the assignor would otherwise be entitled.
partnership:
1. Specific property stated in the An assignee shall have the right to become
a substituted partner if all the members
certificate as contributed by him, but consent thereto or if the assignor, being
which was not contributed or which has thereunto empowered by the certificate,
been wrongfully returned. gives the assignee that right.
2. Money or other property wrongfully An assignee becomes a substituted limited
paid or conveyed to him on account of partner when the certificate is
his contribution. appropriately amended in accordance with
Article 1865.
The liabilities of a limited partners as set
forth in this article can be waived or The substituted limited partner has all the
compromised only by the consent of all rights and powers, and is subject to all the
members; but a waiver or compromise shall restrictions and liabilities of his assignor,
not affect the right of a creditor of a except those liabilities of which he was
partnership who extended credit or whose ignorant at the time he became a limited
claim arose after the filling and before a partner and which could not be ascertained
cancellation or amendment of the for the certificate.
certificate, to enforce such liabilities.
The substitution of the assignee as a limited
When a contributor has rightfully received partner does not release the assignor from
the return in whole or in part of the capital liability to the partnership, under article
of his contribution, he is nevertheless liable 1847 and 1858.
to the partnership for any sum, not in
excess of such return with interest, Limited partner’s interest assignable
necessary to discharge its liabilities to all A limited partner’s interest in the
creditors who extended credit or whose partnership is assignable. The assignee,
claims arose before such return. however, of a limited partner’s interest
does not necessarily become a substituted
Limited partner liable to partnership for limited partner.
sum returned
A limited partner whose contribution has ART. 1860. The retirement, death,
been rightfully returned is still liable to the insolvency, insanity or civil interdiction of a
partnership for an amount not in excess of general partner dissolves the partnership,
the sum returned plus interest as may be unless the business is continued by the
necessary to pay the claims of persons who remaining general partners:
extended credit or whose claims arose
before the return. 1. Under a right so to do stated in the
certificate.
ART. 1859. A limited partner’s interest is
assignable. 2. With the consent of all members.
A substitute limited partner is a person It must be observed that the death, etc., of
admitted to all the rights of a limited a general partner dissolves the partnership
partner who has died or has assigned his while the death of a limited partner does
interest in a partnership. not cause the dissolution of the firm, unless
there is only one limited partner.
An assignee, who does not become a
substituted limited partner, has no right to ART. 1861. On the death of a limited
require any information or account of the partner his executor or administrator shall
partnership transactions or to inspect the have all the rights of a limited partner for
partnership books; he is only entitled to the purpose of settling his estate, and such
receive the share of the profits or other power as the deceased had to constitute his
compensation by way of income, or the assignee a substituted limited partner.
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The estate of a deceased limited partner Law on Business Organizations Reviewer
shall be liable for all his liabilities as a
limited partner. contribution respectively, in proportion to
the respective amounts of such claims.
ART. 1862. On due application to a court of
competent jurisdiction by any creditor of a Art. 1864. The certificate shall be cancelled
limited partner, the court may charge the when the partnership is dissolved or all
interest of the indebted limited partner limited partners cease to be such.
with payment of the unsatisfied amount of A certificate shall be amended when:
such claim, and may appoint a receiver, and
make all other orders, directions, and 1. There is a change in the name of the
inquiries which the circumstances of the partnership or in the amount or
case may require. character of the contribution of any
limited partner.
The interest may be redeemed with the
separate property of any general partner, 2. A person is substituted as a limited
but may not be redeemed with partnership partner.
property.
3. An additional limited partner is
The remedies conferred by the first admitted.
paragraph shall not be deemed exclusive of
others which may exist. 4. A person is admitted as a general
partner.
ART. 1863. In settling accounts after
dissolution the liabilities of the partnership 5. A general partner retires, dies, becomes
shall be entitled to payment in the following insolvent or insane, or is sentenced to
order: civil interdiction and the business is
1. Those to creditors, in the order of continued under article 1860.
priority as provided by law, except 6. There is a change in the character of the
those to limited partners on account of business of the partnership.
their contributions, and to general
partners. 7. There is a false or erroneous statement
in the certificate.
2. Those to limited partners in respect to
their share of the profits and other 8. There is a change in the time as stated
compensation by way of income on in the certificate for the dissolution of
their contributions. the partnership or for the return of a
contribution.
3. Those to limited partners in respect to
the capital of their contributions. 9. A time is fixed for the dissolution of the
partnership, or the return of a
4. Those to general partners other than contribution, no time having been
for capital and profits. specified in the certificate.
5. Those to general partners in respect to 10. The members desire to make a change
profits. in any other statement in the certificate
in order that it shall accurately
6. Those to general partners in respect to represent the agreement among them.
capital.
Art. 1865. The writing to amend a
Subject to any statement in the certificate certificate shall:
or to subsequent agreement, limited
partners share in the partnership assets in 1. Conform to the requirements of article
respect to their claims for capital, and in 1844 as far as necessary to set forth
respect to their claims for profit or for clearly the change in the certificate
compensation by way of income on their which it is desired to make.
2. Be signed and sworn to by all members,
and an amendment substituting a
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limited partner or adding a limited or Law on Business Organizations Reviewer
general partner shall be signed also by
the member to be substituted or Art. 1866. A contributor, unless he is a
added, and when a limited partner is to general partner, is not a proper party to
be substituted, the amendment shall proceedings by or against a partnership,
also be signed by the assigning limited except where the object is to enforce a
partner. limited partner's right against or liability to
the partnership.
The writing to cancel a certificate shall be
signed by all members. Art. 1867. A limited partnership formed
under the law prior to the effectivity of this
A person desiring the cancellation or Code, may become a limited partnership
amendment of a certificate, if any person under this Chapter by complying with the
designated in the first and second provisions of article 1844, provided the
paragraphs as a person who must execute certificate sets forth:
the writing refuses to do so, may petition
the court to order a cancellation or 1. The amount of the original contribution
amendment thereof. of each limited partner, and the time
when the contribution was made.
If the court finds that the petitioner has a
right to have the writing executed by a 2. That the property of the partnership
person who refuses to do so, it shall order exceeds the amount sufficient to
the Office of the Securities and Exchange discharge its liabilities to persons not
Commission where the certificate is claiming as general or limited partners
recorded, to record the cancellation or by an amount greater than the sum of
amendment of the certificate; and when the contributions of its limited partners.
the certificate is to be amended, the court
shall also cause to be filed for record in said A limited partnership formed under the law
office a certified copy of its decree setting prior to the effectivity of this Code, until or
forth the amendment. unless it becomes a limited partnership
under this Chapter, shall continue to be
A certificate is amended or cancelled when governed by the provisions of the old law.
there is filed for record in the Office of the
Securities and Exchange Commission, where CORPORATIONS
the certificate is recorded: TITLE I - GENERAL PROVISIONS
DEFINITIONS AND CLASSIFICATIONS
1. A writing in accordance with the
provisions of the first or second Sec. 1. Title of the Code. – This Code shall
paragraph. be known as “The Corporation Coder of the
Philippines”.
2. A certified copy of the order of the
court in accordance with the provisions Sec. 2. Corporation defined. - A corporation
of the fourth paragraph. is an artificial being created by operation of
law having the right of succession and the
3. After the certificate is duly amended in powers, attributes and properties expressly
accordance with this article, the authorized by law or incident to its
amended certified shall thereafter be existence.
for all purposes the certificate provided
for in this Chapter. Definition
A corporation is an artificial being created
A certificate is considered cancelled or by operation of law having the right of
amended when there is filed for record succession and the powers, attributes and
1. A writing to amend the certificate; or properties expressly authorized by law or
2. A certified copy of the order of the incident to its existence.
court in the event of an unjustified Attributes
refusal of a partner to sign the writing. 1. It is an artificial being.
2. It is created by operation of law.
3. It has the right of succession.
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Law on Business Organizations Reviewer
4. It has only the powers, attributes and Right of partnership. Possesses
properties expressly authorized by law No right of right of
or incident to its existence. Succession succession succession
Stockholders
Similarities between a partnership and a Extent of Partners are liable only
corporation Liability to (except to the extent
1. Juridical personality separate and Third Persons limited of their
partners) investments
distinct from the individuals composing Transferability are liable as
it. of interest personally represented
2. Act only through its agents. and by the shares
3. Composed of an aggregate of subsidiarily subscribed by
individuals. for them.
4. Distribute profits to those who partnership
contribute to capital. debts to A stockholder
5. May be organized only when there is a third has the right
law authorizing it. persons. to transfer his
6. Subject to income tax. A partner shares
cannot without the
Distinctions between a partnership and a transfer prior consent
corporation interest so of the other
as to make a stockholders.
Point of Partnership Corporation partner
Comparison without the May not be
Manner of By mere By law or consent of formed for a
Creation agreement operation of all other term in excess
of the law existing of 50 years
parties Term of partners. extendible to
By a Requires at May be not more than
Number of minimum of least five (5) existence established 50 years.
Parties two (2) incorporators for any
persons period of A corporation
Commence- Generally From the date time may adopt a
from the of the stipulated firm name
ment of moment of issuance of by the provided it is
execution of the certificate partners. not identical
Juridical the contract of A limited or deceptively
incorporation partnership similar to any
Personality May of the Firm name is required registered
exercise Securities and to add the firm name or
Powers powers Exchange word ‘Ltd.’ contrary to
authorized Commission to its name. existing laws.
by partners (SEC) Dissolution May only be
provided the Can exercise May be dissolved with
same are only the Governing dissolved at the consent of
not contrary powers Laws any time by the state.
to law, expressly the will of
morals, granted by any or all Corporation
good law or partners. Code
customs, incident to its Civil Code
public policy existence.
Management or public Advantages of a corporate form of
order. It is vested in business organizations
When it is the board of 1. The capacity to hold property, to
not agreed directors or
upon, each trustees. contract, to sue and be sued as a legal
partner is an unit or distinct entity.
agent of the 2. Exemption of shareholders from
individual liability.
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Law on Business Organizations Reviewer
3. Continuity of existence in spite of death 2. Quasi-public – are entities engaged in
or changes of members.
rendering basic services of such public
4. Transferability of shares.
5. Centralized management under a board importance as to entitle them to certain
of directors. privileges like eminent domain or use of
6. Standardized methods of organization,
public property. Eg. Electric, gas, water
management and finance for the
protection of shareholders and and telephone companies.
creditors under statutory regulations.
3. Government-owned or controlled – are
Disadvantages of a corporate form of
business organizations entities organized by the government
1. The limited liability of the stockholders
or corporations of which the
serves to limit the credit available to
the corporation. government is a majority stockholder.
2. The transferability of shares permits the
uniting of incompatible and conflicting Eg. Philippine Air Lines
interests in one enterprise.
3. The minority stockholders are usually 4. Domestic – one incorporated under
subservient to the wishes of the
majority. Philippine laws.
4. In big corporations, the stockholders’
voting rights have become largely 5. Foreign – one formed, organized, or
theoretical because of widespread
ownership, lukewarmness and existing under any laws other than
disinterest in management, inertia, and
inaccessible meeting places. those of the Philippines.
5. In large corporations, management and
control has been separated from 6. Corporation aggregate – one composed
ownership.
6. By and large corporations are subject to of more than one member or
governmental restrictions, controls, and
report requirements not imposed on corporator.
other forms of business organizations.
7. Corporate sphere of activity is limited in 7. Corporation sole – consists of one
the transaction of its business to the
state of the organization. member or corporator and his
8. The corporate form involves “double
taxation” on corporation income. successors.
Sec. 3. Classes of corporations. – 8. Religious corporations, sole or
Corporations formed or organized under
this Code may be stock or non-stock aggregate – organized, either as sole or
corporations. Corporations which have
capital stock divided into shares and are aggregate, to administer properties of
authorized to distribute to the holders of
such shares dividends or allotments of the the church.
surplus profits on the basis of shares held
are stock corporations. All other 9. Ecclesiastical – organized for religious
corporations are non-stock corporations.
purposes.
Other kinds of corporations
1. Quasi-corporations – from the word 10. Lay – organized for a purpose other
“quasi”, meaning “as if”, are entities than religious
that are not absolutely corporations but
are considered as if they were. Eg. 11. Eleemosynary – organized for charitable
Public boards created by law
purposes.
12. Civil – are those than ecclesiastical and
eleemosynary, whether public or
private.
13. Close – one wherein all the outstanding
stock is owned by the persons who are
active in management and conduct of
the business.
14. Open – one in which all the members or
corporations have a vote in the election
of the directors and other officers.
15. Multi-national – one having been
created or organized in one state
conducts business or activities across
national boundaries and but subject to
the legal sanctions of the countries in
which they operate.
16. Non-profit – organized without
contemplation of gains, profits or
dividends to their members on invested
capital.
17. De Jure – one created in strict or
substantial conformity with the
statutory requirements for
incorporation and whose right to exist
as a corporation cannot be successfully
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attacked even in a direct proceeding for Law on Business Organizations Reviewer
that purpose by the State.
2. The formulation of business and
Sec. 4. Corporations created by special financial plans.
laws or charters. – Corporations created by
special laws or charters shall be governed 3. Assembling the enterprise by
primarily by the provisions of the special negotiations and obtaining some
law or charter creating them or applicable control over the subject matter by
to them, supplemented by the provisions of option or contracts made on behalf of
this Code, insofar as they are applicable. the proposed corporation or on his own
credit.
Sec. 5. Corporators and incorporators,
stockholders, and members. – Corporators 4. The making of arrangements for
are those who compose a corporation, financing the enterprise and the
whether as stockholders or members. floatation of securities.
Incorporators are those stockholders or
members mentioned in the articles of 5. Arrange tactful and painless methods
incorporation as originally forming and for getting his own reward for the task
composing the corporation and who are of promotion out of the prospective
signatories thereof. investors and for reimbursement for his
expenses, contracts, and services
Corporators in a stock corporation are without frightening away those who are
called stock-holders or shareholders. expected to provide the funds.
Corporators in a non-stock corporation are
called members. General rule: A corporation is not bound by
any agreement made by a promoter.
Components of a Corporation Exception to the rule: Unless and until the
1. Corporators – are those who composed corporation approves the agreement.
a corporation, whether as stockholders Sec. 6. Classification of shares. – The
of members. The term includes shares of stock of stock corporations may
incorporators, stockholders or be divided into classes or series of shares,
members. or both, any of which classes or series of
2. Incorporators – are those stockholders shares may have such rights, privileges or
or members mentioned in the articles restrictions as may be stated in the articles
of incorporation as originally forming of incorporation: Provided, That no share
and composing the corporation and may be deprived of voting rights except
who are signatories thereof. those classified and issued as “preferred” or
3. Stockholders or shareholders – are “redeemable” shares, unless otherwise
those corporators in a stock provided in this Code: Provided, further,
corporation. That there shall always be a class or series
4. Members – are those corporators in a of shares which have complete voting
non-stock corporation. rights. Any or all of the shares or series of
5. Promoters – is a self-constituted shares may have a par value or have no par
organizer who finds an enterprise or value as may be provided for in the articles
venture and helps to attract investors, of incorporation: Provided, however, That
form a corporation and launch it in banks, trust companies, insurance
business, all with a view to promotion companies, public utilities, and building and
profits. loan associations shall not be permitted to
issue no-par value shares of stock.
Promotion – is the act of procuring the
initial finances and the making of all Preferred shares of stock issued by any
preparations necessary to launch a corporation may be given preference in the
corporation. distribution of the assets of the corporation
in case of liquidation and in the distribution
Activities of a promoter of dividends, or such other preferences as
1. The discovery and investigation of a may be stated in the articles of
incorporation which are not violative of the
promising business opportunity. provisions of this Code: Provided, That
preferred shares of stock may be issued
only with a stated par value. The board of
directors, where authorized in the articles
of incorporation, may fix the terms and
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conditions of preferred shares of stock or Law on Business Organizations Reviewer
any series thereof: Provided, That such
terms and conditions shall be effective 8. Dissolution of the corporation.
upon the filing of a certificate thereof with
the Securities and Exchange Commission. Except as provided in the immediately
preceding paragraph, the vote necessary to
Shares of capital stock issued without par approve a particular corporate act as
value shall be deemed fully paid and non- provided in this Code shall be deemed to
assessable and the holder of such shares refer only to stocks with voting rights.
shall not be liable to the corporation or to
its creditors in respect thereto: Provided; Definition
That shares without par value may not be A “stock” or share of stock is one of the
issued for a consideration less than the units into which the capital stock has been
value of five (P5.00) pesos per share: divided. It represents the interest or right
Provided, further, That the entire that the holder of the stock or stockholder
consideration received by the corporation has in the corporation.
for its no-par value shares shall be treated
as capital and shall not be available for A stock certificate certifies that one is a
distribution as dividends. holder or owner of a certain number of
shares of stock in the corporation. It is a
A corporation may, furthermore, classify its mere documentary evidence of the holder’s
shares for the purpose of insuring ownership of shares and a convenient
compliance with constitutional or legal instrument for the transfer of title.
requirements.
Classes or series of shares of stock subject
Except as otherwise provided in the articles to restrictions
of incorporation and stated in the 1. Shares shall not be deprived of voting
certificate of stock, each share shall be
equal in all respects to every other share. rights except preferred or redeemable
Where the articles of incorporation provide shares but non-voting shares must still
for non-voting shares in the cases allowed be entitles to vote on matters specified
by this Code, the holders of such shares in the last paragraph of Section 6 like
shall nevertheless be entitled to vote on the matters relating to amendment of the
following matters: articles of incorporation and dissolution
of the corporation.
1. Amendment of the articles of 2. Where non-voting shares are provided
incorporation. for there must always be a class or
series of shares with complete voting
2. Adoption and amendment of by-laws. rights.
3. Banks, trust companies, insurance
3. Sale, lease, exchange, mortgage, pledge companies, public utilities, and building
or other disposition of all or and loan associations shall not be
substantially all of the corporate permitted to issue no-par value shares
property. of stock.
4. Preferred shares of stock which may be
4. Incurring, creating or increasing bonded given preference in the distribution of
indebtedness. assets in case of liquidation and
distribution of dividends or other
5. Increase or decrease of capital stock. preferences may be issued only with
stated par value.
6. Merger or consolidation of the 5. The terms and conditions of preferred
corporation with another corporation shares or series thereof may be fixed by
or other corporations. the board of directors only when
authorized by the articles of
7. Investment of corporate funds in incorporation the effectivity thereof
another corporation or business in shall be reckoned from the filing of
accordance with this Code. certificate with the SEC.
6. Shares without par value may not be
issued for a consideration less than the
value of five (P5.00) pesos per share.
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7. Unless otherwise provided by law the Law on Business Organizations Reviewer
rights, privileges or restrictions on
classes or series of shares must be 4. Incurring, creating or increasing bonded
stated in the articles of incorporation indebtedness;
and in the stock certificates.
5. Increase or decrease of capital stock;
Classes or series of shares 6. Merger or consolidation of the
1. Voting and Non-Voting Shares;
corporation with another corporation
General rule: Every member of a non- or other corporations;
stock corporation and every legal owner 7. Investment of corporate funds in
of shares in a stock corporation, has a another corporation of business in
right to be present and vote at all accordance with the Corporation Code;
corporate meetings. and
Exception to the rule: Unless there is a 8. Dissolution of the corporation.
stipulation in contrary.
2. Par Value and No-Par Value Shares Sec. 7. Founders’ shares. – Founders' shares
Par value is the given fixed or definite classified as such in the articles of
value of a share in the articles of incorporation may be given certain rights
incorporation. and privileges not enjoyed by the owners of
3. Common and Preferred Shares. other stocks, provided that where the
Preferred shares of stock may be: (a) exclusive right to vote and be voted for in
preferred as to assets; (b) preferred as the election of directors is granted, it must
to dividends. Preferred as to dividends be for a limited period not to exceed five (5)
may either be cumulative or non- years subject to the approval of the
cumulative, or participating or non- Securities and Exchange Commission. The
participating five-year period shall commence from the
4. Promotion Shares – are such stocks date of the aforesaid approval by the
issued to those who may originally own Securities and Exchange Commission.
the mining ground or valuable rights
connected therewith, in consideration Definition
of their deeding the same to the mining Founders’ shares, generally common stock,
company when the company is are given to the founders or promoters of a
incorporated, or it may mean such stock corporation in payment of money expended
as is issued to promoters. or services rendered in the promotion of it.
5. Shares of Escrow – are shares subject to
an escrow agreement, that is, an Sec. 8. Redeemable shares. – Redeemable
agreement under which the shares are shares may be issued by the corporation
deposited by the grantor or his agent when expressly so provided in the articles
with a third person, to be delivered by of incorporation. They may be purchased or
the depositary to the vendee or taken up by the corporation upon the
subscriber only upon the happening of expiration of a fixed period, regardless of
certain conditions. the existence of unrestricted retained
6. Founder’s Shares; earnings in the books of the corporation,
7. Redeemable “Callable” Shares; and upon such other terms and conditions
8. Treasury Shares; as may be stated in the articles of
9. Other shares classified to comply with incorporation, which terms and conditions
constitutional or legal requirements. must also be stated in the certificate of
stock representing said shares.
Instances when non-voting shares may
vote Definition
1. Amendment of the articles of Redeemable (“Callable”) shares of stock
which are usually preferred are frequently
incorporation; issued subject to redemption at the option
2. Adoption and amendment of by-laws; of either the corporation, the stockholder,
3. Sale, lease, exchange, mortgage, pledge or both, at a definite price representing
premium above the amount originally paid.
or other disposition of all or
substantially all of the corporate Sinking fund refers to a fund set-up by the
property; corporation where cash is gradually set
aside in order to accumulate the amount
necessary to meet the redemption price of
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redeemable shares of specified dates in the Law on Business Organizations Reviewer
future.
extension as may be determined by the
Sec. 9. Treasury shares. - Treasury shares Securities and Exchange Commission.
are shares of stock which have been issued
and fully paid for, but subsequently Sec. 12. Minimum capital stock required of
reacquired by the issuing corporation by stock corporations. – Stock corporations
purchase, redemption, donation or through incorporated under this Code shall not be
some other lawful means. Such shares may required to have any minimum authorized
again be disposed of for a reasonable price capital stock except as otherwise
fixed by the board of directors. (n) specifically provided for by special law, and
subject to the provisions of the following
Definition section.
Treasury shares are owned by the
corporation having been reacquired by the Sec.13. Amount of capital stock to be
issuing corporation by “purchase, subscribed and paid for purpose of
redemption, donation or through some incorporation. – At least twenty-five
other lawful means.” It has no voting rights percent (25%) of the authorized capital
or rights as to dividends or distributions. stock as stated in the articles of
incorporation must be subscribed at the
TITLE II - INCORPORATION AND time of incorporation, and at least twenty-
ORGANIZATION OF PRIVATE five percent (25%) of the total subscription
CORPORATIONS must be paid upon subscription, the
Definition balance to be payable on a date or dates
Incorporation is the act of creating a fixed in the contract of subscription without
corporation. need of call, or in the absence of fixed date
or dates, upon call for payment by the
Sec. 10. Number and qualifications of board of directors: Provided, however, that
incorporators. – Any number of natural in no case shall the paid-up capital be less
persons not less than five (5) but not more than five thousand (P5,0000) pesos.
than fifteen (15), all of legal age and a
majority of whom are residents of the Amount to be subscribed and paid
Philippines, may form a private corporation Illustration:
for any lawful purpose or purposes. Each of
the incorporators of s stock corporation If X, Inc. has authorized capital
must own or be a subscriber to at least one stock of P100, 000 divided into 1,000 shares
(1) share of the capital stock of the with par value of P100.00 per share, it must
corporation. be shown that at least P25, 000 or 250
shares of the authorized capital stock must
Qualifications of incorporators be subscribed. Of the total subscription of
1. Must be a natural person. P25, 000, at least P6, 250.00 or 25% of total
2. Must be of legal age. subscription must be paid. It is not
necessary that each subscriber pay Twenty-
Sec. 11. Corporate term. – A corporation five percent (25%) on his subscription. On
shall exist for a period not exceeding fifty the other hand, where the authorized
(50) years from the date of incorporation capital stock is stated at 2,000 no par value
unless sooner dissolved or unless said shares , it must be shown that at least 500-
period is extended. The corporate term as no par value share have been subscribed.
originally stated in the articles of The basis of computation is on the number
incorporation may be extended for periods of shares.
not exceeding fifty (50) years in any single
instance by an amendment of the articles of Securities and Exchange
incorporation, in accordance with this Code; Commission (SEC) may conduct compliance
Provided, That no extension can be made with paid-up capital requirements because
earlier than five (5) years prior to the it has come to the knowledge of the
original or subsequent expiry date(s) unless Commission that some corporation have
there are justifiable reasons for an earlier been organized merely as fronts for some
hidden objectives with no real intention of
carrying out the purported purposes in their
articles of incorporation. If a bigger capital
45
stock is required, the abuse of the privileges Law on Business Organizations Reviewer
of a corporation would be minimized.
the Philippines, and no association,
Capital stock requirements under the partnership, or corporation the capital
special laws of which is not wholly owned by citizens
1. In case of mining and agricultural of the Philippines, shall engage directly
or indirectly in the retail trade business.
incorporation, or corporation organized
for the purpose of the disposition , 7. Only vessels of domestic ownership are
exploitation, development or utilization authorized to engage in coastwise
of natural resources of the Philippines, shipping in the Philippines. Vessels are
as well as corporation organized for the considered of domestic ownership
operations of public utilities, the when such ownership is vested in some
Constitution provides that at least 60 % one or more of the following: (1)
of the capital stock of such corporation Citizens of the Philippines; (2) any
must be owned by citizens of the corporation or any company composed
Philippines. wholly of the citizens of the Philippines;
(3) any corporation or company created
2. The Insurance Code provide that “no under the laws of the Philippines,
domestic insurance company shall, if a provided at least 75% of the capital
stock corporation, engage in business in stock thereof or of any interested in
the Philippines unless posses of a paid said capital is wholly owned by the
up capital stock equal to at least two citizens of the Philippines.
million pesos”. Where the insurance
company is to engage in insurance Sec.14. Contents of articles of the
business it must have a “paid-up capital incorporations. – All corporation organized
stock of at least five million pesos” to under this Code shall file with the Securities
be invested in securities specified by and Exchange Commission articles of
law, which securities are to be incorporation in any of the official
deposited with the Insurance languages, duly signed and acknowledged
Commissioner. by all of the incorporators containing
substantially the following matters, except
3. The Financing Company Act requires as otherwise prescribed by this Code or by
that “at least sixty per centum of the special laws:
capital of financing companies must be
owned by citizens of the Philippines and 1. The name of the corporation.
shall have a paid-up capital of not less
than five hundred thousand pesos”. 2. The specific purpose or purposes for
which the corporation is being
4. Commercial banks are required to have incorporated. Where the corporation
a paid-up capital of 100 million pesos. have more than one stated purpose,
When a commercial bank having licence the article of incorporation shall state
to operate an expanded foreign which the primary is and which is/are
currency deposit system it must have a the secondary purpose or purposes:
paid-up capital of at least 150 million Provided, That a non-stock corporation
pesos and when a commercial bank is may not include a purpose which would
authorized to engage in universal change or contradict its nature as such.
banking it must have a paid up capital
of at least 500 million pesos. 3. The place where the principal office of
the corporation is to be located, which
5. The New Constitution provides that: must be within the Philippines.
“The ownership and management of
mass media shall be limited to citizens 4. The term for which the corporation is to
of the Philippines or to corporations or exist.
association wholly-owned and manage
by such citizen”. 5. The names, nationalities and residences
of the incorporators.
6. Under the Retail Trade Nationalization
law “no person who is not a citizen of 46
6. The number of directors or trustees Law on Business Organizations Reviewer
which shall not be less than five (5) nor
more than fifteen (15). Incorporators may choose any name they
see fit , however strange, uneuphonious, or
7. The names, nationalities and residences unrhetorical it may be , provided it is one
of the person who shall act as directors not identical with or prejudicially similar to
or trustees until the first regular a name which has previously been adopted
directors or trustees are duly elected by and is being use by another corporation
and qualified accordance with this as its corporate name
Code.
Change of Corporate name
8. If it be a stock corporation, the amount The change of the corporate name
of its authorized capital stock in lawful
money of the Philippines, the number doesn’t mean a new corporation, nor the
of shares which it is divided, and in case successor of the original corporation. It is
the shares are par value shares, the par the same corporation with a different name
value of each, the names, nationalities having its character with no respect change.
and residences of the original The corporation continues, as before,
subscriber, and the amount subscribed responsible in its new name for all debts or
and paid by each on his subscription, other liabilities it had previously contracted
and if some or all of the shares are or incurred.
without par value, such fact must be
stated. 2. Specific purpose or purposes.
The statement of the purpose has its
9. If it be a non-stock corporation, the principal function the affirmative
amount of its capital, the names, authorization of the management to enter
nationalities and residences of the into those contracts and business
contributors and the amount, transactions which may be considered as
contributed by each. incidental to its attainment of the purposes.
It also imposes implied limitations of their
10. Such other matters are not inconsistent authority by the exclusion of lines of activity
with law and which the incorporators which are not covered.
may deem necessary and convenient.
3. Principal office of the Corporation.
The Securities and Exchange Commission The principal office of the corporation must
shall not accept the articles of incorporation be within the Philippines. It is where the
of any stock corporation unless books of the corporation are kept and its
accompanied by a sworn statement of the officers usually and ordinarily meet for the
Treasurer elected by the subscriber purpose of managing the affairs and
showing that at least 25% of the authorized transactions of the business of the
capital stock of the corporation has been corporation.
subscribed, and at least 25% of the total
subscription has been fully paid to him in 4. Terms of Existence of the Corporation.
actual cash and/or in property the fair The corporation shall exist for a period not
valuation of which are equal to at least 25% exceeding fifty (50) years from the date of
of the said subscription , such paid up incorporation unless sooner dissolved or
capital being not less than five-thousand unless said period is extended.
pesos (P5,000).
5. Names, Nationalities and residences of
Sec.15. Forms of Articles of Incorporation. incorporators.
– Unless otherwise prescribed by special
law, articles of incorporation of all domestic The names, nationalities and residences of
corporations shall supply substantially the the incorporators must be stated in the
following requirements in the form as articles of the corporation for the purpose
provided for by the SEC: of complying with legal requirement that
majority of the incorporators must be
1. The name of the corporation. residents of the Philippines and complying
with the statutory requirement on share
ownership and in other instances where
Filipino Citizens are required.
6. Number of directors and trustees.
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The number of the director and trustees Law on Business Organizations Reviewer
must not be less than five (5) nor more than
fifteen (15). Property as subscription payment –
Generally, all forms of tangible properties
7. Names, nationalities and residences of are acceptable for purposes of payment to
directors. subscription provided that the three test of
paid-up capital determination are complied
A majority of the directors or trustees of all with, i.e., ownership, existence and
corporation organized under this Code must valuable, subject to certain restrictions as
be a residents citizens of the Philippines. may be imposed by law.
8. Amount of authorized capital stock. SEC adopted the policy that
A stock corporation must state the “amount discourages the inclusion of intangible
of its authorized capital stock in lawful assets as goodwill, lease-hold rights, or
money of the Philippines, the number of timber concession rights, payment of such
shares into which it is divided, and in case properties Motor vehicle, real estate
the shares are par value shares, the par properties and navigable vessels in payment
value of each, the names, nationalities, and of pre-incorporation subscription, increases
residences of the original subscribers, and of capital stock or in exchange for additional
the amount subscribed and paid by each on issuance of shares are allowed only by the
his subscription, and if some or all the SEC provided that:
shares are without par value, such fact must
be stated”. 1. There has been a proof of valid
transfer;
9. Non-stock Corporation.
The Corporation Code requires the articles 2. All taxes due from the properties
of the non-stock corporation to states: the has been paid; and
amount of its capital, the names,
nationalities and residences of its 3. Such properties have been
contributors and the amount contributed reasonably valued.
by each. A non-stock corporation may have
capital but it has no authorized capital Papers to accompany articles with SEC
stock. The SEC requires the following papers to be
submitted to it with the articles of
10. Inclusion of other matters. incorporation:
The articles of incorporation “may include
other matters that is not inconsistent with 1. A verification slip executed by the
law and which the incorporators may deem Chief of the Record Section states
necessary and convenient”. that the proposed name of the
corporation has been verified and
Sworn Statement of the Treasurer found to be distinct/ not similar to
The Securities and Exchange Commission the names of already existing
shall not accept the articles of incorporation corporation or those pending
of any stock corporation unless registration.
accompanied by a sworn statement of the
Treasurer elected by the subscribers 2. Written undertaking to change
showing that at least: corporate name in case there is a
person, firm or entity with a prior
1. 25% of the authorized capital stock has right to the use of said name or one
been subscribed. similar to it.
2. 25% of the subscription has been fully 3. Sworn statement of assets and
paid in actual cash or property. liabilities, duly executed under oath
by the corporate treasurer together
3. The paid-up capital being not less than with the amount P50.00 to defray
P5,000.00. publication expenses.
SEC Policy 4. Bank certificate of deposit, issued
under oath by the bank manager or
any authorized bank officer, that
there is a deposit of the stated
amount representing the paid-up
capital of the corporation either in
the name of the treasurer in trust
for the corporation or in the name
of the corporation itself.
48
5. Written authority to verify bank Law on Business Organizations Reviewer
deposit signed by the corporate
treasurer empowering the SEC and Law reserves the rights to modify the
/or the Central bank to check and charter
inspect the existence of the bank The constitution and the Corporation Code
deposit of the corporate paid-up reserved the right to amend the charter of a
capital. private corporation. The constitution
provides that “no franchise or right be
6. Taxpayer account number of the granted except under the condition that it
incorporators pursuant to Executive shall be subject to amendment, alteration,
order No. 213. or repeal by the National Assembly when
public interest so requires.
7. Registration Data Sheet, a
statement in statistical data form, Amendment of Articles of Incorporation
signed by an authorized The articles of incorporation may be
representative of the corporation amended for legitimate purposes that refer
regarding important information to any matter stated in the articles of
about the corporate seal, incorporation. It may refer to:
corporate name, principal office, 1. Change of corporate name;
capital structure, their subscription 2. Extension of term of corporation;
and TAN (SEC Bulletin, Oct. 1982). 3. Change in classes or series of shares;
4. Change in rights, privileges or
Sec. 16. Amendment of Articles of
Incorporation. – Unless otherwise restrictions in share ownership;
prescribed by this Code or by special law, 5. Increase or decrease in the number of
and for legitimate purposes, any provision
or matter stated in the articles of directors; and
incorporation may be amended by a 6. Change in purpose or purposes and
majority vote of the board of directors or
trustees and the vote or written assent of other necessary changes.
the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock, Vote or recent assent required in
without prejudice to the appraisal rights of amendment of the articles of incorporation
dissenting stockholders in accordance with shall be as follows:
the provision of this Code, or the vote or Stock Corporation – A majority vote of the
written assent of two-thirds (2/3) of the directors or trustees and the vote or written
members if it be a non-stock corporation. assent of the stockholders representing at
least two- thirds (2/3) of the outstanding
The original and amended articles capital stock. Under section 81 of the Code,
altogether shall contain all provision a dissenting stockholder may exercise his
required by law to be set out in the articles appraisal right if he is against the
of incorporation. Such articles, as amended amendment to be made and demand
shall be indicated by underscoring the payment of the fair value of his shares.
change or changes made, and the copy
thereof duly certified under oath by the Non-stock Corporation – A majority vote of
corporate secretary and the majority of the board of directors and the vote or written
directors or trustees stating the fact that assent of 2/3 of the members.
said amendments have been duly approved
by the required vote of the stockholders or The amendments to the articles of
members, shall be submitted to the incorporation shall take effect upon its
Securities and Exchange Commission. approval by the Securities and Exchange
Commission or from the filing with the said
The amendment shall take effect upon its Commission if not acted upon within six
approval by the Securities and Exchange months from the date of filing for a cause
Commission or from the date of filing with not attributable to the corporation.
the said Commission if not acted upon
within six (6) months from the date of filing Sec. 17. Grounds when articles of
for a cause not attributable to the incorporation or amendment may be
corporation. rejected or disapproved. – The Securities
and Exchange Commission may reject the
articles of incorporation or disapproved any
amendment thereto if the same is not in
compliance with the requirements of this
49
Code: Provided, That the Commission shall Law on Business Organizations Reviewer
give the incorporators a reasonable time
within which to correct or modify the by which the corporation can be identified
objectionable portions of the articles or and distinguished from other corporation,
amendment. The following are grounds for firms or entities.
such amendment or disapproval:
Change of corporate name
1. That the articles of incorporation or any A corporation may change its name by
amendment thereto is not substantially merely amending its charter in the manner
in accordance with the form prescribed prescribed by law. The change of name of
herein. the corporation does not result in
dissolution. The changing of the name of a
2. That the purpose or purposes of the corporation is no more the creation of a
corporation are patently corporation than the changing of the name
unconstitutional, illegal, immoral, or of a natural person.
contrary to government rules and
regulation. Restriction in use in certain names of
words
3. That the Treasurer’s Affidavit There are special laws prohibiting the use of
concerning the amount of capital stock certain names and/or words. Thus, under
subscribed and/or paid is false. the General Banking Act, no person or
entity not conducting the business of
4. That the required percentage of commercial banking shall use the words
ownership of the capital stock to be “bank”, “banking”, “banker”, “building and
owned by citizens of the Philippines has loan association”, “trust corporation”, etc.
not been complied with as required by or words of similar import. The word
existing laws of the constitution. “National” under Act 2612 may not be use
by those doing business as bankers,
No articles of incorporation or amendment brokers, or savings institutions. “United
to articles of incorporation of banks, Nations” both in its full and abbreviated
banking and quasi-banking institutions, forms, for commercial and business
building and loan association, trust purposes. There are other names or words
companies, public utilities, educational which pursuant to other special laws may
institution, and other corporations not be used.
governed by special laws shall be accepted
or approved by the Commission unless Sec. 19. Commencement of Corporate
accompanied by a favourable Existence. – A private corporation formed
recommendation of the appropriate or organized under this Code commences to
government agency to the effect that such have corporate existence and juridical
articles or amendment is in accordance with personality and is deemed incorporated
law. from the date the Securities and Exchange
Commission issues a certificate of
Sec. 18. Corporate name. – No corporate incorporation under its official seal; and
name may be allowed by the Securities and thereupon the incorporators,
Exchange Commission if the proposed name stockholders/members, and their
is identical or deceptively or confusingly successors shall constitute a body politic
similar to that of any existing corporation or and corporate under the name stated in the
to any other name already protected by law articles of incorporation for the period of
or its patently deceptive, confusing or time mentioned therein, unless said period
contrary to existing laws. When the change is extended or the corporation is sooner
in a corporate name is approved, the dissolved in accordance with law.
commission shall issue an amended
certificate of incorporation under the Sec. 20. De Facto corporation. – The due
amended name. incorporation any corporation claiming in
good faith to be a corporation under this
Necessity of Corporate name Code, and its right to exercise corporate
It is necessary that a corporation should powers, shall not be inquired into
have a name because that is the only way collaterally in any private suit to which such
corporation may be a party. Such inquiry
50
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