Chapter 4 Limited Partnership - Summary for recitation PDF

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CHAPTER 4 LIMITED PARTNERSHIPArticle 1843 - Limited Partnership DefinedA limited partnership is one formed by two or more persons under the provisions of the following article, having as members one or more general partners and one or more limited partners. The limited partners as such shall not be ...

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CHAPTER 4 LIMITED PARTNERSHIP Article 1843 - Limited Partnership Defined A limited partnership is one formed by two or more persons under the provisions of the following article, having as members one or more general partners and one or more limited partners. The limited partners as such shall not be bound by the obligations of the partnership. - Defines what a limited partnership is. - It is sufficient that there is 1 general and 1 limited partner in a limited partnership. - The reason for the existence of a limited partnership is to address the needs of all those who wish to join a partnership without the risk of losing an personal property. General Partner Personally liable for partnership obligations Have equal right in management of partnership May contribute money, property or industry Proper party to proceedings Interest cannot be assigned to make new partner

Limited Partner Liability extends only to his capital Contribution. No share in management of partnership May contribute money and property Not proper party to proceedings Interest is assignable with assignee acquiring all rights of the limited partner His name may appear in the firm Name not included in firm name name Prohibited from engaging in a No prohibition business like partnership’s His retirement, insolvency and His retirement, insolvency and death dissolves the partnership death does not dissolves the partnership

As a GENERAL RULE, the characteristics of a limited partnership are as follows: (1) A limited partnership is formed by compliance with good faith and statutory requirements (Art. 1844.); (2) One or more general partners control the business and are personally liable to creditors (Arts. 1848, 1850.); (3) One or more limited partners (aka special partners) contribute to the capital and share in the profits but do not participate in the management of the business and are not personally liable for partnership obligations beyond the amount of their capital contributions (Arts. 1845, 1848, 1856.); (4) The limited partners are not personally liable for partnership obligations beyond their capital contributions. (5) The limited partners may ask for the return of their capital contributions under the conditions prescribed by law (Arts. 1844[h], 1857.); and (6) The partnership debts are paid out of common fund and the individual properties of the general partners. Here: - The general partners are treated by the law much like a partner in an ordinary partnership. - The limited partners are usually those who put money for the business. They are only investors. - Their limited liability is an exception to the general rule that all partners, including industrial partners, are liable pro rata with all their property for partnership debts. (Art. 1816.) - Thus, a limited partner has the same type of liability as stockholder in a - corporation. Business reason and purpose of statutes authorizing limited partnerships (1) Secure capital from others for one’s business and still retain control. (2) Share in profits of a business without risk of personal liability. (3) Associate as partners with those having business skill.

Article 1844 - Requisites in the Formation of Limited Partnership Qualifications/Essential Requisites of limited partnership 1. The partners must sign and swear to a certificate of limited partnership 2. Must file for record the certificate of a limited partnership in the office of the Securities and Exchange Commission - The purpose of requiring the filing of the certificate is to give actual or constructive notice to potential creditors or persons dealing with the partnership Certificate of a limited partnership: - This document, as a rule, must contain the matters enumerated in said article. Thus, a limited partnership cannot be constituted orally. Questions: Can a limited partnership be formed orally? - No. A limited partnership contract is not perfected by mere agreement as it requires formal proceedings. Partnership must SUBSTANTIALLY comply with the requirements. What if the partnership does not comply with the requirements? Will it be void? - No, it will only become a GENERAL PARTNERSHIP. Why is it that the certificate must be registered? - Registration is the notice, to all 3rd persons who will be dealing with or are dealing with the partnership, that there are partners with limited liability. - The presumption is that when a partnership deals with a 3rd person, the partnership is a GENERAL partnership Last Paragraph: ― A limited partnership is formed if there has been substantial compliance in good faith with the foregoing requirements. ―

- So that public notice may be given to all who desire to know the essential features of the partnership. - A limited partnership is formed if there has been substantial compliance in good faith with the requirements set forth in Article 1844. - A strict compliance with the legal requirements is not necessary. It is sufficient that there is substantial compliance in good faith. - If there is no substantial compliance, the partnership becomes a general partnership as far as third persons are concerned, in which all the members are liable as general partners. otherwise, the liability of the limited partners becomes the same as that of general partners.

Article 1845 - What the Limited Partner Can Contribute The contributions of a limited partner may be cash or other property, but not services. - Limited partners can only contribute cash or other property, not services because if he does so, then he shall become a GENERAL INDUSTRIAL PARTNER. in which case, he shall not be exempted from personal liability. - Contribution must be given immediately. If he has promised additional contribution, then it should be given on the date promised or agreed upon. - This is to protect persons dealing with the firms with frauds. Example: In a limited partnership composed of Anna , Blessie, and Charity, their contributions may be as follows: Anna contributed 500k cash (limited partner); Blessie — 250k cash (general partner); and Charity contributed her services (general partner). Any of the partners may be a general partner and a limited partner at the same time. The contribution may be cash or property only, or both capital and services. Thus, if Anna, in addition to cash, also contributes services, she becomes a general partner and a limited partner at the same time; if he contributes services only, he is a general partner.

If a partner contributes capital only, he is either a general partner or a limited partner, or both, depending upon the agreement as stated in the certificate.

Article 1846 - Non-Inclusion of Name of the Limited Partner - The surname of the limited partner should not appear except if it is also the surname of a general partner or if at the time of his admission, it was already being used. - If the limited partner allows that his surname be used, then he shall be held liable as a general partner as to 3rd persons who extended credit not knowing he was a limited partner. - If the creditor has knowledge of his being a limited partner, then this rule shall not apply. Q: What can a limited partner contribute? A: The contributions of a limited partner may be cash or other property, but not services (Therefore, industrial partner cannot be a limited partner) Q: An industrial partner cannot be a limited partner. But can an industrial partner be a general partner? A: Yes. Article 1845 speaks only of a limited partner Article 1847 - Liability for a False Statement in the Certificate of Limited Partnership Liability for false statement in certificate Under this provision, any partner to the certificate containing a false statement is liable provided the following requisites are present: 1. He knew the statement to be false at the time he signed the certificate, or subsequently, but having sufficient time to cancel or amend it or file a petition for its cancellation or amendment, he failed to do so. 2. The person seeking to enforce liability has relied upon the false statement in transacting business with the partnership. 3. The person suffered loss as a result of reliance upon such false statement.

Notes: - If Innocent person suffers loss by reason of false statements – the person who suffers loss can sue for damages. - he can hold liable all those who had knowledge of the false statement at the time certification was signed. - The same shall apply if the partners concerned had sufficient time to have the certificate cancelled but did not do so. Article 1848 - Effect of Limited Partner’s Taking Part in the Control of the Business General Rule: A limited partner shall not become liable as a general partner Note Exception: If he takes part in the control of the business Acts which do not constitute taking part in the course of business 1. 2.

Mere dealing with customer Mere consultation on one occasion with the general partners

Acts which constitutes taking part in the course of business 1. 2.

Selection of who will be the managing partners Supervision over a superintendent of the business of the firm

- The limited partner who, aside from his powers, participates in the management of the partnership becomes liable as a general partner. Limited partner has no control in business - A limited partner is excluded from any active voice in the control of the affairs of the firm. Limited partner cannot perform acts of administration - Limited partners may not perform any act of administration with respect to the interests of the partnership, not even in the capacity of agents of the managing partners.

Article 1849 - Admission of Additional Limited Partners

The writing to amend a certificate: 1. Shall conform to the requirements of Article 1844 as far as necessary to set forth clearly the change in the certificate which it is desired to make. 2. Be signed and sworn to by all members, and an amendment substituting a limited partner Notes: 1. 2. 3.

Additional limited partners may be admitted even after the formation of the limited partnership. Admission of limited partners requires amendment to the certificate. Failure to amend the certificate upon admission of new limited partner/s shall not dissolve the partnership.

Question/Example: Q: Suppose that in a limited partnership, there are only 2 general partners and 1 limited partner. Can you add another limited partner? - Yes, amend the certificate under Article 1865 and do so. - Note: The firm may still admit new limited partners provided there is proper amendment to the certificate Q: Say additional limited partners are taken in without proper amendment of certificate with the SEC, will the failure to properly amend the certificate result in the dissolution of the limited partnership? - A: No. Failure to properly amend the certificate with the SEC does not result in the dissolution of the limited partnership.

Article 1950 - Rights of a General Partners General Rule: A general partner shall have all the rights and powers and be subject to all the restrictions and liabilities of a partner in a partnership without limited partners. Exception: first paragraph Reason: In a sense the acts are acts of strict dominion or ownership, and are not generally essential for the routine or ordinary conduct of the firm’s business - Refers to the power, liabilities and limitations of general partners in a limited partnership. - A general partner has the same rights, powers and limitations in a limited partnership as when he would have been in a general partnership. - A general partner, without written consent from ALL limited partners, cannot: (1) Do any act in contravention of the certificate (2) Do any act which would make it impossible to carry on the ordinary business of the partnership (3) Confess a judgment against the partnership (4) Possess partnership property, or assign their rights in specific partnership property (5) Admit a person as a general partner (6) Admit a person as a limited partner, unless the right to do so is given in the certificate (7) Continue the business with partnership property on the death, retirement, insanity, civil interdiction or insolvency of a general partner, unless the right to do so is given in the certificate Example/Questions: If there are 100 general partners and 1 dies, the partnership will be dissolved. However, this rule will not apply in the case of limited partners. If there are 5 limited partners and 1 dies, then the partnership will still continue.

Note: A limited partnership will continue (not dissolve) even in cases of the death of a limited partner as long as there is still ONE surviving limited partner in the partnership. Q: If a general partner in a limited partnership goes abroad, his capacity to bind the firm is governed by what law? - A: If a general partner in a limited partnership goes abroad his capacity to bind the firm is governed by the law of the place where the limited partnership was formed Article 1851 - Rights of a Limited Partner This Article is important as far as the limited partner is concerned as it shows them what rights they have. A limited partner is given the same rights as the general partner, that is: 1. 2.

3. 4.

Have the partnership books kept at the principal place of business of the partnership, and at a reasonable hour to inspect and copy any of them Have on demand true and full information of all things affecting the partnership; and a formal account of partnership affairs whenever circumstances render it just and reasonable Have dissolution and winding up by decree of court Have the right to receive a share of the profits or other compensation by way of income and to the return of his contribution as provided in Article 1856 and 1857 NOTE: That a limited partner cannot bind the firm by contract

Rights of limited partner - It has lesser rights than a general partner. It may exercise rights similar to a general partner.

Article 1852 - Contributor Who Erroneously Believes He Has Become a Limited Partner - Refers to a failure to create a limited partnership. Conditions for exemption from liability 1. Prompt renunciation of interest and/ or income upon ascertaining the mistake. 2. Non-inclusion of limited partner’s name in the firm name. 3. Non-participation in the management of the business. Examples/Question: Example 1: Suppose Taylor, Alison and Swift form a limited partnership, with Swift being the limited partner with a contribution of P20,000.00. The certificate that they sign says that Swift is a general partner. What, then, if Swift, believing herself to be a limited partner, begins to exercise her rights as such? - C cannot be held liable, as a general partner, if upon his realization of the error, he promptly renounces his involvement with the partnership, except: (1) If he participates in the management of the partnership (2) If his surname is used in the partnership name Example 2: Consider the situation above, but this time, C’s name is not mentioned at all. What happens then? - If that is the case, then there is no limited partnership because there is no limited partner mentioned . - The law anticipates a situation where in the person is a limited partner but his name is not mentioned as such or not mentioned at all in the certificate. Q1: What if a contributor who erroneously believes that he has become a limited partner exercise the rights of a limited partner, should he be considered as liable as a general partner?

- A: No. If a contributor erroneously believes that he has become a limited partner and thereupon exercises the rights of a limited partner, he should not generally be considered as liable as a general partner. o Note However: That a contributor who erroneously believes that he has become a limited partner can still be liable as a general partner 1. UNLESS on ascertaining the mistake he promptly renounces his interest in the profits of the business or other compensation by way of income; or 2. UNLESS even if no such renouncing is made, partnership creditors are NOT prejudiced

Article 1853 - General – Limited Partner - A partner can be a limited and general partner at the same time provided that this fact is STATED IN THE CERTIFICATE that he signs. Example/Question: Q1: May a person be a general and a limited partner at the same time (General – Limited Partner)? - A: Yes, provided same is stated in the certificate General Rule: General – Limited Partner’s rights are those of a general partner, hence, third parties can go against his individual properties Exception: Regarding his contribution he would be considered a limited partner, with the rights of a limited partner, insofar as the other partners are concerned Q2: Who are they to 3rd persons then? - They are general partners as to 3rd persons but as amongst the partners themselves, they are seen as limited partners with regards to their contribution.

Article 1854 - Right of a Limited Partner to Lend Money and Transact Other Business with the Firm - Provides that a limited partner can extend credit or transact with partnerships that he is part of. - He is also entitled to partnership assets pro rata to creditors but it cannot be used as collateral from the partnership. Loans and business transactions with limited partners - A limited partner is allowed to loan money to the firm; transact other business with the partnership, and receive a pro rata share in the assets with general creditors. Limited partner not allowed to hold collateral security - A limited partner may not receive partnership property as collateral security Example/Question: Example: Suppose X & Co. owes D a sum of P20,000.00 and C, a limited partner, P20,000.00. The total assets of the partnership is P50,000.00. How shall these be settled? - Both C and D can simultaneously collect from the partnership as partnership assets are sufficient to cover BOTH. However, if partnership assets are only P20,000.00, C cannot share in it because it would prejudice D’s claim. Q: May a limited partner loan money to and transact other business with the partnership? - A: Yes. A limited partner also may loan money to and transact other business with the partnership Q: May a limited partner receive on account of resulting claims against the partnership, with general creditors, a pro rata share of the assets? - A: Yes. Unless he is also a general partner, receive on account of resulting claims against the partnership, with general creditors, a pro rata share of the assets

Note Restrictions: No limited partner shall in respect to any such claim: 1. 2.

Receive or hold as collateral security any partnership property or Receive from a general partner or the partnership any payment conveyance, or release from liability, if at the time the assets of the partnership are not sufficient to discharge partnership liabilities to persons not claiming as general or limited partners

Note: The receiving of collateral security or payment, conveyance, or release in violations of the foregoing provisions is a fraud on the creditors of the partnership Note Also: That while the limited partner is prohibited to receive or hold as collateral security any partnership property, still he is NOT prohibited to purchase partnership assets which are used to satisfy partnership obligations towards third parties

Article 1855 - Preference to Some Limited Partners as to the Return of Their Contributions Suppose that there ar e three limited partners. These partners can agree (because there are more than 1) that one of them can have priority over the others provided that such SHOULD BE STATED IN THE CERTIFICATE. Q: Can it be agreed upon by the members that one or more of the limited partners shall have a priority over other limited partners as to the return of their contributions, as to their compensation by way of income, or as to any other matter? - A: Yes. When there are several limited partners the members may agree that one or more of the limited partners shall have a priority over other limited partners as to the return of their contributions, as to their compensation by way of income, or as to...