Law on partnership and corporation by hector de leon PDF

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Law on Business Organizations Reviewer1PARTNERSHIPArt. 1767. By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits amongthemselves.Definition Partnershipis a contract whereby two or mo...

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Law on Business Organizations Reviewer PARTNERSHIP Art. 1767. By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves. Definition Partnership is a contract whereby two or more persons bind themselves to contribute money, property or industry to a common fund with the intention of dividing profits among themselves. Elements 1. Intention to form a contract of partnership 2. Participation in both profits and losses 3. Community of interests Basic Features 1. Voluntary agreement 2. Association for profit 3. Mutual contribution to a common fund 4. Lawful purpose or object 5. Mutual agency of partners 6. Articles must not be kept secret 7. Separate juridical personality Characteristics 1. Consensual – perfected by mere consent. 2. Bilateral – formed by two or more persons creating reciprocal rights and obligations. 3. Preparatory - entered into as a means to an end. 4. Nominate – has a special name or designation. 5. Onerous – contributions in the form of either money, property and/or industry must be made. 6. Commutative – the undertaking of each partner is considered as the equivalent of that of the others. 7. Principal – its existence or validity does not depend on some other contract. Principle of Delectus Personae (choice of persons) – a person has the right to select persons with whom he wants to be associated with in partnership. Art. 1768. The partnership has a juridical personality separate and distinct from that of each of the partners even in case of

failure to comply with the requirements of Article 1772, first paragraph. Partnership, a juridical person As an independent juridical person, a partnership may enter into contracts, acquire and possess property of all kinds in its name, as well as incur obligations and bring civil or criminal actions. Thus, a partnership may be declared insolvent even if the partners are not. It may enter into contracts and may sue and be sued in its firm name or by its duly authorized representative. It is sufficient that service of summons be served on any partner. Partners cannot be held liable for the obligations of the partnership unless it is shown that the legal fiction of a different juridical personality is being used for a fraudulent, unfair or illegal purpose. Effect of failure to comply with statutory requirements Under Art 1772 Partnership still acquires personality despite failure to comply with the requirements of execution of public instrument and registration of name in SEC. Under Arts 1773 and 1775 Partnership with immovable property contributed, if without requisite inventory, signed and attached to public instrument, shall not acquire any juridical personality because the contract itself is void. This is also true for secret associations or societies. To organize a partnership not an absolute right It is but a privilege which may be enjoyed only under such terms as the State may deem necessary to impose. Art. 1769. In determining whether a partnership exists, these rules shall apply: 1. Except as provided by Article 1825, persons who are not partners as to each other are not partners as to third persons. 2. Co-ownership or co-possession does not of itself establish a partnership, whether such co-ownership or copossessors do or do not share any profits made by the use of the property.

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3. The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived. 4. The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment: a. As a debt by installments or otherwise. b. As wages of an employee or rent to a landlord. c. As an annuity to a widow or representative of a deceased partner. d. As interest on a loan, though the amount of payment vary with the profits of the business. e. As the consideration for the sale of a goodwill of a business or other property by installments or otherwise. In general, to establish the existence of a partnership, all of its essential features or characteristics must be shown as being present. In case of doubt, art.1769 shall apply. This article seeks to exclude from the category of partnership certain features enumerated herein which, by themselves, are not indicative of the existence of a partnership. Persons not partners as to each other Persons who are partners as between themselves are partners as to third persons. Generally, the converse is true: if they are not partners between themselves, they cannot be partners as to third persons. Partnership is a matter of intention, each partner giving his consent to become a partner. However, whether a partnership exists between the parties is a factual matter. Where parties declare they are not partners, this, as a rule, settles the question between them. But where a person misleads third persons into believing that they are partners in a non-existent

partnership, they become subject to liabilities of partners (doctrine of estoppel).Whether or not the parties call their relationship or believe it to be a partnership is immaterial. Thus, with the exception of partnership by estoppel, a partnership cannot exist as to third persons if no contract of partnership has been entered into between the parties themselves. Co-ownership or co-possession There is co-ownership whenever the ownership of an undivided thing or right belongs to different persons. Clear intent to derive profits from operation of business Co-ownership does not of itself establish the existence of a partnership, although it is one of its essential elements. This is true even if profits are derived from the joint ownership. The profits must be derived from the operation of business by the members of the association and not merely from property ownership. The law does not imply a partnership between co-owners because of the fact that they develop or operate a common property, since they may rightfully do this by virtue of their respective titles. There must be a clear intent to form a partnership. Existence of fiduciary relationship Partners have a well-defined fiduciary relationship between them. Co-owners do not. Should there be dispute; the remedy of partners is an action for dissolution, termination and accounting. For co-owners it would be one, for instance, for nonperformance of contract. People can become co-owners without a contract but they cannot become partners without one. Persons living together without benefit of marriage Property acquired governed by rules on coownership. Sharing of gross returns not even presumptive evidence of partnership The mere sharing of gross returns alone does not even constitute prima facie evidence of partnership, since in a partnership, the partners share profits after satisfying all of the partnership’s liabilities.

Reason for the rule Partner interested in both failures and successes; it is the chance of loss or gain that characterizes a business. Where the contract requires a given portion of gross returns to be paid over, the portion is paid over as commission, wages, rent, etc. Where there is evidence of mutual management Where there is further evidence of mutual management and control, partnership may result. Receipt of share in the profits strong presumptive evidence of partnership An agreement to share both profits and losses tends strongly to establish the existence of a partnership. It is not conclusive, however, just prima facie and may be rebutted by other circumstances. When no such inference will be drawn Under par. 4 of art. 1769, sharing of profits is not prima facie evidence of partnership in the cases enumerated under subsections (a) – (e). In these cases, the profits are not shared as partner but in some other respects or purpose. The basic test of partnership is whether the business is carried on in behalf of the person sought to be held liable. Sharing of profits as owner It is not merely the sharing of profits, but the sharing of them as co-owner of the business or undertaking that makes one partner. Test: Does the recipient have an equal voice as proprietor in the conduct and control of the business? Does he own a share of the profits as proprietor of the business producing them? One must have an interest with another in the profits of a business as profits. Burden of proof and presumption The burden of proving the existence of a partnership rests on the party having the affirmative of that issue. The existence of a partnership must be proved and will not be presumed. The law presumes that those acting as partners have entered into a contract of partnership. Where the law presumes the existence of partnership, the burden of proof is on the party denying its existence. When a partnership is shown to exist, the presumption is that it continues and the burden of proof is on the person

asserting its termination. One who alleges partnership cannot prove it merely by evidence of an agreement using the term “partner”. Non-use of the term, however, is entitled to weight. The question of whether a partnership exists is not always dependent upon the personal arrangement or understanding of the parties. Parties intending to do a thing which in law constitutes partnership are partners. Legal intention is the crux of partnership. Parties may call themselves partners but their contract may be adjudged something quite different. Conversely, parties may expressly state that theirs in not a partnership yet the law may determine otherwise on the basis of legal intent. However, courts will be influenced to some extent by what the parties call their contract. Tests and incidents of partnership In determining whether a partnership exists, it is important to distinguish between tests or indicia and incidents of partnership. Only those terms of a contract upon which the parties have reached an actual understanding, either expressly or impliedly, may afford a test by which to ascertain the legal nature of the contract. Some of the typical incidents of a partnership are: 1. The partners share in profits and losses. 2. They have equal rights in the mgt and conduct of the partnership business. 3. Every partner is an agent of the partnership, and entitled to bind the others by his acts. He may also be liable for the entire partnership obligations. 4. All partners are personally liable for the debts of the partnership with their separate property except that limited partners are not bound beyond the amount of their investment. 5. A fiduciary relation exists between the partners. 6. On dissolution, the partnership is not terminated, but continues until the winding up of partnership is completed. Such incidents may be modified by stipulation of the partners. Similarities between a partnership and a corporation 1. Both have juridical personality separate and distinct from that of the individuals composing it;

2. Both can only act through its agents; 3. Both are organizations composed of an aggregate of individuals; 4. Both distribute profits to those who contribute capital to the business; 5. Both can only be organized where there is a law authorizing is organization; 6. Partnerships are taxable as corporations. Art. 1770. A partnership must have a lawful object or purpose, and must be established for the common benefit or interest of the partners. When an unlawful partnership is dissolved by a judicial decree, the profits shall be confiscated in favor of the State, without prejudice to the provisions of the Penal Code governing the confiscation of the instruments and effects of a crime. Object or purpose of partnership The provision of the 1st paragraph reiterates 2 essential elements of a contract of partnership: 1. Legality of the object; and 2. Community of benefit or interest of the partners. The parties possess absolute freedom to choose the transaction or transactions they must engage in. The only limitation is that the object must be lawful and for the common benefit of the members. The illegality of the object will not be presumed; it must appear to be of the essence of the relationship.

Right to return of contribution where partnership is unlawful Partners must be reimbursed the amount of their respective contributions. The partner who limits himself to demanding only the amount contributed by him need not resort to the partnership contract on which to base his claim or action. Since the purpose for which the contribution was made has not come into existence, the manager or administrator must return it, and he who has paid his share is entitled to recover it. Right to receive profits where partnership is unlawful Law does not permit action for obtaining earnings from an unlawful partnership because for that purpose, the partner will have to base his action upon the partnership contract, which is null and without legal existence by reason of its unlawful object; and it is self-evident that what does not exist cannot be a cause of action. Profits earned do not constitute or represent the partner’s contribution. He must base his claim on the contract which is void. It would be immoral and unjust for the law to permit a profit from an industry prohibited by it. T he courts will refuse to recognize its existence, and will not lend their aid to assist either of the parties thereto in an action against each other. Therefore, there cannot be no accounting demanded of a partner for the profits which may be in his hands, nor can recovery be had.

Effects of an unlawful partnership 1. The contract is void and the partnership never existed in the eyes of the law; 2. The profits shall be confiscated in favor of the government; 3. The instruments or tools and proceeds of the crime shall also be forfeited in favor of the government; 4. The contributions of the partners shall not be confiscated unless they fall under #3.

Effect of partial illegality of partnership business Where a part of the business is legal and part illegal, a n account of that which is legal may be had. Where, w/o the knowledge or participation of the partners, the firm’s profits in a lawful business has been increased by wrongful acts, the innocent partners are not precluded as against the guilty partners from recovering their share of the profits.

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.

Effect of subsequent illegality of partnership business Contract will not be nullified. Where the business for which the partnership is formed is legal when the partnership is entered into, but afterward becomes illegal, an accounting may be had as to the business transacted prior to such time.

Community of interest between the partners for business purposes The salient features of an ordinary partnership are a community of interest in profits and losses, a community of interest in the capital employed, and a community of power in administration. This community of interest is the basis of the partnership relation. However, although every partnership is founded on a community of interest, e very community of interest does not necessarily constitute a partnership. Property used in the business may belong to one or more partners, so that there is no joint property, other than joint earnings. To state that partners are co-owners of a business is to state that they have the power if ultimate control. But partners may agree upon concentration of management, leaving some of their members entirely inactive or dormant. Only one of these features, profit-sharing, seems to be absolutely essential. But a mere sharing of profits of itself does not of necessity constitute a partnership. The court must consider all the essential elements in light of the facts of the particular case before deciding whether a partnership exists. Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary .Form of partnership contract General rule No special form required for validity or existence of the contract of partnership. Contract maybe made orally or in writing regardless of the value of the contributions. Where immovable property or real rights are contributed Execution of public instrument necessary for validity of contract of partnership. To affect 3rd persons, the transfer of real property to the partnership must be duly registered in the Registry of Property. When partnership agreement covered by the Statute of Frauds An agreement to enter in a partnership at a future time, which by its terms is not to be performed w/in a year from the making thereof is covered by the Statute of Frauds. Such agreement is unenforceable unless it

is in writing or at least evidenced by some note or memorandum. Partnership implied from conduct Binding effect Existence of partnership may be implied from the acts or conduct of the parties, as well as from other declarations, and such implied contract would be as binding as a written and express contract. Ascertainment of intention of parties In determining whether a particular transaction constitutes a partnership, as between the parties, the intention as disclosed by the entire transaction, and as gathered from the facts and from the language employed by the parties as well as their conduct, should be ascertained. Conflict between intention and terms of contract If the parties intend a general partnership, they are general partners although their purpose is to avoid the creation of such a relation. Art. 1772. Every contract of partnership having a capital of three thousand pesos or more, in money or property, shall appear in a public instrument, which must be recorded in the Office of the Securities and Exchange Commission. Failure to comply with the requirements of the preceding paragraph shall not affect the liability of the partnership and the members thereof to third persons. Registration of partnership Partnership with capital of P3, 000 or more Requirements: 1. The contract must appear in a public instrument; 2. It must be recorded or registered w/ the SEC. However, failure to comply w/ the above requirements does not prevent the formation of the partnership or affect its liability and that of the partners to 3rd persons. But any partner is granted the right bylaw to compel each other to execute the contract in a public instrument. 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

accurately their membership and capital before dealing with them. When partnership considered registered The objective of the law is to make the recorded instrument open to all and to give notice thereof to interested parties. This objective is achieved from the date the partnership papers are presented to and left for record in the Commission. This is the effective date of registration. If the certificate of recording is issued on a subsequent date, its effectively retroacts to date of presentation. Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said property is not made, signed by the parties, and attached to the public instrument. Partnership with contribution of immovable property Where immovable property contributed, failure to comply w/ the following requisites will render the partnership contract void: 1. The contract must be in a public instrument; 2. An inventory of the property contributed must be made, signed by the parties, and attached to the public instrument. Art. 1773 is intended primarily to protect 3rd persons. W/ regard to 3rdpersons, a de facto partnership or partnership by est...