Partnership Formation Reviewer PDF

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MODULE 1: Partnership Formation andits naturePartnership● Unincorporated association of two or more individuals for the purpose of conducting a business for profit. ● Owned by two or more individuals ● Formed for a business undertaking that is normally of continuing nature ● Separate accounting enti...

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MODULE 1: Partnership Formation and

property – real or personal, tangible or

its nature

intangible – and industry or service that may

Partnership ● Unincorporated association of two or more individuals for the purpose of conducting a business for profit. ● Owned by two or more individuals ● Formed for a business undertaking that is normally of continuing nature ● Separate accounting entities (assets and liabilities should remain separate and distinct

be physical or mental. ● Limited partner - can contribute cash or other property but not services. ● Purpose: to secure profits and to divide the same among the partners. ● Agreement: division of profits is incorporated in the partnership contract. In case of failure to provide for division of profits, the provisions of the law shall apply.

from the individual partner’s personal assets and liabilities.

Partnership Law (Civil Code of the Philippines) ● governs the formation and operation of

Partnership Agreement ● Any person who is legally capable of entering into a contract may become a partner. ● It may be oral, but sound business practice demands a written agreement to avoid misunderstanding. ● Written Partnership Agreement: constitutes the Articles of Partnership. Contribution to the common fund may consist of cash, non-cash

partnerships in the Philippines. Article 1767 (Partnership Law) ● Definition: By the contract of a partnership, two or more persons bind themselves to contribute money, property or industry to a common fund, with the intention of dividing the profit among themselves. Two or more

persons may also form a partnership for the

authority to act for the partnership in the

exercise of a profession.

particular matter, and the person with whom

● Exercise of a profession: A profession is a calling in the preparation for or practice of

he is dealing has knowledge of the fact that he has no such authority.

which academic learning is required and

4. Co-ownership of property - each partner is a

which has for its prime purpose the rendering

co-owner of the properties invested in the

of the public service. Thus, most professional

partnership and each has an equal right with

practices such as accounting, law, medicine,

his/her

engineering and dentistry take advantage of

partnership property for partnership purposes.

a partnership form of organization.

(Note: a partner will have no right if he or she

Characteristics of a Partnership (based on the book and Module 5 of AE 112)

partners

tioo

possess

specific

did not have any consent of their partners) 5. Co-ownership of profits - a partnership is

1. Ease of Formation - the formation of a

created as a profit-oriented entity or business,

partnership requires less formality compared

and each partner is entitled to share in the

to corporations.

profits of the company. Losses should also be

2. Separate Legal Personality - the partnership

borne by all partners with the exception of the

has a juridical personality separate and

industrial

distinct from the partners. It can also transact

agreement shall be clearly defined in the

and acquire properties in its name.

Articles of Partnership or Article 1799 of Civil

3. Mutual Agency - Each partner is an agent of

partner.

The

profit

and

loss

Code of the Philippines.

the other partners on matters relative to the

6. Limited Life - It has a life limited by the length

affairs of the partnership. The exception is

of time that all partners continue to own the

when the partner so acting has in fact no

business. It is easily dissolved:

● By the express will of any partner;

for all obligations contracted by the

● By the termination of a definite term

partnership.

stipulated in the contract;

➔ Each partner, except for the limited

● By any event which makes it unlawful to carry out the partnership;

partner, is individually liable for all the debts of the business. This means that if

● When a specific thing which a partner

the assets of the partnership cannot

had promised to contribute to the

pay for its liabilities, then the personal

partnership perishes before the delivery

assets of the partners, other than those

(Article 1830 par 4);

already contributed to the partnership,

● When there is an admission of new partners,

the

withdrawal,

death

or

bankruptcy of an existing partner, and the

issuance

because

of

of a

a

court

partner’s

decree insanity,

incapacity or misconduct. 7. Transfer of Ownership - in case of dissolution, the transfer of ownership requires an approval of remaining partners whether to a new or existing partner. 8. Unlimited Liability

should be used to satisfy such liabilities after paying his personal liabilities on a pro-rata basis. ➔ If the personal property of a partner is insufficient

to

meet

his

share,

the

creditors may turn to the assets of the remaining partners who are able to pay. ➔ A partner may be called on to pay all of the debts of his partnership without prejudice to collecting the same from

➔ Partners, including industrial partners,

insolvent partners when they become

are liable with their separate properties

solvent. However, the liability of a

limited partner is restricted to his capital

parties without notice are

investment.

concerned. General-Lia bility Partner

KINDS OF PARTNERS Class As to Liability

Partner General Partner (Real Partner)

Definition one who is liable for partnership debts up to the extent of his personal assets or those not contributed to the partnership when all the partnership assets shall have been exhausted.

Limited Partner (Special Partner)

As to Capitalist Contribu Partner tion

one who contributes money or other property to the common fund of the partnership. The capitalist partner is prohibited in engaging to any operations that is of the same kind of business in which the partnership is engaged, unless there is an

one who is liable for partnership debts up to the extent of his capital contribution. It is to be noted that limited partners are prohibited from having their own surnames in the partnership’s title or business name. Violation of such would make the limited partner liable as a general partner insofar as third

one who has all the rights, powers and subject to all the restrictions of a general partner as to creditors but whose liability is limited to his capital contribution as to the other partners.

agreement to the contrary Industrial Partner

one who contributes his work, labor or services to the partnership. An industrial partner shares in

As to Participa tion

the partnership profits but

the

not in losses. Such exception, however, does not extend to third parties

giving notice and cannot be held liable for the obligations of the firm subsequent to his withdrawal.

Capitalist-in dustrial Partner

one who contributes money or property as well as his services to the partnership.

Silent Partner

one who is not actively involved in the conduct of the business of the partnership although he

Nominal Partner

may be known to be a partner. If he withdraws from the partnership, he must give notice to those persons who do business with the firm to avoid liability in the future Dormant Partner

one who takes no active part in the business and is not known or held out as a partner. The term is synonymous to Sleeping Partner. He may retire from

partnership

without

one who does not take active part in the business, makes no investment, but permits his name to be used by the partnership for accommodation or for a consideration. Nominal partners do not acquire the rights of a partner but they shall be subject to the liability of a partner insofar as third persons without notice are concerned.

Managing Partner

one who manages the affairs of the partnership. He may be appointed either in the Articles of Partnership or after the organization of the partnership. It should be

Liquidating Partner

Secret Partner

noted that the managing

Ostensible

one who takes an active

partner contemplated in the definition refers to a partner, not a stranger, who has been appointed manager.

Partner

part and is known to the public as a partner in the business, whether or not he has an actual interest in the firm. If he is not actually a partner, he is subject to the doctrine of estoppel.

Quasi-Partn er (Partner by Estoppel)

one who is not really a partner or a party to a partnership agreement, but is liable as a partner for the protection of innocent third persons. Thus, he is liable as a partner when, by word or by conduct, he directly or indirectly represents himself to anyone as a partner in an existing or non-existing partnership.

Real Partner

one who is in truth and in fact, connected with the partnership as a partner in its strictest meaning.

one who takes charge of the winding up of partnership affairs upon dissolution. In the absence of one, all the partners who have not wrongfully dissolved the partnership may act as a liquidating partner. one who takes an active part in the business but is not known to be a partner by outside parties now held out as a partner by the other partners, although he participates in the profits and losses of the partnership.

Sub-partner

one

who,

not

being

a

member of the partnership, contracts with a partner with reference to the latter’s share in the partnership. The partnership formed between a member of a partnership and the sub-partner is termed as Sub-partnership.

KINDS OF PARTNERSHIP Classification

Name of the Partnership

transaction or enterprise and divide among themselves the benefits there from. It may be formed for the exercise of a profession As to Liability General one in which all the of the Partners Co-partners partners are hip general partners who may act publicly on behalf of the firm. Furthermore, each of the partners may be held individually liable for obligations of the partnership.

Definition

As to Object of Universal one in which the Partnership Partnership* parties jointly agree to contribute to the common fund their whole property. Particular Partnership

individual

one in which the parties combine to pursue a single

Limited Partnership

one in which there is at least one general partner and at least one limited partner, with

As to Duration

its Partnership at Will

the limited partner

alone; or one for a

not being liable for partnership debts except to the extent of his contribution to the partnership. The word “Limited” or

fixed term or particular undertaking which is continued by the partners after the termination of such term or particular

“Ltd.” is added to the name of the partnership to inform the public that it is a limited partnership.

undertaking without express agreement.

one in which no time is specified and is not formed for a particular undertaking or venture and which may be terminated anytime by mutual agreement of the partners, or by will of any one partner

Partnership one in which the with a Fixed term or period for Term which the partnership is to exist is fixed or agreed upon; or one formed for a particular undertaking. Upon expiration of the term or completion of the particular enterprise, the partnership is dissolved, unless

continued

by the

Partnership

partners.

As to Ordinary representation Partnership to others (Real Partnership)

one that actually exists among the partners and also as to third persons.

Partnership by Estoppel (Ostensible Partnership)

one which in reality is not a partnership, but is considered a partnership only in relation to those who, by their conduct or admission, are precluded to deny or disprove its existence.

As to Legality De Jure one that has of its Existence Partnership complied with all the requirements for its establishment. De

Facto one that has failed

to comply with all the legal requirements for its establishment.

As to Publicity

Secret Partnership

one, wherein the existence of certain persons as partners, are not made known to the public by any of the partners.

Open Partnership (Notorious Partnership)

one whose existence is made known to the public by any of the partners.

As to Purpose Commerci

one

whose

or Activity

al Partnership (Trading Partnership)

activity is the manufacture or purchase and sale of goods.

Professional

one

that

main

is

Partnership

the

they may acquire

(Non-Tradin purpose of g rendering services, Partnership) such as a firm of accountants, lawyers, engineers or medical practitioners

organized

for

therewith. ● It is the intention of the partners to divide the property and all the profits that will be earned on the property among themselves.

the

common

fund. ● Movable and immovable property of each partner at the time of the contract shall continue to be owned by each.

*Two types of Universal Partnership Universal Partnership of Universal Partnership of all Present Property Profits ● One in which the whole property of each partner at the time of the constitution of the partnership

● One in which only all the property acquired through the work and industry of

becomes the common property of all of the partners, as well as the profits which

the partners during the existence of the partnership become part of

Advantages vs. Disadvantages of Partnership (Based on Module 5 of AE 112) Advantages

Disadvantages

A partnership is relatively easier and less expensive to organize than a corporation.

Unlimited liability for the debts of the firm - The business risk of each investor is not limited to his capital contribution only, except if the investor is a limited partner, but extends even to his personal

assets. A partnership is subject to less government regulations than a corporation.

Mutual agency that may result in losses due to acts of one or some of the agent-partners.

A partnership has fewer constraints on their actions unlike a corporation. Certain corporate actions require the approval of

Non-transferability of a partner's interest without the consent of all the other partners.

stockholders or directors. A partnership provides for the combination of capital thus greater source of capital as compared to a sole

Misunderstanding and disputes which may arise among the partners.

term goals. Furthermore, profitable operations may have to be stopped due to withdrawal or death of a partner.

A general professional Limited capital partnership is exempted compared to from payment of income corporation. tax. This would mean savings of at least 35% tax. The partners are taxed individually. But

as a

the other kinds of partnerships are treated as corporations for tax purposes. Less effective than a corporation in raising

proprietorship. A partnership provides better management resulting from the combined abilities of the partners than a sole

proprietorship.

Limited life of the business - Uncertainties regarding its life may hamper the establishment of long

large amounts capital.

of

Accounting for Partnership

2. A partnership is formed between the owner of

Conceptual Framework for Financial Reporting and

an

Philippine

the

individual, with the former contributing his

concepts are applicable to ALL reporting entities

entire business and the latter investing cash or

regardless of the type of organization.

property.

Financial

Reporting

Standard

-

existing

sole

proprietorship

and

an

3. A partnership is formed by two or more NOTE: Accounting for partnerships should comply

existing

with the relevant provisions of the Civil Code of the

owners will contribute their entire business as

Philippines.

their capital investments.

sole

proprietorships,

wherein

the

4. A partnership is formed when an existing Accounting for the equity of a Partnership 1. Formation - accounting for initial investments

partnership, with the consent of all the partners, admits a new partner.

to the partnership 2. Operations - division of profits or losses 3. Dissolution - admission of new partner and withdrawal, retirement or death of a partner. 4. Liquidation - winding-up of affairs

VALUATION OF ASSETS AND LIABILITIES CONTRIBUTED Upon organization of a partnership, the first entries (opening entries) on the partnership books will be the entries to record the investments of partners.

A partnership may be formed under any of the

These investments or contributions may be in the

following arrangements:

form of the following:

1. A partnership is formed by two or more individuals for the first time.

● Cash

● Non-cash assets or Industry or a combination of any or all of these.

ALL ASSETS CONTRIBUTED-

recorded at their FAIR

MARKET VALUE. ALL LIABILITIES ASSUMED - recorded at their PRESENT

NOTE: Sometimes liabilities are transferred to the new

VALUES.

partnership together with assets. Equity Instrument - any contract that evidences a Article 1787 (Civil Code of The Philippines) -

residual interest in the assets

“When the capital or part thereof which a partner is bound to contribute consists of

Fair Value - price that would be received to sell an

goods,...