RFBT06 Law on Partnerships Partnerships PDF

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ReSA - THE REVIEW SCHOOL OF ACCOUNTANCYCPA Review Batch 41  May 2021 CPA Licensure Examination  Week No. 11REGULATORY FRAMEWORK for BUSINESS TRANSACTIONS Atty. J. Domingo  Atty. N. SorianoPage 1 of 12 0915-2303213  resacpareviewRFBT-06: LAW ON PARTNERSHIPS Definition – An agreement whereby two ...

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ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY CPA Review Batch 41  May 2021 CPA Licensure Examination  Week No. 11

REGULATORY FRAMEWORK for BUSINESS TRANSACTIONS

Atty. J. Domingo  Atty. N. Soriano

RFBT-06: LAW ON PARTNERSHIPS  

Definition – An agreement whereby two or more persons agree to contribute money, property or industry to a common fund with the intention to divide the profits among themselves. Elements: a) Two or more persons agree to contribute capital b) Intention to divide profits among themselves

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Perfection – It is perfected by mere consent. There is a meeting of the minds with respect to the object and consideration of the contract.

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What is the entity theory? – The partnership has a personality separate and distinct from the partners Consequences of separate personality a. Acquire property in its own name b. Entitled to do business in its own name c. Partnership shall be impleaded in case of suit involving the property of the business.

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Formality – is it required that the partnership agreement/contract should be in writing? As a rule, No.

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Are there exceptions?  When immovable property or real rights are contributed, the partnership contract should be in a public instrument and an inventory of the real properties duly signed by the parties contributed must be attached to the instrument, otherwise the partnership contract is INVALID.  When the partnership capital is P3,000 or more, the partnership agreement must also be in a public instrument. Non-compliance thereto does NOT nullify the contract but still valid as between the parties.

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When is a partnership required to be registered in the SEC? Partnerships with a capital of at least P 3,000.

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Does non-registration affect the juridical personality of a partnership? NO.

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Who can be partners? – any capacitated person can be a partner. o

Capacity to act – capacity to do acts with legal affects  Must be at least 18yrs old  Of sound mind  No other legal impediment to enter into contracts  Spouses cannot enter into universal partnership with the other spouse. Why? It would defeat the property regime between the spouse; Includes common law spouses;  Spouses are also prohibited from donating property to one another for the same reason.

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Delectus Personae – The right to choose is the foundation and essence of a partnership and its continued existence is dependent on the constancy of their mutual resolve. A contract of partnership is predominantly based on trust and confidence between or among the partners. The partners are free to choose to whom such trust and confidence will be reposed.

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Distinctions between Partnerships and Corporations o As to manner of creation - partnership is created by mere agreement while the existence of a corporation commences only from the issuance of Certificate of Incorporation from the SEC and in some cases, the enactment of a law o

As to number of organizers - two persons may form a partnership while a corporation needs at least 5 incorporators

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As to powers – powers of a partnership are limited to the powers agreed upon by the partners while a corporation has express powers provided by law, by the articles of incorporation including powers that are incidental and inherent to a corporation

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As to Authority of those who compose – there is mutual agency in partnership. Each general partner can bind and represent the partnership while a stockholder are not agents of the corporation in the absence of express authority from the corporation

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As to transfer of interest – Corporate shares are freely transferable without consent of other stockholders (unless there is a stipulation) while interest in the partnership cannot be transferred without the consent of the other partners

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As to right of succession – There is no right of succession in partnership as death of a general partner dissolves the partnership. Right of succession is present in corporations

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY Week No. 11: LAW on PARTNERSHIPS 

RFBT-06

Kinds of Partnerships and Partners Partnerships o As to object  Universal Partnership – ALL properties of the partners either title to or use thereof shall be given to the partnership  Universal Partnership of all present property – partners contribute all the properties that actually belong to them at the time of the perfection of the partnership to the common fund.  Universal Partnership of profits – all that the partners may acquire by their industry or work during the existence of the partnership. Partners shall retain ownership of the properties though the use thereof is given to the partnership. o In default or in absence of any agreement, what kind of universal partnership is entered by the partners? – Universal Partnership of Profits 

Particular Partnership – it has for its object determinate things, their use or fruits or a specific transaction or exercise of profession. – Illustrate.

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As to liability  General Partnership – the partners are all liable for all partnership obligations even up to the extent of their personal properties; there is no limited partner among or between the partners.  Limited Partnership – there is a limited partner among the partners.

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As to duration  With a fixed term;  For a specific undertaking/transaction;  At Will – a partnership that does not fix its term; the birth and life of this partnership is predicated on the mutual desire and consent of the parties

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As to legal status  De facto partnerships exist when some legal formalities or requirements are not complied with;  De jure partnership – all legal formalities and requirements are present or complied.

Partners  Capitalist Partner – one who contributes money or property  Industrial Partner – one who contributes industry; he does not share in the partnership losses; he cannot engage in any business unless expressly provided in the partnership contract  General Partner – one who controls and manages the partnership and is liable for partnership obligations  Limited Partner – he is not personally liable for partnership obligations and is not involved in the management of the partnership  Managing Partner – one who is designated as the person who will administer the affairs of the partnership  Liquidating Partner – one who winds up the affairs of a dissolved partnership  Silent Partner – a partner who does not take part in the management of the partnership business  Secret partner – a partner not known to the public as a partner  Nominal Partner - a partner only by name 

Obligations of Partners to the Partnership and among themselves  Obligation to contribute – unless otherwise agreed upon, each partner must contribute equal shares in the capital. o Money – the partner becomes the debtor of the partnership from the time of execution of the partnership o Property – the partner has the obligation to deliver at the time of execution of the partnership unless otherwise agreed upon o Industry – It cannot be agreed upon that all will contribute industry to the partnership  Obligation of capitalist partner to contribute additional capital – a capitalist partner must contribute additional capital to save the partnership in case there is imminent loss of the business. 

Fiduciary Obligation – in general: partners act in good faith and with fairness. o Duty of loyalty – a duty that a partner owes not to act adversely to the interest of the partnership. o If a debtor is indebted to the partnership and to a managing partner and the latter was able to collect from the said debtor, the managing partner should divide what he collected and apply it to the partnership credit and his credit in proportion, even if the receipt pertains only to the managing partner’s credit. (Article 1792) o What if the receipt is in the name of the Partnership? The entire amount shall be applied to the partnership credit.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY Week No. 11: LAW on PARTNERSHIPS o

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RFBT-06

Industrial partner cannot engage in any business unless authorized by the partnership. If he violates this, the partnership can exclude him plus damages OR avail of the benefits derived by the industrial partner plus damages. Capitalist partners cannot engage in the SAME LINE of Business of the partnership unless EXPRESSLY permitted. Consequence: profits of capitalist partners belong to the partnership.

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Duty of Obedience – partners must adhere to the provisions if the partnership agreement and the decisions of the partners.

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Duty of Care – partners are obliged to use the same level of care and skill that a reasonable person in the same position would use in the same circumstances. o In all his dealings and affairs involving the partnership, must observe diligence of a good father of a family.

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Duty to inform – A partner owes a duty to inform his or her co-partners of all information regarding partnership affairs.

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Obligations of Partners to Third Parties  Obligations that may arise from contracts – The partners are liable pro rata for any contract liability of the partnership even up to the extent of their personal properties. A stipulation to the contrary is void.  Mutual Agency Rule – Every partner is the agent of the partnership for the purpose of its business  The partnership is liable for acts of a partner if the act is performed in the exercise of the partner’s express, implied or apparent authority; o Express authority o Implied authority – authority of a partner to enter into a contract that is implied from the partnership’s business, the express powers of the partners and the customs and practice in the industry. o Apparent Authority – an act of partner for apparently carrying on in the usual way the business of the partnership is binding. Even if there is in fact no or limited authority, the partnership is liable to a third party who deals with this partner who relied on the apparent authority and who is not aware of the absence of authority. The third person is not duty bound to inquire or investigate the limits of the authority of the partner with apparent authority.

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Obligations that may arise Tort – this involves the liability for wrongful act or omission of a partner that is not a crime. o The partnership is liable to third persons who are injured by Torts committed by a partner:  In the ordinary course of business;  With authority;  For misappropriation of funds received – received from third persons when the partner is acting within the scope of his apparent authority;  For misapplication of money in partnership custody – when a partner misapplies any money of a third person in the custody of the partnership.

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When a person who is not a partner is liable for partnership obligation o Firm name – when the name of a person who is a partner appears in the partnership or firm o Partner by Estoppel – when partnership liability results, he is liable as if he is a partner. o Partner by Estoppel – a person who is not a partner but who represents himself as a partner (or who consented to such representation being made public) is liable to third persons who relied on his representation. One can be a partner by estoppel even if there is no partnership. o Partnership is existing – partnership liability results if all the partners consent to the representation; If there is no partnership existing, only the partner by estoppel is liable;

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Rights of Partners o Right to participate in the management – unless otherwise agreed upon, each partner may separately execute all acts of administration o Right to share in the profits – Partners share in the profits and any stipulation which excludes one or more from any share in the profits (or losses) is void. Except: Industrial Partner, may be excluded from sharing in the losses.

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Rules in profit allocation: a. The proportion expressly agreed upon; b. If there is no agreement, in proportion to the partners’ capital contributions;  How about the Industrial Partner? As may be just and equitable under the circumstances; If he has capital contribution, in proportion also to his capital contribution.  How about loss allocation? In the absence of a separate agreement as to distribution of losses, same way as profits is allocated.  Can the designation of the profits and losses be entrusted to one of the partners? NO.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY Week No. 11: LAW on PARTNERSHIPS

RFBT-06

 Right to Compensation – is a partner generally entitled to compensation? NO. When would a partner be entitled to compensation?  Right of reimbursement – right of a partner to be reimbursed for expenditures incurred on behalf of the partnership.  Right to return advances – When will this situation arise? When a partner advances or extends loans to the partnership.  Right to return of capital – upon termination of the partnership, the partners are entitled to the return of their capital upon dissolution, but creditors are given preference.  Right to information – includes the right to inspect and copy the partnership books at any reasonable hour, right to demand true and full information of things affecting the partnership. 

Right to an accounting – When can a partner invoke the right to an accounting?  If he is wrongfully excluded from the partnership business or possession of its property by his co-partners;  If the right exists under the terms of any agreement;  If he derives secret profits pertaining to the partnership; and  Whenever other circumstances render it just and reasonable.  Management of the partnership  Refers to the administration of the partnership.  Manager agreed upon in the Articles of Partnership: o Perform all acts of administration; o Decisions of such partner are generally irrevocable even if there is an objection or opposition from the other partners. Except: if the decision was made in bad faith. o The power of the managing partner designated in the AOP is revocable only by: o Just and lawful cause; and o Vote of the partner having controlling interest in the partnership capital. 

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Manager NOT designated or agreed upon in the Articles of Partnership: o Perform all acts of administration; o Decisions of such partner are generally irrevocable even if there is an objection or opposition from the other partners. Except: if the decision was made in bad faith. o Such power is revocable anytime even without just cause. Two or more managers designated: o Specific duties – specific duties may be designated in which case one can perform such duties without the consent of the others o No specific duties – each manager may separately perform acts of administration. In case of conflict, the majority prevails. In case of a tie, the partners owning controlling interest shall decide. o Unanimity may be required if stipulated except: Imminent danger of grave and irreparable injury. No designated Manager o ALL the partners shall be considered agents and whatever any one of them may do alone shall bind the partnership. o Alteration of immovable not allowed without consent – None of the partners may, without the consent of the others, make any important alteration in the immovable property of the partnership, even if it may be useful to the partnership. But if the refusal of consent by the other partners is manifestly prejudicial to the interest of the partnership, the court’s intervention may be sought.

Limited Partnership  General Concept – is one formed by two or more persons 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;  Only general partners are supposed to be involved in the management of the partnership. What is the consequence if the limited partner gets involved in the partnership? Liable as a general partner;  A limited partner can only contribute money or property and never industry.  Formation of Limited Partnership  Substantially comply in good faith with the following requirements: o Sign and swear to a certificate which shall state the stipulations provided for under a Certificate of Limited Partnership; o File for record the Certificate in the SEC.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY Week No. 11: LAW on PARTNERSHIPS 

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RFBT-06

Effect of false statement – if the certificate contains a false statement, one who suffers loss by reliance on such statements may hold liable any party to the certificate who knew the statement false. Limited Partnership Agreement –This document sets forth the rights and duties of general and limited partners, the terms and conditions regarding the operation, termination and dissolution of the partnership. Defective Formation occurs when: o A certificate of limited partnership is not filed with the SEC; o There are defects in a certificate that is filed which cannot be considered as substantial compliance; o Some other statutory requirement is not met.

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Partnership Name of a Limited Partnership o The surname of a limited partner shall NOT APPEAR in a partnership name unless:  It is also the surname of a general partner;  Prior to the time when the limited partner became such, the business has been carried on under a name in which his surname appeared.

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Liability of General and Limited Partners in a Limited Partnership o General partners of a limited partnership are liable even up to their personal properties for the debts and obligations of the limited partnership; o Limited Partners of a limited partnership are liable only for the debts and obligations of the limited partnership up to their capital contributions. A limited partner shall not become liable as a general partner. A stipulation as to such is VOID.  Exceptions:  If the limited partner takes part in the control of the business;  When the Limited Partner agrees to contribute industry or his services only;  A limited partner whose surname appears in a partnership name contrary is liable as a general partner to partnership creditors who extend credit to the partnership without actual knowledge that he is not a general partner (the creditor didn’t know that he is not a general partner).

Rights of a General and Limited Partner  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;  A Limited Partner shall have the same rights as a general partner: o To have the partnership books kept at the principal place of business of the partnership and at a reasonable hour to inspect and copy them; o To 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; o To have the right to receive a share of the profits or compensation by way of income and to the return of his contribution in case of dissolution.  Limitation to ANY partner’s right to income or compensation: if partnership liabilities are in excess of its assets, in other words, the partnership is insolvent.

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Loan to the Partnership  A limited Partner also may loan money and to transact other business with the partnership. R...