Comprehensive Overview of Philippine Law on Partnerships under Mercantile and Taxation Laws

In the Philippines, the rules governing partnerships fall primarily under the Civil Code of the Philippines, specifically under Title IX (Articles 1767–1867). The Bureau of Internal Revenue (BIR) enforces taxation on partnerships, further shaping the framework. This guide covers essential details on the legal and tax implications related to partnerships.

1. Definition and Nature of Partnerships

Definition: A partnership is a juridical entity formed by two or more persons who agree to contribute money, property, or industry to a common fund, with the intention of dividing profits among themselves (Article 1767, Civil Code).
Essential Characteristics:
- Contractual Agreement: A partnership must be based on a lawful contract.
- Contributions: Each partner must contribute money, property, or industry.
- Profit and Loss Sharing: The primary goal is profit-sharing; however, partners also share in losses.
- Legal Personality: Once registered, a partnership has a separate juridical personality, distinct from the individual partners.
- Duration: Partnerships may be constituted for a definite or indefinite period.

2. Types of Partnerships

Based on Duration:
- Partnership at Will: No fixed term; it exists as long as the partners desire.
- Partnership for a Fixed Term: Established for a specific period or a particular undertaking.
Based on Liability of Partners:
- General Partnership: All partners have unlimited liability for partnership debts.
- Limited Partnership: One or more general partners (with unlimited liability) and one or more limited partners (whose liability is limited to their contributions).
Based on Object:
- Universal Partnership: Covers all present property or all profits.
- Particular Partnership: Limited to specific business or project.
By Legal Personality:
- De Jure Partnership: Registered with the SEC.
- De Facto Partnership: Exists without registration but operates as a partnership in practice.

3. Forming a Partnership

Agreement: A partnership agreement, while not required by law to be in writing unless it involves real property, is typically drafted to establish terms, obligations, and contributions of each partner.
Registration: Partnerships should be registered with the SEC (Securities and Exchange Commission) to acquire a juridical personality.
- Articles of Partnership: Required for registration, including details such as the firm’s name, contributions of each partner, and the purpose of the partnership.

4. Rights and Duties of Partners

Right to Participate in Management: Generally, all partners have equal rights in the management, unless otherwise stipulated.
Right to Inspect Books: Partners can inspect and copy the partnership books to ensure transparency.
Right to Share in Profits and Losses: Profits are shared based on the agreed-upon terms, and, if silent, in proportion to each partner’s contribution.
Duty to Act with Utmost Good Faith: Partners owe each other fiduciary duties, prohibiting them from competing with the partnership or taking opportunities meant for the partnership.

5. Taxation of Partnerships in the Philippines

General Rule: Partnerships are considered corporations under the National Internal Revenue Code (NIRC), with the exception of General Professional Partnerships (GPPs).
Corporate Income Tax: Partnerships are generally subject to corporate income tax on taxable income. The current corporate tax rate is 25% (or 20% for small partnerships).
General Professional Partnerships (GPP): GPPs are partnerships formed by individuals exercising their profession (e.g., lawyers, accountants). They are taxed differently; the partnership itself is not subject to corporate income tax, but the individual partners are taxed on their respective shares.
Withholding Tax Obligations: Partnerships are required to withhold taxes on compensation and other income payments made by the partnership.
Value-Added Tax (VAT): If the partnership engages in taxable transactions, it may be subject to VAT. A threshold of PHP 3,000,000 in annual gross receipts applies for mandatory VAT registration.

6. Dissolution and Liquidation of Partnerships

Causes of Dissolution: A partnership may be dissolved due to the expiration of its term, achievement of its purpose, mutual agreement, or judicial decree. Other causes include death, insolvency, or incapacity of a partner.
Procedure:
- Dissolution: This terminates the authority of partners to act for the partnership, except for winding up.
- Winding Up: The process involves liquidating assets, settling debts, and distributing remaining assets among partners.
- Final Tax Returns: Partnerships must file final tax returns upon dissolution and obtain a Certificate of Tax Clearance from the BIR.

7. Liability of Partners

General Partners: Have unlimited liability for the partnership’s obligations, meaning personal assets can be used to satisfy partnership debts if partnership assets are insufficient.
Limited Partners: Their liability is capped at their investment, provided they do not participate in the management of the partnership.
Joint and Several Liability: Partners may be held jointly and severally liable, meaning creditors can pursue any partner for the entire debt, though the partner paying may seek reimbursement from co-partners.

8. Advantages and Disadvantages of Partnerships

Advantages:
- Simpler formation and fewer regulatory requirements compared to corporations.
- Shared management responsibility and access to pooled resources.
- Flexibility in management and profit-sharing arrangements.
Disadvantages:
- Unlimited liability for general partners.
- Limited lifespan tied to the partners’ ability to work together and their life circumstances.
- Potential for internal conflicts without a structured governance agreement.

9. Miscellaneous Provisions

Right of Subrogation: Partners paying more than their share of debts have the right to be subrogated to the position of the creditor.
Continuation of Partnership After Dissolution: Partnerships can continue with a new agreement if dissolution occurs due to a specific cause (like a partner’s withdrawal).
Estoppel in Partnership by Estoppel: If a person represents themselves or consents to being represented as a partner, they may be held liable as if they were a partner (Article 1825).

10. Partnership in Relation to Other Business Forms

Versus Corporations: Corporations have more rigid regulatory requirements, perpetual existence, and liability limited to corporate assets. In contrast, partnerships offer greater management flexibility but expose partners to personal liability.
Versus Sole Proprietorships: Partnerships enable shared resources and expertise compared to sole proprietorships but entail a complex sharing of profits and management responsibilities.

Summary of Legal and Tax Compliance for Partnerships

SEC Registration is mandatory for formalizing the juridical personality.
Filing of Income Tax Returns (for non-GPPs) and compliance with withholding tax obligations.
VAT Registration is required if the partnership’s gross annual receipts exceed PHP 3,000,000.
Bookkeeping and Audit: Maintain transparent and accurate books of accounts as required by the BIR and SEC.

Understanding these provisions equips partners to structure, manage, and dissolve partnerships effectively under Philippine law, ensuring compliance with both mercantile and tax regulations.