I. BUSINESS ORGANIZATIONS

B. Partnerships

1. General Provisions

The legal framework governing partnerships in the Philippines falls under the Civil Code of the Philippines (Republic Act No. 386), specifically in Articles 1767 to 1867. These provisions detail the formation, existence, rights, obligations, and dissolution of partnerships, providing a basis for understanding partnerships’ nature, structure, and legal implications within Philippine law.

A. Definition of Partnership

Article 1767 defines a partnership as a contract where 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. The partnership is distinguished from other types of business organizations by its mutual contributions, sharing of profits, and collective management.

Key aspects include:

Contribution Requirement: Partners must contribute either money, property, or industry. The nature of these contributions impacts their rights and obligations within the partnership.
Profit Motive: The partnership exists primarily to earn and divide profits, distinguishing it from organizations or entities formed solely for charitable or non-profit purposes.
Legal Entity: Once a partnership is formed, it is considered a separate legal entity. It can own property, enter contracts, and sue or be sued under its name.

B. Types of Partnerships

1. Based on Object

Universal Partnership: Consists of a universal partnership of all present property or a universal partnership of profits.
Particular Partnership: Formed for a specific purpose or to undertake a specific venture.

2. Based on Duration

Partnership at Will: Exists until terminated by any of the partners.
Partnership with a Fixed Term: Exists for a period agreed upon by the partners.

3. Based on Liability

General Partnership: All partners have unlimited liability for partnership debts.
Limited Partnership: There are general partners with unlimited liability and limited partners whose liability is restricted to their capital contributions.

C. Formalities and Registration of Partnership

Article 1771 states that a partnership may exist even if no specific formalities are observed, though certain types of partnerships require specific documentation.

Partnerships with Capital Exceeding P3,000:
- Partnerships with a capital exceeding PHP 3,000 must be registered with the Securities and Exchange Commission (SEC) as mandated under Article 1772. Failure to register does not invalidate the partnership but limits certain legal rights and protections, such as pursuing certain legal actions.
Partnership Agreement:
- While not mandatory, it is recommended for partners to execute a formal partnership agreement detailing rights, duties, and provisions for the operation of the partnership.

D. Rights and Obligations of Partners

The rights and obligations of partners vary depending on their contributions, roles, and the specific terms of the partnership agreement.

1. Mutual Agency

Each partner acts as an agent of the partnership and can bind the partnership within the scope of the partnership business (Article 1818). Limitations on this agency must be expressly agreed upon.

2. Right to Participate in Management

General partners typically have the right to participate in management, unless otherwise stated in the partnership agreement. In a limited partnership, limited partners have no management rights.

3. Right to Share in Profits and Losses

Partners share in the profits and losses as per the partnership agreement or, in its absence, equally. If one partner contributes only industry (labor/skills), that partner does not share in the losses.

4. Fiduciary Duty

Partners owe a fiduciary duty to each other and must act with the utmost good faith and loyalty. Partners cannot benefit at the expense of the partnership.

E. Capital Contributions

Partners may contribute:

Money: This is a monetary contribution to the partnership fund.
Property: Assets such as land, equipment, or intellectual property may be contributed, with ownership transferred to the partnership.
Industry: Skills, knowledge, or services may be contributed; however, partners contributing only industry do not bear losses unless agreed otherwise.

F. Partnership Property

The property of the partnership is separate from the personal assets of the partners. Under Article 1811, partnership property cannot be used for personal transactions of partners, reinforcing the concept of the partnership as a separate entity.

G. Liability of Partners

1. Unlimited Liability in General Partnerships

Partners in a general partnership have joint and unlimited liability for the obligations of the partnership, meaning personal assets can be used to satisfy partnership debts.

2. Limited Liability for Limited Partners

In a limited partnership, limited partners are only liable up to their contribution, while general partners retain unlimited liability.

3. Partnership’s Liability

The partnership itself is liable first for debts and obligations before partners’ individual assets are reached.

H. Dissolution and Winding Up

1. Causes of Dissolution

Article 1830 provides several causes for partnership dissolution, including the expiration of the term, achievement of the partnership’s specific purpose, mutual agreement, or insolvency of any partner.

2. Winding Up

After dissolution, the partnership must “wind up” its affairs, settling debts, and distributing any remaining assets among partners. The priority of distribution follows the Civil Code’s prescribed order: payment of creditors, reimbursement of partners’ contributions, and distribution of remaining assets as profits.

I. Taxation of Partnerships

Partnerships are generally treated as corporations for tax purposes, following Section 27 of the National Internal Revenue Code (NIRC), and thus subject to corporate income tax.

Income Tax
- Partnerships are taxed as corporations on their income. Distributions to partners are treated as dividends and subject to the applicable withholding tax.
Exempt Partnerships
- Certain partnerships are exempt from corporate income tax, such as General Professional Partnerships (GPPs) where income is attributed directly to the partners.
Withholding Taxes
- Partnerships are also subject to withholding taxes on payments made to employees and other entities.

J. Limited Liability Partnerships (LLP)

While traditional partnerships are the norm, the Revised Corporation Code of the Philippines has introduced concepts allowing limited liability for certain professional partnerships. Such provisions are aligned with international standards, permitting LLP structures for professional firms in particular industries. However, Philippine law maintains a distinction by limiting LLP applications to specific professions or under certain conditions.

This overview of the General Provisions on Partnerships under Philippine law provides a comprehensive guide to understanding the formation, operation, and dissolution of partnerships. Legal counsel is advisable for compliance, especially in registration, tax matters, and drafting partnership agreements.