I. Business Organizations > B. Partnerships > 1. General Provisions > a. Definition and Separate Juridical Personality

In Philippine law, partnerships are governed by the Civil Code of the Philippines (Republic Act No. 386), specifically under Title IX of Book IV, which provides the definition, essential elements, and rights attached to partnerships. Partnerships are also considered business organizations with unique legal characteristics distinct from other business entities. Here’s an in-depth analysis of each pertinent provision and principle related to partnerships under Philippine law, with emphasis on their definition and separate juridical personality.

1. Definition of a Partnership

Under Article 1767 of the Civil Code, a partnership is defined 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 essential characteristics of a partnership, as specified in this provision, are:

Contractual Nature: A partnership arises from a mutual agreement between the partners. There must be a valid consent, object, and cause (as in any contract) for it to be enforceable.
Contribution to Common Fund: Each partner contributes either money, property, or industry (labor) to a common fund.
Purpose of Sharing Profits: The primary purpose of a partnership is to generate profits, which must be divided among the partners. Notably, if the purpose does not involve profit (e.g., for a charity), it is not considered a partnership under the Civil Code.

It’s worth noting that the partnership agreement does not need to be in writing, except in cases where real property is contributed, per Article 1771.

2. Separate Juridical Personality of Partnerships

A partnership has a separate juridical personality distinct from its individual partners, according to Article 1768 of the Civil Code. This separate personality means that the partnership is treated as a distinct legal entity, allowing it to:

Enter into contracts
Own and acquire property independently from its partners
Sue and be sued in its own name

The separate personality of the partnership also implies that any obligations or liabilities incurred by the partnership belong to the partnership itself, rather than directly to the partners. This separate identity serves as a safeguard, protecting individual partners from personal liability beyond their respective contributions, except in cases of general partners in general partnerships, where liability can be more direct.

3. Essential Elements of a Partnership

To be considered a valid partnership, it must satisfy the following elements:

Legality of the Object: The partnership’s objective must be lawful. Any partnership established for an illegal purpose is void ab initio.
Consent: All parties must agree to form a partnership, binding themselves to fulfill its obligations.
Division of Profits: A critical feature of the partnership structure is the intent to share profits. This distinguishes it from other contractual relationships such as joint ventures, corporations, and other business organizations.

Failure to meet these criteria disqualifies a relationship from being classified as a partnership.

4. Types of Partnerships in Terms of Personality and Liability

Partnerships can vary based on their liability structures:

General Partnership: All partners have unlimited liability and are jointly responsible for the partnership’s debts. This structure affects each partner’s personal assets and requires a high level of trust.
Limited Partnership: Under Articles 1843-1867 of the Civil Code, limited partnerships include general partners (with unlimited liability) and limited partners (whose liability is confined to their capital contribution). Limited partners cannot participate in management, as doing so would expose them to unlimited liability.

The separate juridical personality of both types enables them to engage in legal activities and own assets, creating a buffer for limited partners in a limited partnership.

5. Effects of Separate Juridical Personality on Partnership Obligations

The Civil Code outlines how the partnership’s separate personality impacts its obligations and legal rights:

Ownership of Partnership Property: Article 1770 specifies that the partnership itself, not the partners individually, owns property contributed to or acquired by the partnership. This aligns with the principle of separate juridical personality.
Liability for Obligations: Article 1816 clarifies that the partnership bears liability for its obligations primarily. Partners in a general partnership are subsidiarily liable, while partners in a limited partnership are liable only to the extent of their contribution unless otherwise agreed.
Right to Bring Suit: Because it is a separate juridical person, a partnership can sue or be sued independently of its partners. Any legal action involving the partnership, however, may still impact the personal interests of the general partners due to the nature of their liability.

6. Partnership Registration and Formation

While a partnership can exist without formal registration, Article 1772 requires registration with the Securities and Exchange Commission (SEC) when the contribution amounts to or exceeds PHP 3,000. However, a partnership's juridical personality is not dependent upon SEC registration; rather, it exists upon the establishment of the partnership contract (mutual consent and agreement).

Registration of the partnership primarily aids in gaining public recognition, safeguarding the rights of partners, and providing transparency to third parties regarding the partnership’s terms and conditions.

7. Dissolution, Winding Up, and Termination of Partnership

When a partnership dissolves, its separate juridical personality persists solely for purposes of liquidation. Article 1828 of the Civil Code states that the dissolution marks the cessation of partnership activities but does not immediately dissolve its separate juridical identity until its affairs are fully settled. Only upon full liquidation does the partnership’s separate personality cease, enabling the equitable distribution of its remaining assets.

8. Tax Implications of Partnership’s Separate Personality

Under Philippine law, a partnership is taxed as a corporation and required to file corporate income tax returns, pursuant to Section 27 of the Tax Code (NIRC). However, General Professional Partnerships (GPPs), such as law firms and accounting firms, are not subjected to corporate income tax but are instead taxed through the individual partners, who declare their share in the partnership’s income on their personal tax returns. This unique tax treatment stems from the professional nature of their services, distinguishing GPPs from other partnerships in terms of tax liabilities.

Conclusion

The partnership structure in the Philippines, as defined under the Civil Code, relies heavily on its separate juridical personality as a core feature that protects and distinguishes it from the partners’ individual liabilities and interests. Through legal recognition as a distinct entity, partnerships enjoy flexibility in owning property, entering into contracts, and shouldering liability, creating a robust framework for business operations where partners can contribute resources collectively while sharing profits and minimizing direct personal risk, particularly for limited partners.