Withdrawal of Partnership Philippines

Dear Attorney,
I would like to inquire about the proper procedure for withdrawing from a business partnership due to the closure of the business. What are the legal steps involved in formally withdrawing my interest in the partnership, and how do we ensure that everything is in compliance with the rules set by the Securities and Exchange Commission (SEC)? Your advice on this matter would be greatly appreciated.

Sincerely,
Concerned Business Partner

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Insights

In the Philippines, the withdrawal of a partner from a business partnership involves specific legal steps that must be observed, particularly when the partnership is registered with the Securities and Exchange Commission (SEC). The withdrawal of a partner from a partnership touches on several key legal concepts, including the dissolution of partnerships, termination of partner obligations, and compliance with regulatory requirements under Philippine laws.

Key Legal Framework

The governing law for partnerships in the Philippines is the Civil Code of the Philippines, primarily under Articles 1767 to 1867. The rules regarding the dissolution and termination of partnerships, including the withdrawal of a partner, are detailed in these provisions. Additionally, for registered partnerships, the SEC has regulations that must be followed to officially close the business or effectuate changes in partnership composition.

Dissolution vs. Termination of a Partnership

In legal terms, dissolution refers to the process by which a partnership is legally brought to an end, while termination refers to the point when all affairs of the partnership have been wound up, and the entity ceases to exist for all purposes. When a partner withdraws, the partnership may be dissolved unless the remaining partners agree to continue the business without the withdrawing partner.

Grounds for Dissolution:

• Mutual Agreement: Partners may mutually agree to dissolve the partnership.
• Withdrawal of a Partner: A partner’s decision to withdraw may trigger dissolution unless otherwise agreed upon in the partnership contract.
• Expiration of Term: A partnership may also dissolve when the agreed term of the partnership has expired.
• Illegality of the Business: If the partnership’s business becomes unlawful, it must be dissolved.

Upon dissolution, the partnership must undergo the process of winding up, where the partnership settles its obligations and liquidates any remaining assets.

Steps for Withdrawing from a Partnership

1. Review of Partnership Agreement
   The first step for any partner wishing to withdraw is to review the partnership agreement. Most agreements contain provisions that outline the procedure for withdrawal. This agreement may specify how notice must be given, how the remaining partners will handle the withdrawing partner's interest, and the division of assets and liabilities.

2. Notice of Withdrawal
   The withdrawing partner must provide formal notice of their intention to leave the partnership. The notice should be in writing, detailing the reason for withdrawal and the effective date of the withdrawal. This document is often referred to as an Affidavit of Withdrawal and is a key legal document that may need to be filed with the SEC for registered partnerships.

3. SEC Filing and Compliance
   If the partnership is registered with the SEC, the withdrawal of a partner must be officially documented through filings with the SEC. The partnership may need to file a formal amendment to the Articles of Partnership to reflect the withdrawal and any other changes in the partnership's structure. The process includes:

   • Filing a General Information Sheet (GIS) reflecting the change.
   • Submitting an amended Articles of Partnership, if necessary.
   • Providing the necessary affidavits or resolutions from the remaining partners agreeing to continue the partnership, if applicable.

4. Settlement of Partner’s Interest
   After withdrawal, the withdrawing partner is entitled to the return of their capital contribution or any share in the partnership assets, depending on the financial status of the business and the terms of the partnership agreement. In case of disputes regarding the amount to be paid, the matter may be subject to legal arbitration or court proceedings.

Winding Up the Partnership

If the partnership is dissolved as a result of the partner's withdrawal, it must undergo the process of winding up. Winding up involves settling the partnership’s affairs, which includes:

• Collecting any outstanding debts.
• Paying off liabilities.
• Distributing any remaining assets to the partners based on their respective shares.

The partners, or a designated liquidator, are responsible for completing these tasks. Once the winding-up process is completed, the partnership must file for formal dissolution with the SEC to finalize the closure.

Withdrawal and Partner’s Liability

It is important to note that a withdrawing partner may still be liable for obligations incurred by the partnership before their withdrawal. Under the law, partners remain jointly and severally liable for the partnership's obligations unless an agreement is made with the partnership’s creditors to release the withdrawing partner from such liabilities.

Tax and Regulatory Implications

When a partnership is dissolved or when a partner withdraws, there may be tax implications. The partnership must file the appropriate tax returns, pay any taxes due, and comply with the requirements of the Bureau of Internal Revenue (BIR). The SEC also requires that the partnership submit any remaining filings, such as the final General Information Sheet and audited financial statements, before it can be formally dissolved.

Continuing Partnership After Withdrawal

If the remaining partners choose to continue the business after the withdrawal of one partner, they must amend the Articles of Partnership to reflect the change in the composition of the partners. The partnership agreement may also need to be updated to account for the new arrangement. The SEC must be notified of these changes, and the remaining partners must ensure that they comply with the necessary legal formalities to avoid any penalties.

Conclusion

The withdrawal of a partner from a partnership in the Philippines is a legally significant event that requires careful attention to the partnership agreement, compliance with SEC regulations, and consideration of the potential tax and liability implications. Whether the partnership is dissolved or continues with the remaining partners, following the proper legal processes is essential to ensure a smooth transition and avoid legal disputes. Consulting with a legal expert is recommended to navigate the complexities of partnership withdrawal and dissolution effectively.