Law on Partnership and Corporations

College of Business Administration Education Legal Management Bolton Street, Davao City Personal Law Notes Jedi Bentillo LAW ON PARTNERSHIP AND CORPORATIONS

(Otherwise: Law on Business Organizations) CONTENTS (BRIEF) PART I. PARTNERSHIP CHAPTER 1. GENERAL PROVISIONS CHAPTER 2. OBLIGATIONS OF PARTNERS CHAPTER 3. DISSOLUTION AND WINDING UP CHAPTER 4. LIMITED PARTNERSHIP PART II. PRIVATE CORPORATIONS TITLE I. General Provisions TITLE II. Incorporation and Organization of Private Corporations TITLE III. Board of Directors/Trustees/Officers TITLE IV. Powers of Corporations TITLE V. By Laws TITLE VI. Meetings TITLE VII. Stocks and Stockholders TITLE VIII. Corporate Books and Records TITLE IX. Merger and Consolidations TITLE X. Appraisal Right TITLE XI. Non-Stock Corporation TITLE XII. Close Corporation TITLE XIII. Special Corporations CHAPTER 1. Educational Corporation CHAPTER 2. Religious Corporation TITLE XIV. Dissolution TITLE XV. Foreign Corporations TITLE XVI. Miscellaneous Provisions

PART I. PARTNERSHIP Art. 1767. By the contract of partnership 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. Definition Partnership is a contract whereby two or more persons bind themselves to contribute money, property or industry to a common fund with the intention of dividing profits among themselves. Elements 1. Intention to form a contract of partnership 2. Participation in both profits and losses 3. Community of interests

Basic Features

College of Business Administration Education Legal Management Bolton Street, Davao City Personal Law Notes Jedi Bentillo

1. 2. 3. 4. 5. 6. 7.

Voluntary agreement Association for profit Mutual contribution to a common fund purpose or object Lawful Mutual agency of partners Articles must not be kept secret Separate juridical personality

Characteristic s 1. Consensual – perfected by mere consent. 2. Bilateral – formed by two or more persons creating reciprocal rights and obligations. 3. Preparatory - entered into as a means to an end. 4. Nominate – has a special name or designation. 5. Onerous – contributions in the form of either money, property and/or industry must be made. 6. Commutative – the undertaking of each partner is considered as the equivalent of that of the others. 7. Principal – its existence or validity does not depend on some other contract. Principle of Delectus Personae (choice of persons) – a person has the right to select persons with whom he wants to be associated with in partnership.

Art. 1768. The partnership has a juridical personality separate and distinct from that of each of the partners even in case of failure to comply with the requirements of Article 1772, first paragraph. Partnership, a juridical person As an independent juridical person, a partnership may enter into contracts, acquire and possess property of all kinds in its name, as well as incur obligations and bring civil or criminal actions. Thus, a partnership may be declared insolvent even if the partners are not. It may enter into contracts and may sue and be sued in its firm name or by its duly authorized representative. It is sufficient that service of summons be served on any partner. Partners cannot be held liable for the obligations of the partnership unless it is shown that the legal fiction of a different juridical personality is being used for a fraudulent, unfair or illegal purpose.

College of Business Administration Education Legal Management Bolton Street, Davao City Personal Law Notes Jedi Bentillo

Efect of failure to comply with statutory requirements Under Art 1772 Partnership still acquires personality despite failure to comply with the requirementsofof public execution instrument and registration of name in SEC.

Under Arts 1773 and 1775 Partnership with immovable property contributed, if without requisite inventory, signed and attached to public instrument, shall not acquire any juridical personality because the contract itself is void. This is also true for secret associations or societies. To organize a partnership not an absolute right It is but a privilege which may be enjoyed only under such terms as the State may deem necessary to impose. Art. 1769. In determining whether a partnership exists, these rules shall apply: 1.

Except as provided by Article 1825, persons who are not partners as to each other are not partners as to third persons.

2.

Co-ownership or copossession does not of itself establish a partnership, whether such co-ownership or co- possessors do or do not share any profits made by the use of the property.

3.

The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived.

4.

The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment: a. As a debt by installments or otherwise. b.

As wages of an employee or rent to a landlord.

c. As an annuity to a widow or representative of a deceased partner.

College of Business Administration Education Legal Management Bolton Street, Davao City Personal Law Notes Jedi Bentillo

d. As interest on a loan, though the amount of payment vary with the profits of the business.

There is co-ownership whenever the ownership of an undivided thing or right belongs to different persons.

e.

Clear intent to derive profits from operation of business Co-ownership does not of itself establish the existence of a partnership, although it is one of its essential elements. This is true even if profits are derived from the joint ownership. The profits must be derived from the operation of business by the members of the association and not merely from property ownership.

As the consideration for the sale of a goodwill of a business or other property by installments or otherwise.

In general, to establish the existence of a partnership, all of its essential features or characteristics must be shown as being present. In case of doubt, art.1769 shall apply. This article seeks to exclude from the category of partnership certain features enumerated herein which, by themselves, are not indicative of the existence of a partnership. Persons not partners as to each other Persons who are partners as between themselves are partners as to third persons. Generally, the converse is true: if they are not partners between themselves, they cannot be partners as to third persons. Partnership is a matter of intention, each partner giving his consent to become a partner. However, whether a partnership exists between the parties is a factual matter. Where parties declare they are not partners, this, as a rule, settles the question between them. But where a person misleads third persons into believing that they are partners in a nonexistent partnership, they become subject to liabilities of partners (doctrine of estoppel). Whether or not the parties call their relationship or believe it to be a partnership is immaterial. Thus, with the exception of partnership by estoppel, a partnership cannot exist as to third persons if no contract of partnership has been entered into between the parties themselves. Co-ownership possession

or

co-

The law does not imply a partnership between co-owners because of the fact that they develop or operate a common property, since they may rightfully do this by virtue of their respective titles. There must be a clear intent to form a partnership. Existence of relationship

fiduciary

Partners have a well-defined fiduciary relationship between them. Co-owners do not. Should there be dispute; the remedy of partners is an action for dissolution, termination and accounting. For co-owners it would be one, for instance, for non- performance of contract. People can become co-owners without a contract but they cannot become partners without one. Persons living together without benefit of marriage Property acquired governed by rules on coownershi p. Sharing of gross returns not even presumptive evidence of partnership The mere sharing of gross returns alone does not even constitute prima facie evidence of partnership, since in a partnership, the partners share profits after satisfying all of the partnership’s liabilities.

College of Business Administration Education Legal Management Bolton Street, Davao City Personal Law Notes Jedi Bentillo

Reason for the rule Partner interested in both failures and successes; it is the chance of loss or gain that characterizes a business. Where the contract requires a given portion of gross returns to be paid over, the portion is paid over as commission, wages, rent, etc. Where there is evidence of mutual management Where there is further evidence of mutual management and control, partnership may result. Receipt of share in the profits strong presumptive evidence of partnership An agreement to share both profits and losses tends strongly to establish the existence of a partnership. It is not conclusive, however, just prima facie and may be rebutted by other circumstances. When no such inference will be drawn Under par. 4 of art. 1769, sharing of profits is not prima facie evidence of partnership in the cases enumerated under subsections (a) – (e). In these cases, the profits are not shared as partner but in some other respects or purpose. The basic test of partnership is whether the business is carried on in behalf of the person sought to be held liable. Sharing of profits as owner It is not merely the sharing of profits, but the sharing of them as co-owner of the business or undertaking that makes one partner. Test: Does the recipient have an equal voice as proprietor in the conduct and control of the business? Does he own a share of the profits as proprietor of the business producing them? One must have an interest with another in the profits of a business as profits. Burden of proof and presumption The burden of proving the existence of a partnership rests on the party having the afirmative of that issue. The existence of a partnership must be proved and will not be presumed. The law presumes that those acting as partners have entered into a contract of

partnership. Where the law presumes the existence of partnership, the burden of proof is on the party denying its existence. When a partnership is shown to exist, the presumption is that it continues and the burden of proof is on the person asserting its termination. One who alleges partnership cannot prove it merely by evidence of an agreement using the term “partner”. Non-use of the term, however, is entitled to weight. The question of whether a partnership exists is not always dependent upon the personal arrangement or understanding of the parties. Parties intending to do a thing which in law constitutes partnership are partners. Legal intention is the crux of partnership. Parties may call themselves partners but their contract may be adjudged something quite different. Conversely, parties may expressly state that theirs in not a partnership yet the law may determine otherwise on the basis of legal intent. However, courts will be influenced to some extent by what the parties call their contract. Tests and incidents of partnership In determining whether a partnership exists, it is important to distinguish between tests or indicia and incidents of partnership. Only those terms of a contract upon which the parties have reached an actual understanding, either expressly or impliedly, may afford a test by which to ascertain the legal nature of the contract. Some of the typical incidents of a partnership are: 1. The partners share in profits and losses. 2. They have equal rights in the mgt and conduct of the partnership business. 3. Every partner is an agent of the partnership, and entitled to bind the others by his acts. He may also be liable for the entire partnership obligations. 4. All partners are personally liable for the debts of the partnership with their separate

College of Business Administration Education Legal Management Bolton Street, Davao City Personal Law Notes Jedi Bentillo

property except that limited partners are not bound beyond the amount of their investment. 5. A fiduciary relation exists between the partners. 6. On dissolution, the partnership is not terminated, but continues until the winding up of partnership is

completed. Such incidents may be modified by stipulation of the partners. Similarities between a partnership and a corporation 1. Both have juridical personality separate and distinct from that of the individuals composing it;

College of Business Administration Education Legal Management Bolton Street, Davao City Personal Law Notes Jedi Bentillo