A partnership is formed when 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. It has a juridical personality separate from the partners. In a general partnership, the partners are liable, even with their personal property, for partnership debts after partnership assets are exhausted; in a limited partnership, a limited partner's liability is confined to their contribution. A partnership with capital of 3,000 pesos or more must be registered with the SEC, and it is dissolved by the causes the law provides, such as the withdrawal or death of a partner.
Two friends pooling money to run a business have, whether they realize it or not, likely formed a partnership — a distinct legal entity with its own rules on liability and profit-sharing.
How a Partnership Is Formed
Under the Civil Code, a partnership exists when 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. Three elements stand out: a contribution (which may be money, property, or even just industry — skill and effort), a common fund, and the intent to share profits. A partnership can arise from an oral agreement, though certain partnerships must be in writing and registered.
Importantly, a partnership has a juridical personality separate and distinct from each partner — it can own property, sue, and be sued in its own name.
Registration
A partnership with a capital of 3,000 pesos or more (in money or property) must appear in a public instrument and be registered with the Securities and Exchange Commission (SEC). Where immovable property or real rights are contributed, an inventory of that property, signed by the parties, must be attached, and the contribution must be in a public instrument — otherwise the partnership is void as to those. Registration also gives the partnership a clear legal footing for dealing with third parties.
Kinds of Partnership and Partners
- A general partnership is composed of general partners, all of whom participate in management and bear liability;
- A limited partnership has at least one general partner and one or more limited partners, whose liability is capped at their contribution; and
- Partners are also classified as capitalist (contributing money or property) or industrial (contributing only industry).
Liability of the Partners
This is where partnerships differ sharply from corporations. In a general partnership, after the partnership’s own assets are exhausted, the general partners are liable with their personal property, pro rata, for partnership obligations — there is no limited liability shield. An industrial partner, who contributed only labor, is generally not liable for losses as between the partners, but may still be liable to third-party creditors. A limited partner, by contrast, risks only their contribution — provided they do not take part in management, which can strip the protection.
Rights and Duties Among Partners
Partners owe each other the duty of loyalty and good faith (a partnership is a fiduciary relationship). Profits and losses are shared per the agreement; absent one, in proportion to contributions (with special rules for the industrial partner). A partner generally cannot engage in a competing business to the partnership’s prejudice, and must account for benefits derived from partnership transactions.
Dissolution
A partnership is dissolved by causes the law lists — the expiration of its term, the express will of a partner (in a partnership at will), the withdrawal, death, insolvency, or civil interdiction of a partner, and others. Dissolution starts the winding up: partnership affairs are settled, creditors paid, and any remainder distributed to the partners. Dissolution does not instantly end the entity; it survives for winding up.
Practical Advice
- Put the partnership in writing — contributions, profit-sharing, management, and exit — and register it with the SEC where required.
- Understand that general partners risk personal assets; if you want limited liability, consider a limited partnership or a corporation instead.
- Address dissolution and buy-out in the agreement so a partner’s exit or death does not paralyze the business.
Frequently Asked Questions
When is a partnership formed? When two or more persons agree to contribute money, property, or industry to a common fund with the intention of dividing the profits. It has a juridical personality separate from the partners.
Are partners personally liable for partnership debts? In a general partnership, yes. After partnership assets are exhausted, general partners are liable with their personal property, pro rata. A limited partner's liability is confined to their contribution, unless they take part in management.
Does a partnership need to register with the SEC? A partnership with capital of 3,000 pesos or more must be in a public instrument and registered with the SEC. Where immovable property is contributed, an inventory must be attached and the contribution made in a public instrument.
How is a partnership dissolved? By causes the law provides, such as expiration of its term, the express will of a partner in a partnership at will, or the withdrawal, death, insolvency, or civil interdiction of a partner, followed by winding up.
This commentary is for general informational purposes only and does not constitute legal advice. For guidance specific to your situation, please consult a licensed attorney.
If you are forming a partnership or dealing with a partner's exit, our firm can prepare the agreement and protect your interests. You may reach us via Viber or WhatsApp, call us at 0995 433 5550, or send an email to vivasnobles@gmail.com. We look forward to hearing from you.