Partnership

PARTNERSHIP & CORPORATIONBusiness Law and Taxation

Atty. Genevieve R. Geronimo

PARTNERSHIPNature and as Distinguished from

Corporation Partnership is covered by Article 1767-1867 of the Civil

Code of the Philippines; “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.” Art. 1767 Civil Code of the Philippines

“Two or more persons may also form a partnership for the exercise of a profession.” Ibid.

Nature and as Distinguished from Corporation

Essential Elements Partnership CorporationGoverning Law Civil Code of the Philippines Corporation Code

Creation By agreement of the parties By operation of law

No. of incorporators At least 2 partners At least 5 incorporators

Commencement of juridical personality

From the moment of execution of the contract of partnership

From the date of issuance of the certificate of incorporation by the

SEC

Powers Only those powers granted by law or implied from those granted or

incident to its existence

Any power authorized by the partners (provided it is not contrary

to law, morals, good customs, public order and public policy).

Management When not agreed upon, every partner is an agent of the

partnership.

The power to do the business and manage its affairs is vested in the

BD and trustees.

Nature and as Distinguished from Corporation

Essential Elements Partnership Corporation

Effect of Mismanagement A partner can sue a co-partner who mismanages

The suit must be in the name of the corporation

Right of succession Has no right of succession Has right of succession

Extent of liability to 3rd persons

Partners are liable personally and subsidiary (sometimes solidarily) for

partnership debts to 3rd persons

Stockholders are liable only to the extent of the shares subscribed by

them.

Transferability of interests Needs unanimous consent of all existing partners

A stockholder can transfer his shares without prior consent of

other stockholders.

Terms of existence Any period stipulated by the partners.

50 years extendible for another 50 years

Firm name Limited partnership requires to put “Ltd” to its name

May adopt any name not similar to any registered name

Dissolution Any time by or all of the partners Only with the consent of the State.

Essential requisites of partnership There must be a valid contract; There must be a mutual contribution of money, property

or industry to a common fund; It must have a lawful object or purpose; The partnership must be established for the common

benefit or interest of the partners which is to obtain profits and to divide the profits among the partners.

Form of a partnership contract – WRITTEN OR ORAL, except

Where immovable property or real rights are contributed to the partnership (regardless of the amount thereof);

Where the capital of the partnership is P3,000 or more, in money or property;

If the partnership is a limited partnership, a certificate signed under oath by the partners and recorded with the SEC.

Kinds of PartnershipAS TO OBJECT Universal Partnership (a) of all present property or (b) of profits. Particular Partnership – has for its objects determinate things, their use

or fruits, or a specific undertaking, or the exercise of a profession.

AS TO LIABILITY General Partnership – liability to the extent of their separate property

after the partnership assets have been exhausted. All are general partners.

Limited Partnership – General Partners are liable up to the extent of their separate property; Limited property are liable up to the extent of their investment; 1 General Partner and at least 1 Limited Partner.

Kinds of PartnershipAS TO DURATION Fixed Partnership – duration is fixed by the partners. For a particular undertaking – one which is organized for a certain

undertaking and its attainment will cause the termination of the partnership.

Partnership at will – one where no period is fixed by the parties for its duration; hence may be terminated at will by the partners.

AS TO REPRESENTATION TO OTHERS Ordinary Partnership – one which actually exists among the partners

as well as to third persons. Partnership by estoppel – one which in reality is not a partnership but

is considered as one with respect to those who, by reason of their conduct or admission, are precluded from denying its existence.

Rules of ManagementManaging Partners Scope of Authority Revocation of

Appointment1 .Appointment as Managing

Partner in the Articles of Partnership

May perform all acts of administration despite the opposition of his partners unless he acts in bad faith.

With just or lawful cause = vote of the partners owning the controlling interest.

Without just or lawful cause = consent of all the partners + managing partner

2 .Appointment as Managing Partner after the partnership has been executed

May perform all acts of administration but in case of opposition the partners owning the controlling interest may resort to voting for his removal.

May be removed with or without lawful cause by the vote of the partners owning the controlling interest.

3 .2 or more partners as managers

a) With specification of their respective duties b) No specification of their respective duties c) when there is a stipulation that none of the managing partners shall act w/out the consent of the others.

Rules of ManagementManaging Partners Scope of Authority Revocation of

Appointment4 .When the manner of

management has not been agreed upon

They are all managers; whatever any one of them may do alone shall bind the partnership ;

In case of opposition of the other partners: a) the decision of the majority prevails; and b) in cse of a tie, the decision of the partners owning the controlling interest shall prevail.

Distribution of profits and lossesKinds of Partners Rules of Division

1 .All are capitalist partners

a. Profits and losses are divided according to their agreement.b. If only sharing of profits has been agreed upon, the sharing of losses is proportionate to the share of each in the profits.

c. In the absence of agreement, the profits and losses are proportional to their capital contribution.

2 .In case of industrial partners

a. Profits are divided according to agreement.b. In the absence of agreement, the industrial partner shall receive a just and equitable share of the profits then the capitalist partners will divide the remaining in proportion to their contribution.c. In case of losses the industrial partner does not share in the losses.

d. In case of capitalist partners (i) losses shall be divided in accordance with their agreement (ii) in the absence of agreement in proportion to their profits; (iii) in

proportion to their capital contribution .3 .In case of capitalist-

industrial partnersa. Profits are divided according to agreement.

b. In the absence of agreement, the capital-industrial partner shall receive a just and equitable share of the profits then the capitalist partners including the capital-industrial partner in his capacity as capitalist partner will divide the remaining in proportion to their contribution.c. In case of losses, it shall be divided according to their agreement ;

d. In the absence of agreement (i) in proportion to their contribution including the capitalist-industrial partner or (ii) in accordance with the above the capitalist-industrial partner shall not share in the losses in his capacity as industrial partner.

Rule on Sharing of LiabilitiesNATURE OF LIABILITY Pro rata – equally divided among the partners. Subsidiary – partners are liable with their separate property after all the

assets of the partnership are exhausted.

PARTNERS LIABLE – ALL GENERAL PARTNERS whether capitalist or industrial.

STIPULATION EXEMPTING A PARTNER FROM LIABILITY (after exhaustion of partnership assets).

Void – as to third persons Valid – among the partners.

Dissolution and Winding-UpDISSOLUTION Change in the relationship of the partners caused by any partner ceasing

to be associated in the carrying on of the business. For any reason, provided that such dissolution does not amount to a

breach of contract or is prejudicial to 3rd parties. Remaining partners may form a new partnership with less or more

partners.

Modes of DissolutionWithout violation of the agreement of the

partnersIn contravention of the agreement

a. Termination of the definite term or particular undertaking specified in the agreement.

a. By express will of any partner any time.

b. Express will of the partners b. In the event which makes it unlawful for the business of the partnership to be carried on.

c. By expulsion of any partner c. In case of loss

Dissolution and Winding-up

WINDING-UP Is the process of settling the business or affairs of the partnership after

the dissolution. Termination refers to a point when all the business or affairs of the partnership are completely wound up.

Limited PartnershipConcept A partnership which has one or more general partners and one or more

limited partners. The limited partners as such shall not be bound by the obligations of the partnership except up to the extent of their contribution.

Use of the word “Limited” in the firm name. A limited partner may contribute money or property but not services.

CORPORATIONNature and Classes

The law governing private corporations is the Corporation Code of the Philippines (Batas Pambansa 68) which took effect on May 1, 1980.

“A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.” Section 2, BP 68


As to whether shares of stock are issued or not: (a) stock corporation and (b) non-stock corporation.

As to state or country under whose laws it was created: (a) domestic and (b) foreign corporation.

TESTS TO DETERMINE NATIONALITY OF A CORPORATION Incorporation test – nationality of the corporation follows the

country under whose laws it was incorporated. Control test – nationality of the corporation follows that of the

stockholders owning the controlling interest. Grandfather Rule – 60%-40% Filipino to foreign ratio.


As to number of persons composing them: (a) corporation aggregate and (b) corporation sole

As to purpose: (a) public and (b) private. As to whether religious or not: (a) ecclesiastical or religious

corporation and (b) lay corporation. As to whether its purpose is charitable or not: (a)

eleemosynary and (b) civil corporation. As to legal right to corporate existence: (a) de jure

corporation and (b) de facto


As to their relation to another corporation: (a) parent or holding corporation and (b) subsidiary.

As to whether the shares may be held by the public or not: (a) close and (b) open.

Corporation by prescription Corporation by estoppel – one which is in reality not a

corporation but is considered as one with respect to those who are precluded by their admission or conduct from denying its existence.

CORPORATIONCorporation, how organized: Philippine corporate entities are organized as follows:

[a] Number of incorporators - Incorporators are required to be not less than five [5] but not more than fifteen [15].

[b] Residency requirement: Majority of the incorporators are required to be residents of the Philippines.

[c] Qualifications: All incorporators: [1] must be natural persons; [2] must be of legal age

A corporation or a partnership cannot be incorporators of a Philippine corporate entity. The only way a corporation or a partnership may become stockholder of a Philippine corporation is by acquiring a stock thereof but only after it shall have been duly incorporated.

[d] Subscription requirement: All incorporators must subscribe to at least one (1) share of stock of the corporation being organized.

CORPORATIONCorporation, minimum subscription: The law requires that the total capital stock to be

subscribed at the time of incorporation should at least be twenty five percent [25%] of the authorized capital stock of the corporation being organized.

Corporation, minimum paid-up capital: The paid-up capital of a Philippine corporation

must not be less than PhP5,000.00. Thus, it is required that at least twenty five percent [25%] of the subscribed capital stock should be fully paid up but the amount of which should not be less than said PhP5,000.00.

CORPORATION

The following incorporation documents are required: [a] Articles of Incorporation; [b] By-laws; [c] Treasurer's Affidavit which should state compliance with

the authorized subscribed and paid-up capital stock requirements.

[d] Bank Certificate that the paid-up capital portion of the authorized capital stock has been deposited with the issuing bank.

CORPORATIONPowers of Corporations [a] Express – powers expressly granted to a corporation by its

charter (e.g. to sue and be sued; succession; to amend its articles).

[b] Implied – powers which are necessary to carry into effect powers which are expressly granted, and which must therefore be presumed to have been the intention in the grant of the franchise (e.g. to protect debts due to the corporation, acts to protect or aid employees).

[c] Incidental or inherent – powers that a corporation may exercise by reason of its very existence as a corporation. (e.g. power of succession, to have a corporate name, to adopt a corporate seal)

CORPORATION

Board of Directors, Trustees and Officers BD or BT is the governing body of a corporation; They shall perform the duties enjoined on them by law and

the by-laws of the corporation. Principal functions include (a) to exercise corporate powers;

(b) to conduct all corporate business and (3) to control and hold corporate property.

Qualifications of a director or trustee Owner of at least 1 share of stock which shall stand in his

name on the books of the corporation. For non-stock, the trustee must be a member of the corporation.

CORPORATION

Qualifications of a director or trustee Majority of the directors or trustees must be

residents of the Philippines. The number must not be less than 5 nor more than

15.Election of directors and trustees They are elected at a meeting called for the purpose. There must be present in person or by representative

authorized by written proxy (a) owners of the majority of the outstanding capital stock or (b) majority of the members in case of non-stock corporation.

CORPORATION

Election of directors and trustees Voting must be through ballot No delinquent stock shall be voted

Methods of voting Stock corporations – number of votes to which a

stockholder is entitled. Non-stock corporations – A member may casts as many

votes as there are trustees but may not cast more than one vote for one candidate.

CORPORATIONCorporate officers President – who must be a director Treasurer – who may be a director or not Secretary – must be resident and citizen of the Philippines Other officers as may be provided in by the by-laws. Any 2 or more positions may be held concurrently by the same person. However,

no one can be the president and secretary or president and treasurer at the same time.

* Directors of a corporation have a fiduciary duty to the company and its shareholders. To third parties, the directors act as agents. Directors are liable for losses and damages resulting from gross negligence, assenting to patently unlawful acts, bad faith in directing the affairs of the corporation and acquiring personal or pecuniary interest in conflict with their duties as directors.

CORPORATIONShare of Stock A share of stock is one of the units into which the capital stock of the

corporation divided. It represents the intangible interest or right which an owner has in the management, profits and assets of the corporation. It is property subject to conversion.

Share of stock Stock Certificate

Represents the rights and interest of a stock holder in the corporation.

Is the written evidence of such right.

Intangible personal property Tangible personal property

Maybe issued even if not fully paid (except shares without par value which are deemed fully paid)

Is issued only after subscription is fully paid.

CORPORATIONClasses of shares of stock Common stock – ordinary stock of the corporation Preferred stock – entitles the holder to certain preferences Par value stock – one the nominal value of which appears on the stock certificate No par value stock – one without any nominal or par value appearing on the

stock certificate. Redeemable shares – those which grant the issued corporation the power to

redeem or purchase them after a certain period. Founder’s shares Treasury stock – fully paid stocks but subsequently reacquired by the issuing

corporation. Watered stock – those issued without consideration or with no adequate

consideration Voting Shares – those entitled to vote in the meetings of the corporations. Non-voting shares – those without voting rights, except in certain cases.

CORPORATIONRights of stockholders Right to vote Right to dividends Right to inspect corporate books and records Right to elect and remove directors Right to a stock certificate Right to pre-emption Right to enter into voting trust agreement Right to ask for the dissolution of the corporation in proper cases Right to bring derivative suit

Rights of unpaid shares – same as paid except non-entitlement to a stock certificate.

CORPORATIONStocks, concepts Being a contract must have all the requisites of a contract including cause

or consideration. Amount of consideration: (a) par value shares – should not be less than

the par value as stated in the stock certificate (b) should not be less than the issued price as stated in the AOI, or as fixed by the BOD pursuant to its authority or in the absence of both, by the SH holding the majority of the outstanding capital stock in a special meeting called for the purpose.

The consideration for stocks are: (a) actual cash; (b) property – tangible or intangible which must be actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; (c) Labour performed or services actually rendered to the corporation; (d) previously incurred indebtedness by the corporation; (e) amounts transferred from the unrestricted retained earnings to stated capital. (f) outstanding shares exchanged fro stocks in case of reclassification or conversion.

CORPORATIONMERGER AND CONSOLIDATION Merger – union of 2 or more corporations whereby one or more but not all of the

constituent corporations are absorbed by once which continues in existence and retains its name and corporate identity.

Consolidation – union of 2 or more corporations whereby the existence of constituent corporations are terminated and a new one called the consolidated corporation is created.

The board of directors or trustees of each corporation, party to the merger or consolidation, shall approve a plan of merger or consolidation setting forth the following: 1. The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations; 2. The terms of the merger or consolidation and the mode of carrying the same into effect; 3. A statement of the changes, if any, in the articles of incorporation of the surviving corporation in case of merger; and, with respect to the consolidated corporation in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this Code; and 4. Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable.

CORPORATIONMERGER AND CONSOLIDATION Stockholder's or member's approval.

(1) Majority vote of each of the board of directors of trustees of the constituent corporations of the plan of merger or consolidation(2) 2/3 of the outstanding capital stock or 2/3 of the members; in this case any stockholder may exercise his appraisal right but not after the plan has been approved.(3) amendment is allowed upon approval of the majority vote of the BD or BT and ratified by 2/3 of the OCS.

Articles of merger or consolidation. - After the approval by the stockholders or members as required by the preceding section, articles of merger or articles of consolidation shall be executed by each of the constituent corporations, to be signed by the president or vice-president and certified by the secretary or assistant secretary of each corporation setting forth: (1) The plan of the merger or the plan of consolidation; (2) As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations, the number of members; and (3) As to each corporation, the number of shares or members voting for and against such plan, respectively.

CORPORATIONMERGER AND CONSOLIDATION Effectivity of Merger and Consolidation – upon issuance by the SEC of the

certificate of merger or consolidation.

Effects or merger or consolidation. - The merger or consolidation shall have the following effects:

1. The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation;2. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation; 3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code;

CORPORATIONMERGER AND CONSOLIDATION

4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; and

5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation.

CORPORATIONDISSOLUTION AND LIQUIDATION Dissolution is the termination of the existence of a corporation.

VOLUNTARY – (a) no creditors are affected (b) creditors are affected (c) to shorten the corporate term (d) in case of a corporation sole by submitting to SEC a declaration of dissolutionINVOLUNTARY – (a) expiry of the term stated in the AOI (b) failure to formally organize and commence transaction of its business and construction of its works within 2 years from incorporation (c) by order of the SEC and (4) by legislative dissolution.

Liquidation – existence of a dissolved corporation for 3 more years to (a) prosecute and defence suits by or against it; (b) to enable it to settle and close its affairs (3) to dispose of and convey its property and (4) to distribute its assets.

Who may effect liquidation (a) the BD or BT (b) receiver and (c) trustee

FOREIGN CORPORATIONConcept It is a corporation formed, organized or existing under any laws other than those

of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state.

License to do business – requires a business license and authority from the appropriate government agency

Purpose of the license – to subject them to the jurisdiction of the Philippine courts.

Consequence of the absence of a license – shall not be permitted to maintain or intervene in any action, but may be sued

“Doing business” – (a) soliciting orders (b) service contracts (3) opening offices (4) appointing representatives – staying 180 days or more in the Phils. (5) participation in the management, supervision and control of any domestic business (6) any other acts for commercial gain or of the purpose of the business organization.

“Not doing business” – (a) mere investment (b) having a nominee director and (c) appointment of a representative

FOREIGN CORPORATIONConcept Suit by or against a foreign corporation: (a) doing business with a license –it

may sue and be sued; (b) doing business without license – it may not sue but may be sued; (c) Not doing business – may sue and be sued in the Philippines.

Grounds for revocation of license – license may be revoked or suspended by the SEC based on certain grounds

Withdrawal of foreign corporation – upon filing of a petition for withdrawal and issuance by the SEC of a certificate of withdrawal upon satisfaction of certain requirements

CORPORATE BOOKS & RECORDSConcept Required to be kept (a) records of all business transactions (b) Minutes of

meetings of BD or BT (c) Minutes of meetings of SH or members and (d) stock and transfer books.

Where kept (a) principal office or (b) office of the stock and transfer agent. Rights of SH or Members to corporate books and records: (a) to inspect (b) to

demand the notation of certain information in the minutes. Time of inspection – reasonable hours on business days. Inspection not allowed or may be refused – (a) improper use of information

obtained through prior examination (b) absence of good faith or legitimate purpose.

Partnership

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Transcript of Partnership