FINAL TEXTBOOK LATEST Vol.1 (Partnership and Corporation – Illustrative Approach 1).
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ACCOUNTING 2011 (ACCOUNTING2011)
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University Of South Africa
FINAL TEXTBOOK LATEST Vol.1 (Partnership and Corporation – Illustrative Approach 1). Definition and Nature of a Partnership
A partnership is an association of two or more persons who bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the...
final textbook vol1 latest partnership and corporation
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ACCOUNTING 2011 (ACCOUNTING2011)
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Partnership and Corporation – Illustrative Approach 1
Chapter 1
The Nature and Formation of a Partnership
Learning Objectives
After studying Chapter 1, the students should be able to
1. Understand and explain the nature of a partnership and how it is formed;
2. Know the basic elements and characteristics of a partnership;
3. Identify the advantages and disadvantages of a partnership;
4. Distinguish the different kinds of partnerships;
5. Distinguish the different kinds of partners; and
6. Know the basic contents of the Articles of Co-Partnership.
Definition and Nature of a Partnership
A partnership is an association of two or more persons who bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among themselves ( Civil Code of the Philippines).
The partnership is a legal relationship among the contracting parties. This relationship originates from a voluntary contract
between them. The partnership contract may be done orally or in writing, or simply implied from the acts of the parties, as
long as the element of mutual contribution and intent to divide profits are present (Art.1767). Aside from the normal
registration requirement imposed on all businesses a partnership has to apply, upon its formation, to a city or municipality for
business permit. However, registration with the Securities and Exchange Commission is required of all partnerships with a
capital of P3,000 or more. A partner’s contributions may be in the form of money, personal property, or real property. If real
properties, such as lands and buildings, are contributed thereto, such should be executed in a public instrument (Art.
1771, 1772 and 1773).
Characteristics of a Partnership
The basic characteristics of a partnership are briefly summarized below:
1. Mutual Agency. Each partner has the authority to act for the partnership and to enter into contracts binding
upon it, provided these are within his expressed or implied authority. However, the acts of a partner that do not fall
into the category of carrying on business in the usual manner will not bind the partnership unless specific authority
has been given to the partner into such transactions.
2. Limited Life or Easily Dissolved. Since a partnership is based on a contract between individuals, its life is
limited as to the duration of that contract. Any change in the relationship among partners terminates the contract
and therefore dissolves the partnership. The addition of a new partner, death , insolvency or withdrawal of a partner
automatically dissolves the partnership.
3. Unlimited Liability. The liability of a partner for the partnership’s unpaid obligations goes beyond the amount of
his capital invested in the partnership. All partners, except the limited partners, are liable to the creditors for the
partnership’s debts up to the extent of his personal assets. Partners, therefore, may be held personally liable and
their separate assets may be attached to meet partnership obligations.
4. Co-ownership of Property. Assets invested in a partnership are no longer separately owned but now belong to
the partnership. An equipment invested in a partnership by a partner ceases to be his own property. It becomes
the property of the partnership.
5. Share in Partnership Profits. Each partner shares in the profits of the partnership. The income earned or loss
incurred from operations is divided among the partners according to their agreement. The partners are entitled to
share in the firm's profits as a return of their investment.
6. Separate Legal Entity. The partnership has a juridical personality separate and distinct
from the owners. A partnership can acquire assets or incur liabilities or enter into a contract with third parties in its
own name. It can sue and be sued.
, Partnership and Corporation – Illustrative Approach 2
Advantages and Disadvantages of the Partnership Form of Business Organization
When several persons decide to pool their resources in a business venture, they will have to choose the form of business
organization to organize. This decision calls for a careful evaluation of the relative advantages and disadvantages of each
form of business organization.
Advantages of a Partnership
1. Easily formed. A partnership may be created by an oral or written contract between two or more persons or may
be implied by their actions.
2. A greater amount of capital may be raised in a partnership than in a sole proprietorship.
3. Relative freedom and flexibility in decision-making. Decisions are made by the
managing partner and changes in the enterprise may be effected simply by agreement among the partners without
the formalities necessary under a corporation provided such agreement comply with the provisions of the
Partnership Law.
4. Better management resulting from the combined experience and ability of several
individuals. Compared to a sole proprietorship, the combined skills of two or more partners will result in better
operations of the firm.
Disadvantages of Partnership
1. Unlimited liability. Each partner is personally liable for partnership debts.
A partnership creditor can run after the assets of a general partner in case the assets of the partnership are
insufficient to cover the creditor's claim against the firm. This usually happens during the process of liquidation.
2. Easily dissolved. There is a lack of partnership continuity because of its being easily dissolved. When the old
partners accept a new partner, the partnership is dissolved, and new articles of co-partnership should be prepared
and submitted to the SEC for approval. Also, when a partner die, or when a partner withdraws from the partnership
for whatever reason or when a partner becomes disabled, all of these will cause the dissolution of the partnership;
thus, the organization is unstable as compared to a corporation.
3. Difficulties in transferring ownership interest. The interest of a partner in the partnership cannot be transferred
to another without the consent of all the other partners. This is not true in the case of a corporation or a sole
proprietorship.
4. Limited capital. Unlike corporations, a partnership cannot raise large amounts of capital from public sources
through the sale of securities. The partnership capitalization therefore is limited to what may be invested by the
partners.
Kinds of Partnerships
According to the Activities or Purpose
1. A commercial partnership is a partnership whose main activity is the manufacture
or the purchase and sale of goods and services.
2. A professional partnership is a partnership organized for the purpose of rendering professional services such as
the professional firm of accountants, lawyers, engineers, doctors, and others.
According to the Liability of the Partners
1. A general partnership is one wherein all partners may publicly act on behalf of
the firm and each partner can be held individually liable for the obligations of the firm to the extent of their personal
property. Such partners are known as general partners.
2. A limited partnership is a partnership wherein one or more, but not all the partners,
have a limited liability. The law provides that at least one number of the limited partnership shall be a general
partner. Since a limited partner is answerable for partnership debts only up to the extent of his contribution, the law
requires that a limited partnership should have at least one general partner to protect the interest of creditors.
, Partnership and Corporation – Illustrative Approach 3
Normally, the partnership name has the word limited ( Ltd.) at the end of the name. Example : Black & Decker
Ltd.,
Limited Partnership
The minimum composition of a limited partnership:
1. At least one general partner. Aside from making his own contribution to the limited
partnership, he is also the partner responsible for the efficient and profitable
management of the partnership’s business. Normally, he is the managing partner.
2. At least one limited partner. His only role in the partnership is to make his own
contribution and receive his share in the profit. He does not participate in the
management of the partnership. He is liable to partnership contractual liabilities only to the extent of his
contributions to the partnership.
According to Object
1. Universal Partnership of Profits
“ART. 1780 – A universal partnership of profits comprises all that the partners may have acquired by their industry
or work during the existence of the partnership.”
Movable or immovable property which each of the partners may possess at the time of the celebration of the
contract shall continue to pertain exclusive to each, only the usufruct passing to the partnership.”
In a universal partnership of profits, the partners retain ownership of the things they have placed at the disposal of
the partnership and only the usufruct of these things plus their industry or work represent their actual contribution to
the partnership.
2. Universal Partnership of all Present Property
“ART. 1778 – A partnership of all present property is that in which the partners contribute all the property which
actually belongs to them to a common fund, with the intention of dividing the same among themselves, as well as
all the profits which they may acquire therewith.”
“ART. 1779 – In a universal partnership of all present property, the property which belonged to each of the partners
at the time of the constitution of the partnership, becomes the common property of all the partners, as well as all the
profits which they may acquire therewith.”
As a rule, all present property contributed to the common fund of the universal partnership of all present property
shall belong to the partnership, to be used by all partners, not for their individual private purposes or needs, but
rather for the common benefit of the partnership. The partners may divide among themselves all property placed in
the common fund as well as the profits earned in the operation of the partnership business.
According to Legality of Existence
1. A de jure partnership is a partnership that has complied with all the legal
requirements for its existence.
2. A de facto partnership is a partnership that has not complied with some or all the legal
requirements for its formation.
According to Duration
1. Partnership at will. The partnership’s term of existence is unlimited since no period is
fixed. However, it can be terminated any time by the agreement of the partners.
2. Partnership with a fixed term. The partnership has a specific period or term for
existence and the expiration thereof dissolves the partnership. If it was formed for a specific undertaking, it is
terminated upon completion of such undertaking.
, Partnership and Corporation – Illustrative Approach 4
According to Manner of Creation
1. Orally agreed is when the partnership agreement was in the form of verbal
communication.
2. Written in a public or private instrument. When the partnership agreement was
incorporated in an article of co-partnership and approved by the Securities and
Exchange Commission (SEC), it is said to be written in a public instrument. When the
partnership agreement was made in writing but such writings was not submitted
and approved by the SEC, it is said to be written in a private instrument.
Two Kinds of Professional Partnership
1. A general professional partnership is a partnership of individuals of the same profession or licenses such as
partnership of lawyers, CPAs, Architects, etc. Normally, the name of the partnership has the word " & Associates".
Example: Angara and Associates; SGV and Associates, etc. This kind of professional partnership is exempt from
income tax.
2. A multi-professional partnership is a partnership composed of individuals with various professions.
When individuals with different professions such as lawyers, CPAs, and engineers formed a management
partnership to serve all advisory needs of the
clients, this kind of professional partnership is subject to income tax.
Differences Between a General and a Limited Partnership
General Partnership Limited Partnership
1. As to composition Composed of two or more general Composed of at least one general
partners. No limited partner. partner and at least one limited
partner.
2. As to contribution Contribution may be money, Contribution is only money and
property or industry. property.
No contribution of industry.
3. As to contract The contract is called The contract is called
“Articles of Partnership”. “Certificate of Partnership”.
4. As to management The general partners manage Only the general partner manages
the partnership by themselves the business. Limited partners can-
as mutual agents or by a not participate in the management
managing partner. of the business.
5. As to firm name The name of one or more partners The firm name should include the
may be used in the firm name. Word “Limited” and the names of
limited partners cannot be used in the firm name.
6. As to liability General partners, including Limited partners are liable only up
to a third party industrial partners, are liable to their contributions.
to the extent of their personal Only the general partners are
assets for net contractual liable to the extent of their
liabilities of the partnership. personal assets to liabilities of the
partnership.
7. As to return General partners get the return Limited partners get the return of
of contribution of their contribution only contribution as per stipulation in
during dissolution and liquidation the certificate.
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