In the Philippines, partnerships are governed primarily by the Civil Code of the Philippines (Articles 1767 to 1867). A 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 the profits among themselves.
When structuring a partnership, one of the most critical decisions involves the classification of partners. The law distinguishes between General Partners and Limited Partners, each carrying vastly different rights, obligations, and levels of risk.
1. The General Partner (GP)
A General Partner is the traditional participant in a partnership. In a "General Partnership," all partners are general partners. However, in a "Limited Partnership," there must be at least one general partner.
Liability to Third Persons
Under Article 1816, all partners (including general partners in a limited partnership) are liable pro rata with all their property for the partnership’s debts after the partnership assets have been exhausted. This liability is:
- Subsidiary: It only kicks in once the partnership's own assets are gone.
- Unlimited: A general partner’s personal assets (house, bank accounts, etc.) can be reached by partnership creditors.
Management and Agency
Every general partner is considered an agent of the partnership. Their acts for the purpose of the business bind the partnership, unless they have no authority and the person they are dealing with knows this. They have an active voice in the day-to-day management and decision-making processes.
Contributions
A general partner may contribute money, property, or industry (labor/skills). A partner who contributes only industry is specifically called an "industrial partner."
2. The Limited Partner (LP)
The concept of a Limited Partnership is found in Article 1843. It is a form of partnership where one or more general partners manage the business, while one or more limited partners contribute capital but do not participate in management.
Limited Liability
The defining feature of a limited partner is that their liability is limited to their capital contribution. Creditors cannot go after the personal assets of a limited partner to satisfy partnership debts.
Management Restrictions
Under Article 1848, a limited partner shall not become liable as a general partner unless they take part in the control of the business. If a limited partner starts managing the company, they lose their "limited" status and become liable like a general partner.
Contributions
Unlike general partners, a limited partner can only contribute cash or other property. They cannot contribute "industry" (services) alone. If they contribute services, they must be classified as a general partner.
3. Key Differences at a Glance
| Feature | General Partner (GP) | Limited Partner (LP) |
|---|---|---|
| Liability | Unlimited and subsidiary; personal assets are at risk. | Limited to the amount of their capital contribution. |
| Management | Has the right to manage and bind the partnership. | No share in management; strictly a "silent" investor. |
| Contribution | Money, property, or industry. | Money or property only (No industry). |
| Firm Name | Their name may appear in the partnership name. | Generally, their name cannot appear in the firm name (Art. 1846). |
| Proper Party | Is a proper party to proceedings by or against the partnership. | Not a proper party to proceedings, unless to enforce a right against the partnership. |
4. Legal Requirements for Creation
A partnership is generally created by mere agreement. However, for a Limited Partnership to legally exist, specific formalities must be met under Article 1844:
- A Certificate of Limited Partnership must be signed and sworn to.
- The certificate must be filed for record with the Securities and Exchange Commission (SEC).
If these requirements are not met, the partnership is treated as a General Partnership, and the intended "limited partners" may find themselves unexpectedly liable for all partnership debts with their personal property.
5. Right to Information and Accounting
Despite their lack of management power, limited partners are not powerless. Under Article 1851, a limited partner has the same rights as a general partner to:
- Inspect and copy the partnership books at reasonable hours.
- Demand true and full information of all things affecting the partnership.
- Demand a formal account of partnership affairs whenever circumstances render it just and reasonable.
- Ask for the dissolution and winding up of the partnership by decree of court.
6. Impact of Death or Insolvency
- General Partner: The death, retirement, insolvency, or civil interdiction of a general partner usually dissolves the partnership unless the business is continued by the remaining general partners under a right stated in the certificate or with the consent of all members.
- Limited Partner: The death of a limited partner does not dissolve the partnership. Their executor or administrator acquires all the rights of a limited partner for the purpose of settling their estate.