Introduction

A partnership in Philippine law is not created only by signing a document labeled “Partnership Agreement.” It can exist even without formal registration, and even when the parties deny it—so long as the legal requisites are present. Determining whether a partnership exists is crucial because it affects liability, property ownership, tax treatment, and rights among the parties and against third persons.

This article lays out the governing law, core elements, and the practical “tests” Philippine courts use to determine whether a partnership exists.

Governing Law and Basic Definition

Civil Code Definition

Under Article 1767 of 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.”

This definition controls. Labels chosen by parties are secondary to substance.

Partnership vs. Corporate Personality

A partnership is a juridical person separate and distinct from the partners (Art. 1768), once it exists. But its juridical personality can arise even without SEC registration, depending on the facts.

The Three Essential Elements (Core Legal Tests)

Philippine courts essentially look for the three requisites embedded in Article 1767:

Contribution
Common fund or joint undertaking
Intent to divide profits

If these three are shown, a partnership exists as between the parties, and often as to third persons, subject to specific rules.

1. Contribution Test

Question: Did each alleged partner contribute money, property, or industry?

Contribution can be unequal.
Contribution may be express or implied.
“Industry” includes labor, skill, management, or services.

Indicators courts accept:

Evidence of capital pooling.
Contribution of equipment or property to be used in the business.
Continuous rendering of services as a stake in the venture, not as an employee.

Not enough by itself: Mere helping out, lending money, or occasional services without profit-sharing intent.

2. Common Fund / Joint Business Test

Question: Were the contributions placed into a common fund or used in a joint business venture?

This looks at whether the parties acted as co-owners of a business, not merely co-owners of property.

Indicators:

Joint control or management.
Use of pooled resources for a continuing business.
Holding out a unified business to the public.
Shared expenses and business risks.

Key distinction:

Co-ownership of property (e.g., inherited land) does not automatically create a partnership.
It becomes a partnership if co-owners use the property to carry on business and share profits (Art. 1769(3)).

3. Profit-Sharing Test (Primary Indicator)

Question: Did the parties intend to divide profits?

Profit sharing is the strongest badge of partnership—so strong that under the Code, it may create a prima facie presumption.

Article 1769 Rules on Profit-Sharing

Article 1769 provides guidance:

Sharing of gross returns does not by itself establish a partnership. Example: Two people split sales proceeds from a property sale once—this alone doesn’t prove partnership.
Receipt of a share in net profits is prima facie evidence of partnership, unless received as:
1. Payment of a debt
2. Wages/compensation to an employee
3. Rent to a landlord
4. Annuity to a widow/heir of a deceased partner
5. Interest on a loan
6. Consideration for sale of goodwill

So courts test: Is the profit share really a profit share, or is it one of these exceptions?

Indicators of real profit-sharing:

Profit distribution proportional to agreement.
Profit share tied to business performance, not fixed like salary.
Losses also shared (or at least contemplated).

Intention Test: The “Animus Societatis”

Beyond the three elements, courts look for intent to form a partnership, sometimes called animus societatis.

Question: Did the parties intend to carry on as co-owners of a business for profit?

This intent can be shown by conduct, and can override disclaimers.

Important: Even if parties say “this is not a partnership,” courts may still find one if their acts show otherwise.

Control and Management Test (Secondary but Powerful)

Question: Did the alleged partners participate in control or management?

Partnership implies mutual agency (Art. 1818): each partner is an agent of the firm.

Indicators:

Joint decision-making on business matters.
Authority to bind the business.
Signing contracts on behalf of the venture.
Representing oneself as partner to clients or suppliers.

Note: A “silent partner” may exist, so lack of active management does not automatically negate partnership. But control strengthens the inference.

Risk-and-Loss Sharing Test

Question: Did the parties share business risks or losses, or agree to do so?

Sharing losses is not required to prove partnership if profit-sharing exists, but it is strong evidence.

Indicators:

Agreement that losses will be shared.
Each contributes to covering deficits.
No guaranteed return regardless of loss.

Contrast with loans or employment:

A lender gets paid even if the business loses.
An employee gets wages regardless of profit.

Representation / “Holding Out” Test (Partnership by Estoppel)

Even if a true partnership is absent, a person may be liable as a partner if they represented themselves as one and a third person relied on it.

Article 1825 (Partnership by Estoppel)

Question: Did the person hold out as partner (or allow others to hold them out), and did third persons rely on that?

Indicators:

Business cards, signage, public statements naming them as partner.
Allowing one’s name to be used in firm title.
Participating in negotiations as “partner.”

Effect: They may be treated as partner for liability purposes to third persons, even if no partnership exists inter se.

Written Agreement / Formalities Test (When Required)

Partnerships are generally consensual and may be oral. But some require formalities:

When a Public Instrument Is Required

If real property is contributed, the partnership must be in a public instrument, and the inventory must be attached (Art. 1771–1773). Failure affects validity as between partners, but third persons may still be protected if there was holding out.

Registration

Registration with SEC is not constitutive of partnership existence, but affects notice to third persons and compliance requirements.

So courts ask:

Is the partnership valid between the parties?
Is it enforceable against third persons?

Distinguishing Partnerships from Similar Arrangements

Courts often decide partnership existence by rejecting alternative characterizations.

1. Co-Ownership

Not partnership if parties merely own property together and split proceeds.
Becomes partnership if they operate a business using the property and share profits (Art. 1769(3)).

2. Employer–Employee

Profit share may still be wages if fixed and not tied to ownership or risk.
Test: Is the recipient subordinate, paid as compensation, and not sharing risk?

3. Loan with Profit-Based Interest

If a lender receives “profits” as interest (Art. 1769(4)(e)), no partnership if the relationship is really debtor–creditor.
Test: Is there a right of control and ownership, or only repayment?

4. Joint Venture

A joint venture is treated as a form of partnership for a single transaction or limited purpose. Courts apply the same tests: contribution, joint undertaking, profit-sharing intent.

5. Agency / Commission Arrangement

Splitting gross returns or commissions is not enough. There must be a sharing of net profits as owners.

Practical Indicators Courts Weigh Together (Totality Test)

Philippine adjudication is fact-driven. Courts typically use a totality of circumstances, including:

Existence of profit sharing
Pooling of resources
Joint control
Mutual agency
Sharing of losses/risk
Public representation
Consistency of behavior over time
Business records showing partners’ accounts

No single factor is always decisive (except that profit-sharing strongly implies partnership unless an exception applies).

Burden of Proof

The party alleging a partnership must prove it by preponderance of evidence in civil cases.

Evidence may include:

Written contracts
Receipts, ledgers, bank accounts
Testimony on agreements and conduct
Correspondence describing “partners”
SEC filings or business permits
Tax returns showing partnership income

Key Legal Effects Once Partnership Is Found

Finding partnership existence triggers major consequences:

Liability
- Partners are liable pro rata with partnership property first, and then personal assets.
- In general partnerships, liability can be solidary for torts or wrongful acts (Art. 1824).
Property Regime
- Property contributed becomes partnership property (Art. 1774 onward).
Fiduciary Duties
- Partners owe duty of utmost good faith and must account (Art. 1807–1809).
Right to Profits
- Partners have right to share profits as agreed, or equally if silent.
Dissolution Rules Apply
- Withdrawal, death, insolvency, illegality, etc., may dissolve partnership.

Common Philippine Scenarios Where Courts Find Partnerships

Family businesses run jointly with profit division even without papers.
Professional firms (law, accounting, clinics) where practitioners pool resources and split fees net of expenses.
Real estate development arrangements where parties contribute land and capital and split net gains.
Informal trading or retail ventures with shared capital and profit sharing.

Takeaways

To determine if a partnership exists under Philippine law, courts primarily apply the Civil Code framework:

Contribution by each party
Common fund/joint business
Intent to divide net profits
Supported by conduct showing co-ownership of a business, shared control, risk-sharing, and public holding out.

Profit-sharing is the strongest indicator, but it must be genuine profit-sharing as owners—not a disguised salary, rent, or loan interest.

In short: Philippine partnership law looks at reality over form. If parties behave like partners, the law will likely treat them as such.