I. Concept and Governing Law

A. Definition and Essential Elements

In Philippine law, a partnership is a contract where 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.

From this definition flow the classic requisites:

A valid contract (meeting the general requisites of consent, object, and cause).
Mutual contribution (money, property, and/or industry).
A lawful business or undertaking and a common fund.
Intention to obtain and share profits (profit motive distinguishes partnership from many other collaborative arrangements).
Mutual agency (each partner is generally an agent of the partnership for partnership business, subject to limits).

B. Juridical Personality

A partnership generally acquires a juridical personality separate and distinct from the partners from the moment of the meeting of minds, subject to rules on form (especially where the law requires a public instrument or inventory). This separate personality matters for ownership of partnership property, suing and being sued, and continuity rules.

C. Primary Source of Rules

The principal rules are found in the Civil Code provisions on Partnership. Special laws and regulatory requirements may apply depending on the industry (e.g., regulated professions, foreign equity limits in certain sectors, licensing), and tax rules treat partnerships in distinct ways (discussed briefly below), but the Civil Code provides the foundational framework.

II. Partnership Distinguished from Nearby Arrangements

A. Partnership vs. Corporation

Creation: Partnership arises primarily by agreement; corporation requires state grant and statutory formation.
Management: Partners manage as owners/agents; corporate management is through a board and officers.
Liability: General partners may be personally liable; shareholders generally have limited liability (subject to piercing).
Transferability: Partner status is generally not freely transferable; shares are generally transferable subject to restrictions.
Life: Partnership may be more fragile (dissolution triggers) unless structured; corporation has stronger continuity.

B. Partnership vs. Co-ownership

Co-ownership exists when two or more own a thing in common (often by law or succession) and does not necessarily carry a profit-sharing business intention. Co-owners may share fruits, but sharing of gross returns alone does not establish partnership.

C. Partnership vs. Employer–Employee / Independent Contractor

A profit share paid as wages/compensation can be a labor arrangement, not partnership, if there is no co-ownership of the business and no intent to form a partnership.

D. Partnership vs. Joint Venture

A joint venture is generally treated as a species of partnership for a single project or limited purpose, unless a statute or the contract clearly dictates a different treatment. Many partnership principles (agency, fiduciary duties, accounting, dissolution) commonly apply by analogy.

III. Formation and Formalities

A. Form of the Partnership Contract

As a rule, a partnership contract may be oral or written; however, Philippine law imposes form requirements in several situations, including:

Where immovable property or real rights are contributed (commonly requiring a public instrument and, as a rule, an inventory of the immovable contribution).
Where the partnership name, third-party reliance, or registration rules require documentation.

Failure to observe required formalities can affect enforceability between partners and rights of third persons, but the partnership may still exist in fact depending on circumstances, especially as to third-party dealings.

B. Registration and Public Dealing

Partnerships that operate publicly often register with the appropriate government agencies (commonly with the SEC for certain partnership registrations, and business permits and tax registrations with local government and the BIR). Registration is not the “source” of partnership existence in the same way as corporations, but it is practically important for:

Public notice (especially for limited partnerships),
Use of firm name,
Compliance, licensing, and tax administration.

IV. Types of Partnerships in Philippine Context

Philippine law recognizes multiple classifications, often overlapping. Each classification answers a different legal question (scope, liability structure, duration, purpose).

A. As to Scope of Business: Universal vs. Particular

1. Universal Partnership

A universal partnership is one where the parties agree to bring into a common fund either:

All present property (and its use and fruits), or
All profits (or income) that they may acquire through their work or industry.

Key points:

Universal partnerships are heavily regulated by default rules because they can sweep broadly into personal assets/profits.
Spouses and persons prohibited by law from making donations to each other may face limits as to forming certain universal arrangements due to rules on property relations and prohibitions designed to prevent circumvention.

2. Particular Partnership

A particular partnership is formed for:

A specific undertaking, or
The exercise of a profession or vocation, or
A specific business, or
The use or fruits of specific property.

This is the most common modern commercial form: partners define a business (e.g., trading, services, a project, a professional practice).

B. As to Liability Structure: General vs. Limited

1. General Partnership

In a general partnership, all partners (unless otherwise agreed and disclosed) are generally treated as general partners—meaning they can participate in management and may incur personal liability for partnership obligations, subject to rules on exhaustion of partnership assets and the nature of the obligation.

Core features:

Mutual agency is broad.
Personal liability of partners is a major risk; hence, third parties often prefer it.

2. Limited Partnership

A limited partnership consists of:

One or more general partners (who manage and have personal liability), and
One or more limited partners (who contribute capital and have liability generally limited to their contributions, provided they do not take part in control in a way that defeats limited status under applicable rules).

Core features and cautions:

Limited partnership status commonly requires statutory compliance and proper public notice/registration, because third parties must be able to rely on the limitation of liability.
Limited partners must be careful about participation in control, which can expose them to liabilities to persons who reasonably believe they are general partners.

C. As to Duration: Partnership at Will vs. Partnership for a Fixed Term/Particular Undertaking

1. Partnership at Will

A partnership is at will when:

No definite term is specified, and
No particular undertaking is specified, or
Even if there is a term, the partners continue the business after the term without a new agreement fixing a term.

Effect: It may generally be dissolved by the will of any partner acting in good faith, subject to damages if the withdrawal is wrongful under the circumstances.

2. Partnership for a Fixed Term or Particular Undertaking

If a partnership is constituted:

For a definite period, or
For a specific project/undertaking,

it is generally meant to last until completion/expiry, and dissolution before that point can be wrongful unless justified by law or agreement.

D. As to Legality and Public Policy: Lawful vs. Unlawful Partnerships

A partnership formed for an unlawful purpose (or whose business is illegal) is void, and courts generally will not aid parties in enforcing illegal bargains. However, third-party protections and restitution rules can become complex depending on fault and public policy considerations.

E. As to Relation to Third Persons: De Jure/Regular vs. De Facto; Partnership by Estoppel

1. De Facto Partnership

A partnership may exist in fact even if some formalities were not observed, especially where the parties acted as partners and third persons relied on that representation. The internal enforceability between partners may be affected by form requirements, but third-party reliance can still create consequences.

2. Partnership by Estoppel (Ostensible Partnership)

Even if no true partnership exists, a person who represents himself as a partner, or consents to be represented as such, may be liable to third persons who extend credit in reliance on that representation. Liability is based on estoppel—fairness and protection of reliance.

F. As to Business Nature: Commercial vs. Civil (Functional Classification)

Partnerships can be described as:

Commercial if engaged in trade/business in a commercial sense, or
Civil if engaged in activities not considered “commercial” in character (e.g., certain professional or agricultural arrangements).

This distinction may matter historically for certain rules, but modern practice usually focuses on the Civil Code’s partnership provisions, tax rules, and licensing regulations.

V. Kinds of Partners (Philippine Classifications)

“Kinds of partners” are commonly discussed from different angles: contribution, liability, participation, disclosure, and timing of entry/exit. A partner can fall into multiple categories at once.

A. According to Contribution: Capitalist, Industrial, and (Sometimes) Capitalist–Industrial

1. Capitalist Partner

Contributes money and/or property.

Shares in profits as agreed; in the absence of agreement, shares are typically proportional to contribution (subject to default rules).
May engage in other businesses subject to stipulations; duties of loyalty apply.

2. Industrial Partner

Contributes industry (labor, skill, services) rather than capital.

Generally cannot engage in business for himself that competes with the partnership without consent (a stricter default rule is often taught for industrial partners).
Profit share is as agreed; absent agreement, equity-based default rules apply (often “just and equitable” allocation rather than capital proportionality).

3. Capitalist–Industrial Partner

Contributes both capital and industry and is treated accordingly.

B. According to Liability: General Partner vs. Limited Partner

1. General Partner

Participates in management (unless restricted by agreement).
Bears personal liability for partnership debts under partnership rules.

2. Limited Partner

Liability is generally limited to contribution, subject to compliance with limited partnership rules and restrictions on control.
Typically has defined rights to information and distributions but is not the public “face” manager.

C. According to Participation in Management: Managing, Silent, and Others

1. Managing Partner

Entrusted with management powers by agreement or by partners’ designation.

Owes fiduciary duties; must act with due care and loyalty.
Can bind the partnership within authority (and within apparent authority in dealings with third persons).

2. Silent Partner

Contributes capital but does not actively manage.

Still a true partner internally; may still be liable as a general partner in a general partnership.

3. Partner with Limited Authority

A partner whose authority is contractually restricted.

Internal restrictions bind partners, but third parties may still rely on apparent authority unless they had notice of restrictions.

D. According to Disclosure to the Public: Ostensible (Apparent), Secret, Dormant, Nominal

These are practical labels often used in Philippine legal education:

1. Ostensible / Apparent Partner

Known to the public as a partner and may act for the partnership.

Third persons can rely on representations within apparent authority.

2. Secret Partner

A real partner internally, but not disclosed to the public.

Still shares profits and losses internally; may be liable depending on structure and third-party reliance principles.

3. Dormant Partner

A real partner who is both undisclosed and inactive in management.

Similar consequences to a secret partner; classification mainly affects third-party perception, not internal status.

4. Nominal Partner

Not a true partner by agreement (no real interest), but lends his name.

May incur liability to third persons under estoppel if his name/representation induced reliance.

E. According to Timing: Incoming, Existing, Retiring, Outgoing, Continuing

1. Incoming Partner

A person admitted into an existing partnership.

Admission typically requires consent as agreed (often unanimity unless stipulated).
Liability for prior obligations can be limited by agreement, but third-party rules and notice requirements matter.

2. Retiring/Outgoing Partner

Leaves the partnership by withdrawal, expulsion (if allowed), assignment, death, insolvency, or dissolution event.

Continuing liability to third persons can persist for obligations incurred while a partner, and sometimes for subsequent obligations if no proper notice of dissociation is given (depending on the circumstance and reliance).

3. Continuing Partners

Those who remain after a partner’s departure and may continue the business per agreement or by law, typically with accounting and settlement obligations.

F. Partners by Special Relation: Partner by Estoppel and Subpartner

1. Partner by Estoppel

Not a true partner, but held liable as if a partner to protect third-party reliance because of representations or consent to representations.

2. Subpartner

A person who shares in the interest of a partner (e.g., receives a portion of that partner’s share in profits) but is not a partner of the partnership.

Has no rights against the partnership’s management as a partner; rights are generally against the partner with whom he contracted, subject to accounting.

VI. Core Rights and Obligations of Partners

A. Fiduciary Duties (Good Faith, Loyalty, Disclosure)

Partners owe each other obligations of utmost good faith:

Duty to account for benefits derived from partnership opportunities.
Duty to avoid conflicts of interest and secret profits.
Duty to make full disclosure on partnership affairs.

B. Contribution and Property Rules

Contributions become part of the partnership fund under agreed terms.
Partnership property is owned by the partnership entity, not by partners individually.
A partner’s interest is typically an economic interest in profits/surplus, not a direct co-ownership of specific partnership assets.

C. Profit and Loss Sharing

Governed primarily by agreement.
If no agreement, default rules allocate based on contributions and equity principles.
Stipulations excluding a partner from profits are generally problematic; stipulations excluding a partner from losses may be treated differently depending on context and fairness, but cannot defeat mandatory rules or public policy.

D. Management and Decision-Making

Default rule: each partner has a say in ordinary matters; extraordinary acts typically require broader consent.
Appointment of a managing partner can centralize authority, but fiduciary accountability remains.

E. Right to Information and Inspection

Partners generally have rights to:

Access books and records,
Demand formal accounting in situations recognized by law (e.g., wrongful exclusion, breach of duty, dissolution, or as stipulated).

F. Transfer of Partnership Interest

Economic interests may be assignable, but assignment typically does not make the assignee a partner without consent.
Transfer does not automatically confer management rights.

VII. Partnership Liability and Third-Party Relations

A. Liability of the Partnership Entity

The partnership is liable for obligations incurred in the course of its business through authorized acts.

B. Liability of Partners

In a general partnership, partners may be personally liable for partnership obligations under applicable rules, commonly after partnership assets are exhausted or as otherwise provided by law.
Liability can arise from contract, tort, or statutory violations committed in partnership business.

C. Apparent Authority and Notice

Third persons may bind the partnership through a partner’s acts within:

Actual authority (express or implied), or
Apparent authority (what the partnership held out to the public), unless the third person had notice of restrictions.

D. Limited Partnership Specific Liability

Limited partners who take part in control or allow representations inconsistent with limited status may face exposure under reliance-based rules and statutory principles governing limited partnerships.

VIII. Dissolution, Winding Up, and Termination

A. Dissolution vs. Winding Up vs. Termination

Dissolution: change in relationship caused by a partner ceasing to be associated in carrying on the business.
Winding up: settling accounts, collecting assets, paying debts, distributing surplus.
Termination: the partnership ends after winding up is completed.

B. Causes of Dissolution

Common causes include:

Expiration of term or completion of undertaking,
Express will of any partner in a partnership at will (in good faith),
Death, insolvency, or incapacity of a partner (subject to agreement and legal rules),
Unlawfulness of the business,
Judicial dissolution for causes like misconduct, breach of agreement, or impracticability.

C. Settlement of Accounts

Winding up follows priorities:

Payment to partnership creditors,
Payment to partners for advances/loans (if any),
Return of capital contributions,
Distribution of surplus as profits according to profit-sharing ratios.

IX. Practical Philippine Notes: Naming, Professional Partnerships, and Tax Treatment (Overview)

A. Firm Name

Partnerships commonly use:

A trade name or firm name, often reflecting partners’ names in professional partnerships.
Use of a person’s name can create apparent authority/estoppel risks if it suggests partner status.

B. Professional Partnerships

Professional firms (law, accounting, architecture, medicine, etc.) must also comply with:

Professional regulatory rules (ethics, licensing, restrictions on ownership/advertising, and practice requirements).
Certain professions limit who may be a partner and how fees/profits may be shared.

C. Tax Treatment (High-Level)

Philippine tax rules typically distinguish between:

General professional partnerships (often treated as pass-through in certain respects, with partners taxed on distributive shares), and
Other partnerships that may be treated as corporations for income tax purposes under the tax code framework, depending on classification and activity.

Tax classification is fact-specific and can materially affect compliance, withholding, and reporting.

X. Checklist: Choosing the Right Partnership Form

Purpose and scope: single project (joint venture/particular) vs ongoing business.
Risk and liability: general vs limited partnership; consider personal asset exposure.
Capital vs labor: include industrial partners where skills are the main contribution.
Control and governance: managing partner, voting thresholds, deadlock rules.
Continuity planning: admission/exit, death/incapacity, buyout mechanisms.
Documentation and formalities: public instrument/inventory where required; registration and licensing.
Regulatory and tax profile: industry restrictions, foreign participation rules, and tax classification implications.

XI. Summary of Types of Partnerships and Kinds of Partners (Quick Map)

Types of Partnerships

Universal / Particular
General / Limited
At will / Fixed term / Particular undertaking
Lawful / Unlawful
De facto (in practice) / By estoppel (liability by representation)
Joint venture (often treated as a particular partnership)

Kinds of Partners

Capitalist / Industrial / Capitalist–Industrial
General / Limited
Managing / Silent
Ostensible / Secret / Dormant / Nominal
Incoming / Outgoing (Retiring) / Continuing
Partner by estoppel
Subpartner (not a true partner of the firm)