Partnership Law in the Philippines: Formation, Liabilities, and Dispute Resolution

This article distills the core rules on partnerships under the Civil Code of the Philippines (Title on Partnership) and related practice norms. It’s meant for general guidance, not legal advice.

1) What a “Partnership” Is—and Why It Matters

Definition & nature. A partnership is a consensual contract where two or more persons agree to contribute money, property, or industry to a common fund with the intention of dividing profits. Once formed, the partnership acquires a juridical personality separate and distinct from the partners. This separateness drives many consequences: it can own property, enter contracts, sue and be sued, keep its own books, and is primarily liable for its obligations.

Delectus personae. Choice of partners is fundamental. You can freely transfer your economic interest (right to profits and surplus), but you cannot make someone a partner—or substitute a partner—without unanimous consent (unless the articles provide otherwise).

Partnership vs. co-ownership or joint venture. Merely owning property together or sharing gross returns does not create a partnership. Sharing of net profits is prima facie evidence, except when the share is really rent, wages, interest on loans, annuities, or similar.

2) Types and Classifications

By scope of contributions

Universal partnership of present property (rare in practice).
Universal partnership of profits (rare).
Particular partnership (most common): formed for a specific enterprise, business, or undertaking.

Persons who cannot donate to each other (e.g., spouses) cannot form a universal partnership, but they may form a particular partnership.

By liability and role

General partnership: all partners are general partners (mutual agency; personal exposure described below).
Limited partnership: at least one general partner (management, personal exposure) and one limited partner (no management; liability generally limited to contribution).
Industrial partner: contributes industry/services only (no capital); ordinarily cannot engage in competing business.

By duration

For a term or undertaking, or
At will (no term): any partner may dissolve in good faith at any time.

By conduct

Partnership by estoppel (or “partner by estoppel”): arises vis-à-vis third persons when someone holds out (or allows being held out) as a partner and a third party reasonably relies.

3) Formation: Elements, Formalities, and Registration

Essential elements

Consent of at least two persons with capacity.
Object: lawful business or undertaking.
Cause: contribution to a common fund and intent to divide profits.

Contributions

Money or property (ownership or use/fruits; immovables require proper form/inventory).
Industry (skills, labor, know-how). Industrial partners usually share in profits, but—unless agreed—not in losses.

Form requirements

The contract may be oral or written.
If real property or real rights are contributed, a public instrument and inventory are required.
Traditionally, if capital meets or exceeds a statutory threshold (commonly cited as ₱3,000), the articles should be in a public instrument and registered with the Securities and Exchange Commission (SEC). Lack of registration does not negate the existence of the partnership as to third persons, but it can have important evidentiary and compliance consequences.

Regulatory & tax registrations (practice)

SEC: registration of Articles of Partnership (and Certificate of Limited Partnership for LPs).
BIR: registration; authority to print invoices/ORs; books of accounts; tax type activation.
LGU: mayor’s/business permits, barangay clearance.
Other: DTI trade name or IPOPHL trademark (if branding), industry licenses (if regulated).

Naming

Avoid corporate designators like “Inc.” or “Corp.”
In limited partnerships, using a limited partner’s surname in the firm name can expose that limited partner to general-partner-like liability towards unaware creditors.

Typical contents of Articles of Partnership

Firm name and principal office.
Purpose/business.
Term (years; “until dissolved”; “until completion of [undertaking]”).
Partners (capital vs. industrial) and contributions (valuation; timing).
Profit/loss sharing (default: in proportion to agreed contributions; industrial partners share in profits; losses per agreement—industrial partners usually excluded from losses unless agreed).
Management: managing partner(s); voting thresholds; bank signatories; acts needing unanimity.
Restrictions: non-compete; confidentiality; assignment limits.
Transfers & admission: process for new partners; pre-emptive rights.
Dispute resolution: mediation/arbitration clause; venue; governing law.
Events of dissolution and liquidation waterfall.

4) Partnership Property and Partner Interests

What counts as partnership property

Property contributed or later acquired in the partnership name or on its account. Title, intention, and treatment in the books matter.

Rights in specific partnership property

Held in a special “tenancy in partnership;” generally not assignable by an individual partner; not subject to attachment for a partner’s personal debts.

Partner’s transferable interest

The right to receive distributions (profits/surplus). It is assignable and chargeable by a personal creditor via charging order, which diverts distributions to satisfy the judgment.
An assignee does not become a partner (no management or information rights), unless admitted by all partners or per the articles.

Books & information

Books are kept at the principal place of business. Each partner has a right to inspect and copy at reasonable times and to demand a formal account in specified situations (e.g., being excluded from profits, misappropriation, wrongful conduct, or upon dissolution).

5) Management, Agency, and Authority

Mutual agency (general partners). Every general partner is an agent of the partnership for acts in the ordinary course of business. The partnership is bound unless:

The partner lacked authority; and
The third person knew or should have known of the lack of authority.

Extraordinary acts (e.g., disposing of substantially all assets, admitting a new partner, changing the business, confessing judgment, making fundamental changes) typically require unanimity or the approvals stated in the articles.

Compensation. Absent agreement, a partner is not entitled to salary for acting in the partnership business, but is entitled to reimbursement for advances and expenses, with interest where allowed.

Fiduciary duties.

Loyalty: account for any benefit derived from partnership property or a transaction connected to the partnership; no secret profits; avoid conflicts; do not appropriate partnership opportunities.
Care/good faith: act with the diligence of a good father of a family; disclose true and full information on all partnership matters to co-partners.

Competition.

A capital partner may engage in other ventures unless prohibited and not in direct competition that injures the partnership.
An industrial partner generally may not engage in any business for himself unless the partnership permits; otherwise, he risks expulsion and must account for profits.

6) Liabilities: Who Pays, When, and How Much

A. Contractual obligations

The partnership is primarily liable for obligations validly incurred in its name or in the ordinary course.
General partners are subsidiarily liable pro rata with their separate property after partnership assets are exhausted (unless they have expressly agreed to become solidarily liable or the law provides otherwise).

B. Torts and wrongful acts

For wrongful acts or omissions of a partner acting in the ordinary course or with authority (e.g., negligence causing damage), the partnership and all general partners are solidarily liable to the injured party.

C. Misapplication of money/property

If a partner receives money/property for the partnership and misapplies it, or the partnership receives money/property in the course of business and it’s misapplied by any partner, solidary liability may also attach.

D. Partner by estoppel / Partnership by estoppel

One who represents (or allows another to represent) that he is a partner can be liable to third persons who extend credit in reliance on that representation, to the extent necessary to protect those third persons.

E. Incoming and outgoing partners

An incoming partner is liable for pre-admission obligations only to the extent of partnership property; his separate property is not answerable for antecedent debts.
A retiring partner remains liable for obligations incurred before retirement; for post-retirement obligations, he can be discharged by novation or proper notice to creditors. Giving public and specific notice is best practice to cut off apparent authority.

F. Limited partnerships

A limited partner is not liable beyond the amount of his contribution provided he does not take part in control. Participation in control (beyond enumerated safe acts) can expose him to general partner liability towards persons who reasonably believed he was a general partner.
Mandatory filing of a certificate of limited partnership is essential; defects in filing can lead to loss of limited liability as to third persons misled thereby.

G. Creditors’ priorities (marshalling)

Partnership creditors have preference over partnership assets.
Separate creditors of a partner have preference over that partner’s separate property.
Any surplus then follows the agreed or legal waterfall.

7) Dissolution, Winding Up, and Termination

Dissolution is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business. The partnership continues for the limited purpose of winding up, and finally terminates once winding up is complete.

Common causes

Expiration of term or completion of undertaking.
Express will (at-will partnerships; withdrawal must be in good faith, otherwise damages may be due).
Expulsion of a partner according to the articles.
Death, insolvency, or civil interdiction of any partner.
Illegality of the business.
Court decree for causes such as partner incapacity, gross misconduct, persistent breach, business loss, or impracticability.

Who winds up

The partners who have not wrongfully caused dissolution, or a liquidator/receiver appointed by the court.

Liquidation waterfall (general partnership)

External creditors (including partner-creditors in their capacity as creditors).
Partner advances/loans distinct from capital.
Return of capital contributions.
Distribution of surplus (profits) to partners per agreement; losses per agreement or proportionate to contributions (industrial partners generally exempt from losses unless otherwise agreed).

(Limited partnerships follow the Civil Code priority: outside creditors, limited partners (for profits and return of contributions), then general partners.)

Buyout options. Articles frequently provide for buy-sell arrangements (e.g., at book value, appraised value, or via agreed formula) upon triggers such as death, disability, retirement, or deadlock.

8) Dispute Resolution: Tools and Forums

A. Internal governance first

Check the Articles of Partnership for mediation/arbitration clauses, deadlock resolution, expulsion rules, and buy-sell provisions.

B. Mediation & Arbitration

The Alternative Dispute Resolution Act of 2004 (RA 9285) strongly supports arbitration and mediation. A well-drafted clause can make accounting, valuation, and buyout disputes faster and more confidential than court litigation. Interim relief (e.g., asset freezes, receivership) can be sought from courts in aid of arbitration, when appropriate.

C. Court actions commonly used

Action for accounting and damages (e.g., breach of fiduciary duty; secret profits; diversion of opportunities).
Petition for judicial dissolution and winding up; appointment of a receiver.
Injunctions to restrain misappropriation, competition in breach of duty, or misuse of confidential information.
Charging order/garnishment against a partner’s transferable interest to satisfy a separate judgment.

D. Jurisdiction, venue, and prescription

Regional Trial Courts (RTCs) generally hear partnership disputes (commercial courts may be designated for business cases).
Venue: often tied to principal place of business or as agreed in the articles.
Limitation periods depend on the nature of the claim (e.g., written contracts vs. torts). A partner’s right to an accounting typically accrues at dissolution or when a cause for accounting arises (e.g., exclusion, misappropriation). Timeliness is strategic—act early.

9) Tax and Compliance Notes (High-Level)

Under the National Internal Revenue Code (NIRC), most partnerships are treated as corporations for income tax purposes, except General Professional Partnerships (GPPs) (e.g., law or accounting firms), which are pass-throughs—the partnership computes net income then allocates to partners who pay the tax.
Withholding, VAT/percentage tax, documentary stamp tax, and local business taxes may apply depending on activities and thresholds.
Keep books of accounts and issue official receipts/invoices as required.
Tax rules evolve—coordinate early with a tax adviser when structuring profit shares (especially for industrial partners, draw/guaranteed payments, and buyouts).

10) Practical Checklists

Forming a general partnership

Align on purpose, term, capital vs. industry contributions, and profit/loss sharing.
Draft Articles of Partnership; include authority matrices, dispute resolution, non-compete, buy-sell provisions.
If contributing real property, prepare public instrument with inventory.
SEC registration (and Certificate for limited partnerships).
BIR registration; books and ORs/invoices; tax types.
LGU permits; other sectoral licenses.
Open bank accounts; set signatories; adopt internal controls and an expense policy.
Keep partnership books; calendar for filings and taxes.

Avoiding liability traps

Document authority limits; require dual signatories for big-ticket transactions.
Give clear public notice of retirement or changes (letters to regular creditors; notices where appropriate).
In a limited partnership, do not let limited partners manage beyond safe harbors; keep filings current.
Train partners on conflicts, opportunity doctrine, and no-secret-profits rules.
Separate partnership assets from personal assets; keep clean books.

When trouble brews

Send a formal demand for accounting; freeze suspect disbursements; secure books and bank statements.
Consider mediation early; if needed, file for injunctive relief and/or receivership.
For deadlocks or partner exit, activate buy-sell/valuation mechanisms.

11) Sample Clauses (for your Articles)

Authority & approvals

“No partner may dispose of assets exceeding ₱[X] or incur debt exceeding ₱[Y] without [unanimous/¾] approval.”

Profit & loss

“Profits shall be shared [A%:B%:C%]. Losses shall be borne [per capital contribution; industrial partner excluded unless otherwise stated].”

Industrial partner

“The Industrial Partner shall not engage in any other business without prior written consent; any profits realized in violation shall be accounted to the Partnership.”

Admissions & transfers

“No person shall be admitted as a Partner without unanimous consent. Assignment of a Partner’s transferable interest does not admit the assignee as a Partner.”

Non-compete & confidentiality

“During the term and [X] years thereafter, a Partner shall not directly compete within [territory/line of business]; each Partner shall keep confidential all non-public information.”

Dispute resolution

“Any dispute arising out of or in connection with this Partnership shall be resolved by mediation under [institution] rules; if unresolved in 30 days, by arbitration seated in [city], under [arbitration rules], with judgment enforceable in any court of competent jurisdiction. Interim relief may be sought from the Regional Trial Court.”

Dissolution & buy-sell

“Upon death, disability, insolvency, or material breach, the Partnership may be dissolved or the affected Partner’s interest purchased at [book/appraised/EBA formula] within [X] days.”

12) FAQs and Edge Cases

Can a corporation be a partner? Corporate participation in partnerships depends on the corporation’s powers under its charter and general law; in practice, corporations do participate in joint ventures/partnerships if duly authorized.

Can spouses be partners? Yes, but not in a universal partnership. A particular partnership is permissible subject to property regime rules and conflict-of-interest safeguards.

Is registration mandatory? A partnership exists by consent; however, proper SEC/BIR/LGU registration is essential for enforceability, compliance, banking, and limited liability effects (especially for limited partnerships).

Are partners employees? Generally no—they are proprietors. However, a partner may also hold an employment role in rare structured arrangements; tax and labor consequences must be considered carefully.

13) Key Takeaways

A partnership is easy to form—but it’s the governance and exits that need the most drafting attention.
General partners carry personal exposure (subsidiary pro rata for contracts; solidary with the firm for torts).
Limited partners keep limited liability only if they do not control and filings are proper.
Build in authority matrices, information rights, valuation, buy-sell, and ADR from day one.
Keep books clean, give notices on changes, and separate personal from partnership assets.

If you’d like, I can turn this into a printable checklist or draft Articles of Partnership tailored to your business (purpose, capital, roles, approvals, ADR, and buy-sell).