Rights and Obligations in Business Partnerships (Philippine Law)

This is general information for learning and planning. It’s not a substitute for tailored legal advice on your specific facts.

1) Legal Sources & Big Picture

Business partnerships in the Philippines are governed primarily by the Civil Code of the Philippines (Title IX, “Partnership,” Arts. 1767–1867). Related regimes include the law on agency, obligations and contracts, the NIRC (tax), SEC rules on registration and reporting, and special provisions on limited partnerships (embedded in the Civil Code). Jurisprudence clarifies many rules, especially on partner liability and dissolution.

A partnership is a consensual 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. The partnership has juridical personality separate from the partners once formed.

2) Types of Partnerships

By scope of contributions

Universal partnership of present property: common fund includes property the partners presently own and fruits thereof.
Universal partnership of profits: common fund includes profits the partners may acquire by their industry or property.
Particular partnership: for a specific undertaking or determinate things.

By duration

Partnership for a term/particular undertaking
Partnership at will: no fixed term; dissolvable by any partner in good faith.

By liability/role

General partnership: all partners are general partners (manage; unlimited, subsidiary personal liability after partnership assets are exhausted).
Limited partnership: at least one general partner and at least one limited partner (liability limited to agreed contribution; must comply with statutory formation/notice requirements).

By existence/appearance

De jure vs de facto
Partnership by estoppel: persons represent themselves as partners; they can be held liable to third persons who relied on the representation.

3) Formation, Formalities, and Registration

Essential elements

Consent (meeting of minds to form and to share profits),
Object (lawful business or purpose),
Cause/Contribution (money, property, or industry).

Form

Partnerships may be oral or written; however:
- If immovable property or real rights are contributed, the partnership contract must be in a public instrument with an inventory of such property signed by the parties.
- If capital is ₱3,000 or more, the contract should appear in a public instrument and be recorded with the SEC. Noncompliance does not void the partnership inter se, but affects enforceability and notice to third persons and may trigger penalties or practical difficulties (e.g., opening bank accounts, securing permits).

Name

Use of a firm name is allowed; it should not be misleading or deceptively similar to others. Inclusion of a limited partner’s surname in a limited partnership firm name generally exposes that limited partner to general-partner liability to persons misled thereby (subject to narrow exceptions).

Contributions

Money: deliver on due date; defaulting partner owes interest and damages.
Property: must transfer ownership/possession as promised and warrant against eviction and hidden defects (as applicable).
Industry (services/skill): “industrial partner” contributes labor/skill; typically cannot be charged with losses unless stipulated; forbidden to engage in any separate business without consent.

4) Internal Governance & Management

Default rules (modifiable by agreement)

Management may be entrusted to one or more partners (or even a third person). If appointed in the articles, a managing partner cannot be removed without just cause. If several managers and there is conflict, majority decision controls; if tied, decision preserving the status quo prevails unless urgency.
Acts of strict dominion usually need consent of the partners (e.g., assigning or mortgaging real property of the partnership, admitting a new partner, compromising claims, submitting to arbitration, renouncing rights without payment, disposing of the good-will), unless a manager is expressly authorized.
Agency principle: Every general partner is an agent of the partnership for acts apparently carrying on the business in the usual way. Acts outside ordinary business do not bind the partnership without authority.

Books & information rights

Partners have the right to access and inspect partnership books at the principal place of business during reasonable hours, and to demand a formal account in specific situations (e.g., managing partner’s breach, partner excluded from profits, dissolution).

Fiduciary obligations (partners to each other)

Loyalty: account for any benefit derived without consent from any transaction concerning the partnership or use of its property/name/goodwill; no secret profits.
Care: avoid gross negligence or willful misconduct; act with diligence of a good father of a family.
Good faith: full disclosure on matters affecting the partnership.

5) Financial Rights & Duties

Profits and losses

Profit/loss sharing is as stipulated. If none:
- Capitalist partners share profits and losses in proportion to contributions.
- Industrial partner receives a just and equitable share of profits and, by default, does not bear losses (unless agreed).
Interest on capital is not owed unless expressly stipulated, and if so, typically from the date agreed.

Reimbursement & advances

A partner who, in good faith, advances funds or incurs obligations in the proper conduct of the business has a right to reimbursement with interest.

Competing business

An industrial partner may not engage in any business for himself unless permitted; violation allows exclusion and damages. A capitalist partner may engage in other businesses unless they compete with the partnership or the articles prohibit; then damages or exclusion may follow.

Transfers of interest

A partner’s transferable interest is his share of profits and surplus. Assignment of this interest does not make the assignee a partner nor give management rights; it merely entitles the assignee to receive distributions and, upon dissolution, the assignor’s share of surplus.
Substitution of a partner (admission of a new one or transfer of full partnership status) requires consent of all partners, unless otherwise agreed.

Charging order / creditors

A judgment creditor of a partner may obtain remedies against the partner’s transferable interest, not against specific partnership property. The proper route is akin to a charging order over distributions.

6) Rights in Partnership Property

Partners have three distinct rights:

Rights in specific partnership property (owned by the firm, not the partners as co-owners in their individual capacity; not subject to attachment by a partner’s personal creditors).
Interest in the partnership (profits and surplus).
Right to participate in management (unless waived/limited).

Use of property must be for partnership purposes. Private use without consent triggers accounting and damages.

7) Liability Regime

Primary liability of the partnership

The partnership is primarily liable for its obligations.

Secondary, subsidiary partner liability (contract)

After partnership assets are exhausted, all partners (including industrial partners) are subsidiarily liable pro rata with their separate property for partnership debts arising from contracts—unless a partner has separately bound himself solidarily.

Solidary partner liability (torts/wrongs)

For wrongful acts or omissions of any partner acting in the ordinary course of business or with authority, the partnership and all partners are solidarily liable to third persons for resulting loss/injury.
For misapplication of money/property received in the course of business, liability is likewise solidary.

Incoming/outgoing partners

An incoming partner is liable pro rata for existing obligations only to the extent of partnership property, unless he assumed more.
A retiring partner remains liable for obligations incurred while he was a partner, unless a novation or release is obtained.

Partner by estoppel

One who represents himself or consents to be represented as a partner can be liable to third persons who relied in good faith—even if no partnership actually exists.

8) Special Rules on Limited Partnerships

Formation

Must execute and file a certificate containing statutory particulars with the SEC. Public notice is essential for limited-liability status.

Firm name

Should include the word “Limited” (or equivalent). Inclusion of a limited partner’s surname may expose him to general liability if it misleads.

Rights & restrictions (limited partners)

May receive profits and return of contributions under statutory solvency tests.
May inspect books and seek information; may advise but must not take part in control. Control risks loss of limited liability as to persons who reasonably believe the limited partner is a general partner.
Priority on dissolution: return of contributions and unpaid profits after creditors but before general partners’ returns.

Liability ceiling

Limited partner’s liability is generally limited to the contribution actually made or agreed, subject to estoppel, control, and improper distributions rules.

9) Third-Party Dealings: Authority & Notice

Apparent authority

Acts by a partner in the usual course bind the partnership, even if the partner exceeded internal limits, unless the third party knew of the restriction.

Extraordinary acts (normally require unanimity or express authority)

Disposing of or encumbering real property,
Admitting new partners,
Assigning goodwill,
Compromising or submitting to arbitration partnership claims,
Renouncing claims without payment,
Fundamental changes in the nature of business.

Negotiable instruments

Execution/indorsement by a partner in the firm name binds the partnership if within apparent authority and ordinary course of the business.

10) Dissolution, Winding Up, and Termination

Dissolution = change in relation of partners caused by any partner ceasing to be associated in carrying on the business. It may occur by:

Will (for partnership at will, in good faith),
Expiration of term or completion of particular undertaking,
Mutual agreement,
Unlawfulness of business,
Death, insolvency, or civil interdiction of a partner,
Judicial decree (e.g., partner’s incapacity, breach, business can only be carried on at a loss, or other equitable grounds).

Winding up

Partners who have not wrongfully caused dissolution (or a court-appointed liquidator) wind up the affairs: collect assets, pay creditors, settle accounts.

Distribution waterfall

Outside creditors,
Partner loans/advances,
Capital contributions,
Profits/surplus.

Post-dissolution authority

A partner may still bind the partnership to third persons who had extended credit prior to dissolution and lacked notice, for acts appropriate for winding up or ordinary acts unless third persons had actual/constructive notice. Proper notice (publication + personal notices to known creditors) is critical.

Wrongful dissolution

The partner who wrongfully dissolves is liable for damages; the innocent partners may continue the business using partnership assets (with security for the wrongfully dissolving partner’s interest) under statutory terms.

11) Accounting Between Partners

Partners are entitled to a formal account:

If a partner is wrongfully excluded,
If a partner has derived secret profits,
Upon dissolution, or
As provided by the agreement.

Rules include:

Capital account and current account maintenance,
Interest only if stipulated (or on wrongful retention/advances),
Allocation of profits/losses as agreed or per default rules,
Indemnity for liabilities incurred in proper conduct of the business.

12) Regulatory & Tax Considerations (high-level)

SEC: Partnerships meeting statutory thresholds or with real property contributions should be in a public instrument and recorded; limited partnerships must file a certificate with requisite contents. Updates to beneficial ownership/KYC rules may apply.
Local permits: Mayor’s/business permits, DTI/BN registration if using a business name (where applicable), BIR registration, invoicing compliance.
Tax (NIRC):
- In general, partnerships (other than GPPs) are treated as corporations for income tax purposes and file corporate returns. Rates and incentives depend on current tax law.
- General Professional Partnerships (GPPs) are pass-through for income tax: the entity computes net income, but partners are taxed on their distributive shares (as professional income). The GPP may still be subject to VAT or percentage tax depending on gross receipts.
- Withholding, VAT, percentage tax, documentary stamp tax, and local business taxes may apply depending on activities.
Labor, data, sectoral licenses: Partnerships hiring employees must comply with labor standards; regulated industries (e.g., finance, healthcare) require sectoral approvals.

(Tax rates and procedural thresholds change; always confirm current figures before filing or transacting.)

13) Common Clauses to Manage Risk

Purpose & scope of business; principal office.
Contributions (amount, timing, valuation, non-cash appraisal, default remedies).
Profit/loss sharing (including treatment of industrial partners).
Management (who manages; veto/consent rights; matters requiring unanimity).
Banking & funds control (dual signatures, spending limits).
Non-compete/conflict-of-interest, duty to offer opportunities.
Admission of new partners; transfer restrictions; right of first refusal.
Deadlock resolution (tie-breaker, buy-sell).
Dispute resolution (mediation/arbitration; venue; governing law).
Death/disability/withdrawal (buyout formula; valuation method; insurance-funded buyouts).
Dissolution/winding-up procedures; distribution waterfall restatement.
Confidentiality & IP ownership, assignment of work product.
Books & records; audit rights; fiscal year; tax matters partner.
Limited partnership-specific: control limitations, safe harbors, distributions, return of capital.

14) Practical Do’s & Don’ts

Reduce the agreement to a clear written contract; notarize and comply with any public-instrument/SEC requirements.
Keep proper books, minutes of key decisions, and document authority granted to managers.
Use separate bank accounts; avoid commingling.
Give prompt notice of any dissolution or partner changes to limit apparent authority.
Periodically review profit-sharing vs actual contributions and roles.

Don’t

Allow partners to bind the firm for extraordinary acts without written authority.
Let an industrial partner moonlight in competing ventures without consent.
Distribute profits when the partnership would be insolvent or in breach of creditor protections.
Admit a new partner without unanimous consent, unless your contract clearly allows it.

15) Quick Reference: Rights & Obligations Matrix

Topic	General Partner	Industrial Partner	Limited Partner
Manage/Bind	Yes (default, ordinary course)	Yes if made a manager	No (risk loss of limitation if controls)
Profit Share	As agreed; else proportionate to capital	Just & equitable	As agreed in certificate
Bear Losses	As agreed; else proportionate to capital	No (by default, unless stipulated)	Up to contribution (subject to improper control/estoppel)
Access Books	Yes	Yes	Yes (inspection/information rights)
Liability (Contracts)	Subsidiary, pro rata after firm assets	Same	Limited to contribution if compliant
Liability (Torts)	Solidary with firm if in ordinary course	Same	Generally limited (but control/estoppel can expand)
Transfer Interest	Profits/surplus only (assignee ≠ partner)	Same	Same
Admission/Substitution	Requires partners’ consent (unless agreed)	Same	Requires consent per certificate

16) Checklist Before You Start

Choose structure: general vs limited; particular vs at-will; consider GPP if a professional practice.
Draft a robust partnership agreement covering contributions, management, exits, and disputes.
Formalize: Notarize; prepare public instrument and inventory if real property; file SEC registration where required (mandatory for limited partnerships).
Register with BIR and obtain local permits; set up statutory books and invoicing.
Open bank accounts and set internal controls (signatories, approval thresholds).
Document authority of managers/agents; define matters requiring unanimity.
Arrange insurance (key-person, buy-sell funding).
Adopt compliance calendar (tax, permits, SEC filings if applicable).
Plan for exits: buyout formula, valuation method, and funding.

17) Final Notes

Many default rules are suppletory—partners can reallocate rights and duties by contract, except where the law imposes mandatory protections (e.g., fiduciary duties, creditor protection).
Because tax, registration, and regulatory thresholds evolve, confirm current forms, rates, and filings before acting.
For cross-border partners, add clauses on foreign ownership limits, FX/remittance, and dispute resolution.

If you want, I can turn this into a fill-in-the-blanks Partnership Agreement Term Sheet tailored to your scenario (capital, roles, profit split, exit rules).