CFAS C1

Civil Code and Partnerships

  • The new Civil Code repealed provisions from previous codes that related to mercantile and civil partnerships.

  • Rules from two American Uniform Partnership Acts were included in the new Civil Code.

Definition of Partnership

  • A contract of partnership is formed when two or more persons agree to contribute money, property, or services to a common fund with the intention to share profits (Civil Code of the Philippines, Article 1767).

  • Defined as an association of persons working together for profit (Uniform Partnership Act, Section 6).

  • The partnership has a separate juridical personality distinct from its partners (Civil Code of the Philippines, Article 1768).

    • E.g., Vincent Fabella and Wilhelmina Neis' partnership involves three entities: the partnership itself, Fabella, and Neis.

  • Distinction from sole proprietorships: a partnership has multiple owners, each called a partner.

  • Partnerships allow pooling of talents, knowledge, and equity capital, enabling sharing of business risks.

Characteristics of a Partnership

  • Mutual Contribution: Contributions of money, property, or industry are required for the partnership.

  • Division of Profits or Losses: Essential characteristic; all partners must share profits or losses.

  • Co-Ownership of Assets: Assets contributed belong to the partnership.

  • Mutual Agency: Partners can bind each other in contracts under express or implied authority.

  • Limited Life: A partnership can be dissolved by various factors such as the withdrawal or death of a partner.

  • Unlimited Liability: Partners (excluding limited partners) are personally liable for debts of the partnership.

  • Income Taxes: Partnerships are typically taxed (30% as per R.A. No. 9337) on their taxable income, excluding general professional partnerships.

  • Partners' Equity Accounts: Each partner has individual capital and withdrawal accounts, reflecting their investment and withdrawals from the partnership.

Advantages and Disadvantages of Partnerships

Advantages Over Sole Proprietorships

  1. Greater financial capability.

  2. Combines diverse skills and expertise.

  3. Offers flexibility in decision-making.

Advantages Over Corporations

  1. Easier to organize.

  2. More personal and informal structure.

Disadvantages

  1. More easily dissolved, leading to instability.

  2. Mutual agency and unlimited liability impose personal obligations.

  3. Limited effectiveness in raising large capital compared to corporations.

Partnership vs Corporation

Creation

  • Partnership: Formed by partner agreement.

  • Corporation: Created by law.

Number of Persons

  • Partnership requires two or more persons.

  • A corporation can also form a One Person Corporation (single stockholder).

Juridical Personality Commencement

  • Partnership: Begins with the execution of partnership articles.

  • Corporation: Begins with the issuance of incorporation certificate.

Management

  • Every partner acts as an agent unless a managing partner is appointed; in corporations, management is by the Board of Directors.

Liability

  • Partners (except limited partners) are liable for debts; stockholders’ liability is limited to their investment amount.

Succession

  • Partnerships lack succession rights whereas corporations possess perpetual existence despite changes in ownership or management.

Classifications of Partnerships

  1. According to Object:

    • Universal Partnership of All Present Property

    • Universal Partnership of Profits

    • Particular Partnership.

  2. According to Liability:

    • General (all partners liable)

    • Limited (limited partners liable only to their contribution).

  3. According to Duration:

    • Fixed term

    • At will.

  4. According to Purpose:

    • Commercial (for business transactions)

    • Professional (for practicing professions).

  5. According to Legality:

    • De jure (legally established)

    • De facto (not fully legal).

Kinds of Partners

  1. General Partner: Liable enitrely beyond investment.

  2. Limited Partner: Liable only for capital contribution.

  3. Capitalist Partner: Contributes monetary assets.

  4. Industrial Partner: Contributes expertise/services only.

  5. Managing Partner: Appointed manager.

  6. Liquidating Partner: Settles affairs upon dissolution.

  7. Dormant, Silent, and Secret Partners: Varying degrees of business involvement.

  8. Nominal Partner: Represents self as a partner without actual status.

Articles of Partnership

  • Can be oral or written, formalizing partnership structure.Key Provisions:

  1. Partnership name, purpose, and location.

  2. Partners' names and information.

  3. Formation date and duration.

  4. Capital contributions and evaluation procedures for non-cash assets.

  5. Rights and duties of partners.

  6. Accounting records and audits provisions.

  7. Profit/loss sharing methods.

  8. Partner withdrawals and salary provisions.

  9. Dispute arbitration and dissolution processes.

  • A partnership is void if there are contributions involving immovable property without proper documentation.

SEC Registration and Public Accountancy Accreditation

  • Partnerships with a capital of 3,000 or more must register with the SEC, ensuring transparency regarding membership and capital.

  • Accounting firms must register with the Professional Regulation Commission to practice public accountancy.

Accounting for Partnerships

  • Similar accounting principles to sole proprietorships; separate capital and drawing accounts for each partner.

  • A partner's capital account tracks investments, while a drawing account tracks withdrawals.

  • Withdrawals can be temporary or permanent, affecting how they are recorded.

  • Loans between partners categorized distinctly from other partnership liabilities for liquidation priority purposes.

Partnership Formation and Investments

Valuation of Investments

  • Net contributions recorded upon formation: assets credited at agreed values or fair market values.

  • Adjustments to existing accounts necessary before partnership formation to reflect fair values.

Opening Entries Upon Formation

  • Recognize individual contributions, liabilities assumed, and the overall partnership capital structure.

Conclusion

  • Understanding partnerships requires grasping legal definitions, characteristics, financial implications, and operational management distinctions from corporations.