2. CHAP 4: Limited Partnership
What is the effect for the failure of a limited partnership to extend its term when it expired, and to register it anew with the Commission?
- It has the effect of divesting the limited partners of the privilege of limited liability. - Consequently, as far as third persons are concerned, the law considers the firm as a general partnership (McDonald vs. Morky, 1956.) having juridical personality.
What may a limited partner contribute in a limited partnership?
- It may be cash or property, but NOT services. (Art 1845)
Who may become limited partners?
-It must consist of specified persons. Note: - A partnership cannot become a limited partner. - A general partner may become a limited partner.
What is the effect if there is no substantial compliance with the legal requirements?
1. As to third persons - the firm is such a general partnership only as to its relation to third persons. --- EXC: Partnership creditor guilty of estoppel. (if attaching creditors recognized and deal with a firm as a limited partnership) 2. As between the partners - the firm is treated as limited partnership, that as between the partners they are bound by their agreement.
What is the status of an heir of deceased general partner admitted as a partner under the articles of partnership?
1. GR: He shall be admitted as a limited partner. (to protect him from any liability in excess of the value of the estate inherited.) 2. EXCEPTION: There is a stipulation in the articles of partnership admitting him as a general partner. ("the partnership shall be continued and the deceased partner shall be represented by his heirs and assignees in said partnership") 3. EXC TO EXC: Stipulation would not bind the heirs if the latter would refuse to assume personal and unlimited responsibility for the obligations of the firm. (Goquiolay vs Sycip, 1963)
What are the instances when a surname of a limited partner may appear in the partnership name?
1. GR: Surname of a limited partner shall NOT appear in the partnership name. 2. EXCEPTIONS: --- a. It is also the surname of a general partner, or --- b. Prior to the time when the limited partner became such, the business had been carried on under a name in which his surname appeared. (Art 1846)
Differences between a general partner/partnership and a limited partner/partnership
1. General partner - personally liable; Limited Partner - liability extends only to his capital contributions; 2. General partners - have equal right in the management of the business; Limited Partner - no share in the management of the limited partnership. 3. General partner - may contribute money, property, or industry; Limited Partner - only money and property. 4. General partner - a proper party to a proceeding by or against a partnership; Limited partner - not a proper party. 5. General partner - his interest in the partnership may not be assigned to a third person as to make the assignee a new partner without the consent of the other partners. Limited partner - his interest in the partnership is freely assignable. 6. General partner - his name may appear in the firm name. Limited partner - his name must not appear in the firm name 7. General partner - prohibited from engaging in a business in which in which the partnership is engaged (capitalist partner), or in any business for himself (industrial partner). Limited partner - no such prohibition. 8. General partner - retirement, death, insanity or insolvency dissolves the partnership. Limited partner - does not dissolve the partnership. 9. General partnership - as a general rule, it may be constituted in any form by contract or conduct of the parties. Limited partnership - created by the members after compliance with the requirements set forth by law.
What are other limitations on the acts of a general partner?
1. General partner has no power to bind the limited partners beyond the latter's investment. 2. General partner has no power to act for the firm beyond the purpose and scope of the partnership; 3. General partner has no authority to change the nature of the business without the consent of the limited partners.
What are the liability of a limited partner in the following instances: 1. A, a limited partner, appeared as a general partner in the certificate. 2. The contribution of A, limited partner, is erroneously stated in the certificate as P15,000.00 instead of P10,000.00. 3. In the above cases, is the A liable to his co-partner who knew of such erroneous statement in the certificate?
1. If Article 1847 is applicable, he cannot raise the defense that he is merely a limited partner to escape personal liability to innocent third persons in case the other general partners are insolvent. 2. If Article 1847 is applicable, he may be made liable to innocent third persons for the difference of P5,000.00. 3. A is not liable and is a limited partner with respect to his co-partners with knowledge of the falsity.
What are the characteristics of limited partnership?
1. Limited partnership is formed by compliance with the statutory requirements (Art 1844); 2. One or more general partners control the business and are personally liable to creditors (Art 1848, 1850); 3. One or more limited partners contribute to the capital and share in the profits but do not participate in the management of the business and are not personally liable for partnership obligations beyond the amount of their respective contributions (Art 1845, 1848, 1856); 4. Limited partners may ask for the return of their capital contribution under the conditions prescribed by law (Art 1844 [h], 1857); and 5. The partnership debts are paid out of common fund and the individual properties of the general partners.
What are the conditions or requisites in order for a person erroneously believing himself to be a limited partner to be exempted from liability as a general partner?
1. On ascertaining the mistake, he promptly renounces his interest in the profits of the business or other compensation by way of income (Art. 1852.); 2. His surname does not appear in the partnership name (Art. 1846.); and 3. He does not participate in the management of the business. (Art. 1848.)
What are the Business reasons and purpose of statues authorizing limited partnership?
1. Secure capital from others for the one's business and still retain control; 2. Share in the profits of a business without risk of personal liability; 3. Associate as partners with those having business skill.
What are the rights of a limited partner which is the same with the rights of a general partner?
1. To require that the partnership books be kept at the principal place of business of the partnership (1805); 2. To inspect and copy at a reasonable hour partnership books or any of them (1805); 3. To demand true and full information of all things affecting the partnership (1806); 4. To demand a formal account of partnership affairs whenever circumstances render it just and reasonable (1809); 5. To ask for dissolution and winding up by decree of court (1831, 1857, par 4); 6. To receive a share of the profits or other compensation by way of income (1856); and 7. To receive the return of his contribution provided the partnership assets are in excess of all its liabilities. (1857).
Define a limited partnership
A partnership with one or more general partners and one or more limited partners. (Art 1843) Note: 1. The limited partners shall not be bound by the obligations of the partnership. 2. It is called as such because limited partners liability to third persons is limited to their capital contributions.
May a person be a general partner and a limited partner in the same partnership? What are his rights?
A person may be a general partner and a limited partner in the same partnership at the same time, provided that this fact shall be stated in the certificate provided for in article 1844. 2. A person who is a general, and also at the same time a limited partner shall have all the rights and powers and be subject to all the restrictions of a general partner; --- except that, in respect to his contribution, he shall have the rights against the other members which he would have had if he were not also a general partner. NOTE: 1. This means that while he is not relieved from personal liability to third persons for partnership debts, he is entitled to recover from the general partners the amount he has paid to such third persons; and in settling accounts after dissolution, he shall have priority over general partners in the return of their respective contributions.
What is the effect if a partner files a false certificate?
A person who files a false certificate thereby renders himself liable as general partner.
EXAMPLE: In a limited partnership composed of A, B, and C, the contributions may be as follows: A — cash (limited partner); B — cash (general partner); and C — services (general partner).
Any of the partners may be a general partner and a limited partner at the same time. The contribution may be cash or property only, or both capital and services. Thus, if A, in addition to cash, also contributes services, he becomes a general partner and a limited partner at the same time; if he contributes services only, he is a general partner. If a partner contributes capital only, he is either a general partner or a limited partner, or both, depending upon the agreement as stated in the certificate.
What is the effect if a limited partner contributes services?
He shall be considered an industrial and general partner, in which case, he shall not be exempted from personal liability. Note: 1. A partner may be a general partner and a limited partner in the same partnership at the same time, provided that this fact shall be stated in the certificate provided for in Article 1844. 2. but a limited partner may not be an industrial partner without being a general partner in view of Article 1845.
What is the consequence if all the partners agreed that some limited partners shall be considered as preferred limited partners but it was not stated in the certificate?
In the absence of such statement in the certificate, even if there is an agreement, all the limited partners shall stand on equal footing in respect of these matters.
Is strict compliance with the legal requirements to form a limited partnership necessary?
NO. It is sufficient that there is substantial compliance in good faith.
When must the contribution of a limited partner be contributed to the partnership?
The contribution of each limited partner must be paid before the formation of the limited partnership (see Art. 1844[f].) Note: - Additional contribution - after limited partnership has been formed.
May a limited partnership created by mere agreement between parties? How is limited partnership created?
The creation of a limited partnership is a formal proceeding and is not a mere voluntary agreement, as in the case of a general partnership. A limited partnership is formed if there has been substantial compliance in good faith with the requirements set forth in Article 1844.; --- otherwise, the liability of the limited partners becomes the same as that of general partners.
What is the liability of a general partner who performs acts of strict dominion or ownership without the consent of all the limited partners?
The general partner who violates the requirement imposed by Article 1850 is liable for damages to the limited partners.
What is the effect if a limited partner's surname appear in the partnership name?
The limited partner is liable as a general partner to partnership creditors who extend credit to the partnership without actual knowledge that he is not a general partner. Note: - If the creditor has knowledge that he is a limited partner -> limited partner shall not be liable as a general partner.
What are the instances where a limited partner takes part in the management of the partnership business?
The limited partner takes part in the management of the business and is liable generally for the firm's obligations where: 1. The business of the partnership is in fact carried on by a board of directors chosen by the limited partners; 2. By the terms of the contract between the parties, an appointee of the limited partner becomes the directing manager of the firm; 3. The limited partner purchases the entire property of the partnership, taking title in himself and then carries on the business in his own name and for his own exclusive benefit; or 4. He makes or is a party to a contract with creditors of an insolvent firm with respect to the disposal of the firm's assets in payment of the firm's debts.
A, B, and C are general partners with D as limited partner. The total assets of the partnership amount to P200,000.00. The partnership owes D P50,000.00 and E, a third party creditor, P250,000.00. Who is entitled to the partnership assets?
The third party creditor. Since the assets of the partnership are not sufficient to discharge its liabilities to E, D cannot receive his claim of P50,000.00 and payment to him will be presumed to have been made to defraud E. It will likewise raise the same presumption if D is the one indebted to the partnership and he is released from liability. D, however, is not prohibited from purchasing any partnership property if the purpose is to generate cash with which to pay off partnership obligations to third persons.
Who is preferred in payment of creditors? creditor of partnership or limited partner (considered as a non-partner creditor)
Third persons always enjoy preferential rights insofar as partnership assets are concerned. (Art 1827) Note: - the rule is designed to prevent illegal competition between a limited partner and creditors of the partnership for the assets of the partnership.
What are the requirements for formation of a limited partnership?
Under 1844, there are 2 essential requirements, which are as follows: 1. The certificate or articles of the limited partnership which states the matters enumerated in the article, must be signed and sworn to; and 2. Such certificate must be fi led for record in the Office of the Securities and Exchange Commission. Note: Purpose of certification? --- actual or constructive notice to potential creditors or persons dealing with the partnership. (eg. limited liability of the limited partners)
What are the allowable transactions may a limited perform?
Under 1854, a limited partner is not prohibited from: 1. Granting loans to the partnership; 2. Transacting other business with it; and 3. Receiving a pro rata share of the partnership assets with a general creditor if he is not also a general partner.
What are the prohibited transactions which a limited cannot perform?
Under 1854, a limited partner is prohibited from: 1. Receiving or holding as collateral security any partnership property; or 2. Receiving any payment, conveyance, or release from liability if it will prejudice the right of third persons. NOTE: Any violation of the prohibition will give rise to the presumption that it has been made to defraud partnership creditors.
Who are considered as preferred limited partners?
Under 1855, by an agreement of all members, general or limited, stated in the certificate, priority or preference may be given to some limited partners over other limited partners as to the: 1. return of their contributions; 2. their compensation by way of income; or 3. any other matter.
What are the matters which must be stated, signed and sworn to, in the certificate or articles of the limited partnership?
Under Art 1844, the following must be stated in the certificate or articles of the limited partnership: 1. The NAME of the partnership, adding thereto the word "Limited"; 2. The CHARACTER of the business; 3. The LOCATION of the principal place of business; 4. The NAME AND PLACE of residence of EACH MEMBER, general and limited partners being respectively designated; 5. The TERM for which the partnership is to exist; 6. The AMOUNT OF CASH and description of and the agreed value of the other property contributed by each limited partner; 7. The ADDITIONAL CONTRIBUTIONS, if any, to be made by each limited partner and the times at which or events on the happening of which they shall be made; 8. The TIME, if agreed upon, when the CONTRIBUTION of each limited partner is to be RETURNED; 9. The SHARE OF THE PROFITS or the other compensation by way of income which each limited partner shall receive by reason of his contribution; 10. The right, if given, of a limited partner to substitute an ASSIGNEE as contributor in his place, and the terms and conditions of the substitution; 11. The right, if given, of the partners to admit ADDITIONAL LIMITED PARTNERS; 12. The right, if given, of one or more of the limited partners to PRIORITY OVER OTHER LIMITED PARTNERS, as to contributions or as to compensation by way of income, and the nature of such priority; 13. The right, if given, of the remaining GENERAL PARTNER or partners to CONTINUE THE BUSINESS on the death, retirement, civil interdiction, insanity or insolvency of a general partner; and 14. The right, if given, of a limited partner to demand and RECEIVE PROPERTY OTHER THAN THE CASH in return of his contribution.
What is/are the liability of a partner for false statement in the certificate?
Under Article 1947, any partner to the certificate containing a false statement is liable provided the following requisites are present: 1. He knew the statement to be false at the time he signed the certificate, or subsequently, but having sufficient time to cancel or amend it or fi le a petition for its cancellation or amendment, he failed to do so; 2. The person seeking to enforce liability has relied upon the false statement in transacting business with the partnership; and 3. The person suffered loss as a result of reliance upon such false statement.
Are their restriction to the general rule that a general partner may bind the partnership by any act of administration?
YES. 1. GR: A general partner shall have the rights and powers and be subject to all the restrictions and liabilities of a partner in a partnership without limited partners. 2. EXCEPTIONS: However, without the written consent or ratification of the specific act by all the limited partners, a general partner or all of the general partners have no authority to: --- a. Do any act in contravention of the certificate; --- b. Do any act which would make it impossible to carry on the ordinary business of the partnership; --- c. Confess a judgment against the partnership; --- d. Possess partnership property, or assign their rights in specific partnership property, for other than a partnership purpose; --- e. Admit a person as a general partner; --- f. Admit a person as a limited partner, unless the right to do so is given in the certificate; --- g. Continue the business with partnership property on the death, retirement, insanity, civil interdiction or insolvency of a general partner, unless the right so to do is given in the certificate. (Art 1850)
After a limited partnership has been formed, may an additional limited partner be admitted in the partnership?
YES. After the formation of a limited partnership, additional limited partners may be admitted upon filing an amendment to the original certificate in accordance with the requirements of article 1865. (Art 1849) REQUIREMENTS: The amended certificate: 1. must be signed and sworn to by all of the partners, including the new limited partners; and 2. It must be filed with the SEC.
What is the effect if a limited partner participate in the management of the partnership business?
a limited partner is liable as a general partner for the firm's obligations if he takes part or interfere in the management of the firm's business.