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o General partner can secure capital from others for one’s business and still
E. LIMITED PARTNERSHIP retain control.
o There are at least three classes of contracts which can be made with
those from whom the capital is secured:
1. CONCEPT 1. Ordinary loan on interest.
2. Loan where the lender, in lieu of interest, takes a share in the profits
ART. 1843. A limited partnership is one formed by two or more persons under the
of the business.
provisions of the following article, having as members one or more general partners and
3. Cases in which the person advancing the capital secures, besides a
one or more limited partners. The limited partners as such shall not be bound by the
share in the profits, some measure of control over the business.
obligations of the partnership.
Characteristics of limited partnership.
Concept of limited partnership-- composed of two classes of partners. (1) formed by compliance with the statutory requirements (Art. 1844.);
o One or more general partners; and (2) One or more general partners control the business and are personally liable to
o One or more limited partners creditors (Arts. 1848, 1850.);
(3) One or more limited partners contribute to the capital and share in the profits
Limited liability as the key characteristic but do not participate in the management of the business and are not
- Main feature: limited partners NOT personally bound by obligations of the personally liable for partnership obligations beyond the amount of their capital
partnership. contributions (Arts. 1845, 1848, 1856.);
- Their liability to third persons is limited to a fixed amount , their capital (4) limited partners may ask for the return of their capital contributions under the
contributions or the amount they have invested in the partnership. conditions prescribed by law (Arts. 1844[h], 1857.); and
- Exception to the general rule that all partners, including industrial partners, are (5) partnership debts are paid out of common fund and the individual properties of
liable pro rata with all their property for partnership debts. (Art. 1816.) the general partners.
- Limited partner has the same type of liability as stockholder in a corporation.
General partners –much like a partner in an ordinary partnership. They are typically those
- Reason: encourage/enable persons with capital but not desiring to engage in a who know how to manage the business.
business to invest capital and become partners w/ people who have the skill in such Limited partners –usually those who put money for the business. (only investors)
business.
o Limited partners can share in profits and not be liable as general
partners; Can associate as partners with those having business skill
Limited Partnership 2
interest in the partnership may not be assigned as to make the partner’s interest is freely assignable, with the assignee acquiring all the
assignee a new partner without the consent of the other rights of the limited partner subject to certain qualifications
partners
(although he may associate a third person with him in his share)
name may appear in the firm name Must not
prohibited from engaging in a business which is of the kind of No prohibition
business in which the partnership is engaged, if he is a capitalist (since considered a mere contributor)
partner
or in any business for himself if he is an industrial partner
retirement, death, insanity, or insolvency of a general partner retirement, etc. of a limited partner does not have the same effect, for his
dissolves the partnership executor or administrator shall have the rights of a limited partner for the
purpose of selling his estate.
constituted in any form by contract or conduct of the parties limited partnership is created by the members after compliance with the
requirements set forth by law; it is composed only of general partners; it
must operate under a fi rm name which in the case of a limited partnership
must be followed by the word “Limited” (Art. 1844[1, a].); and its
dissolution and winding up are governed by different rules.
A limited partnership, unless prohibited by law, may carry on any business which could be carried on by a general partnership.
Limited Partnership 3
Example: when actual contribution is less than the amount stated in the certificate
(since reliance may cause loss to creditor; note: that no loss when actual contribution
is more)
3. CONTRIBUTIONS A general partner in a limited partnership possesses all the rights, and powers and is
ART. 1845. The contributions of a limited partner may be cash or other property, but not subject to all the restrictions and liabilities of a partner in an ordinary/general
services. partnership.
- Generally has the right to control and conduct the business of the partnership
- otherwise, he shall be considered an industrial and general partner
(only one who can act in behalf of the partnership—this is considering his personal
- partner may be a general partner and a limited partner in the same partnership
liability for all debts)
at the same time, provided that this fact shall be stated in the certificate (Art. 1853.)
- Limited partners have no right to interfere in the management
- BUT a limited partner may NOT be an industrial partner without being a general
o If they do, gen partner has the right to dissolve.
partner
o in view of Article 1845 which requires that a limited partner must be a
Restrictions on authority--general partners cannot do certain acts without the written
capital contributor. It is not clear whether the rule still applies if the
consent or certification of the act by ALL the limited partners: (See: Art. 1850)
contribution of services is made after the formation of the limited
partnership.
Article 1850. A general partner shall have all the rights and powers and be subject to all
contributions type of partner
the restrictions and liabilities of a partner in a partnership without limited partners.
partner in addition to cash, also a general partner and a limited partner
However, without the written consent or ratification of the specific act by all the limited
contributes services at the same time
partners, a general partner or all of the general partners have no authority to:
services only General partner
capital only either a general or a limited partner, or (1) Do any act in contravention of the certificate;
both,
- depending upon the (2) Do any act which would make it impossible to carry on the ordinary business of the
agreement in the certificate. partnership;
- General partner NOT entitled to compensation beyond his share of the profits 7. Assignment of interest
for his services 8. Right to judicial dissolution
o Unless: agreement to the contrary 9. Preference over general partners as to assets
Receive or hold as collateral security any partnership If liabilities are earned after withdrawal—no liability
property Provided, the certificate was amended to show the fact
Or receive from a general partner/partnership any of withdrawal.
payment, conveyance, or release from liability if at the
time, the assets of partnership are not sufficient to cover 7. Assignment of interest
liabilities to other persons (not general or limited partners) o Freely assignable by him
o Assignee does not necessarily acquire all rights of the assigning partner.—
- If Violation: only entitled to receive share of the profits/other compensation by way of
o Receipt of such is ipso jure fraud on the part of the creditor of the income or the return of contribution (to w/c assignor would otherwise be
partnership. entitled)
o Rescission o Has the right to be a substituted limited partner upon amendment of
- Reason of prohibition: prevent illegal competition between limited partners and certiifcate—in accordance w/ Art. 1865.
creditors for partnership assets. o Substitution does not release assignor from liability to partnership.
o No danger of competition if there are sufficient assets.
8. Right to judicial dissolution
5. Share of profits or compensation o Same right as a general partner; same grounds
o Right to receive what has been stipulated in the certificate to be his share o Additionally, may ask for dissolution & winding up on grounds in last par of
of profits/other compensation by way of income Art. 1857.
o May sue firm for his share of profits
o BUT: after payment if made, partnership assets must be in excess of all A. PREFERRED LIMITED PARTNERS
liabilities of the partnership (other than those to limited partners and
general partners) ART. 1855. Where there are several limited partners, the members may agree that one or
o In the absence of stipulation, not entitled to compensation for services in more of the limited partners shall have a priority over other limited partnersas to the
closing up business after dissolution. return of their contributions, as to their compensation by way of income, or as to any other
matter. If such an agreement is made, it shall be stated in the certificate, and in the
6. Return of contribution absence of such a statement all the limited partners shall stand upon equal footing.
o May withdraw it in full/in part from general partner or out of partnership
property
o Provided: GR: all the limited partners shall stand upon equal footing.
1. All liabilities of partnership (not including those to partners) have EXP: By agreement, preference may be given to some limited partners over other limited
been paid, or that there remains sufficient property to pay them partners as to:
2. Consent of all members (1) Return of their contributions;
3. Certificate is cancelled or amended (to show (2) Their compensation by way of income; or
withdrawal/reduction) (3) Any other matter.
o Need of Sufficient property so limited partner can withdraw B. COMPENSATION OF LIMITED PARTNER
contributions: (see: Art. 1858)
If not:
Insolvent partnership: he must return contribution (at ART. 1856. A limited partner may receive from the partnership the share of the profits or
the instance if partnership and creditors) the compensation by way of income stipulated for in the certificate; provided, that after
subsequently became insufficient after withdrawal: must such payment is made, whether from the property of the partnership or that of a general
return only amount that made the properties partner, the partnership assets are in excess of all liabilities of the partnership except
insufficient. liabilities to limited partners on account of their contributions and to general partners.
o Plus interest (presumably earned)
Limited Partnership 8
(1) On dissolution; or
- In other words, third-party creditors have priority over the limited partner’s rights. (2) Upon date specified in the certificate for the return; or
- In determining the liabilities of the partnership, the liabilities to the limited (3) After the expiration of the 6 months’ notice in writing given by him to the
partners for their contributions and to general partners, whether for contributions other partners if no time is fixed in the certificate for the return of the
or not, are not included. contribution or for the dissolution of the partnership.
- Liabilities to limited partners other than on account of their contributions arising
from business transactions by them with the partnership, enjoy protection, subject Right of limited partner to cash in return for contribution.
to the preferential rights of partnership creditors. (see Art. 1854.) (3rd par) Even if a limited partner has contributed property, he has only the right to demand
and receive cash for his contribution. The exceptions are:
C. RETURN OF CONTRIBUTION (1) Contrary stipulation in the certificate; or
(2) all partners (general and limited) consent to the return other than in the form of
ART. 1857. A limited partner shall not receive from a general partner or out of cash.
partnership property any part of his contributions until:
(1) All liabilities of the partnership, except liabilities to general partners and to limited When limited partner may have partnership dissolved.
partners on account of their contributions, have been paid or there remains (4th par) Additional grounds for the dissolution of the partnership upon petition of a limited
property of the partnership sufficient to pay them; partner. (See Arts. 1851[3], 1831.)
(2) The consent of all members is had, unless the return of the contribution may be (1) When his demand for the return of his contribution is denied although he has a
rightfully demanded under the provisions of the second paragraph; and right to such return; or
(3) The certificate is cancelled or so amended as to set forth the withdrawal or (2) When his contribution is not paid although he is entitled to its return because the
reduction. other liabilities of the partnership have not been paid or the partnership property is
insufficient for their payment.
Subject to the provisions of the first paragraph, a limited partner may rightfully demand the
return of his contributions: In other words, were it not for this first condition in the first paragraph of Article
(1) On the dissolution of a partnership, or 1857 which is not present, he would have been entitled to the return of his
(2) When the date specified in the certificate for its return has arrived, or contribution because of the presence of the second and third conditions.
(3) After he has given six months notice in writing to all other members, if no time is The limited partner must first ask the other partners to have the partnership
specified in the certificate, either for the return of the contribution or for the dissolved; if they refuse, then he can seek the dissolution of the partnership by
dissolution of the partnership. judicial decree.
In the absence of any statement in the certificate to the contrary or the consent of all
members, a limited partner, irrespective of the nature of his contribution, has only the right
to demand and receive cash in return for his contribution.
A limited partner may have the partnership dissolved and its affairs wound up when:
D. LIABILITIES OF A LIMITED PARTNER
(1) He rightfully but unsuccessfully demands the return of his contribution, or
(2) The other liabilities of the partnership have not been paid, or the partnership
property is insufficient for their payment as required by the first paragraph, No. 1, ART. 1858. A limited partner is liable to the partnership:
and the limited partner would otherwise be entitled to the return of his (4) For the difference between his contribution as actually made and that stated in the
contribution. certificate as having been made, and
(5) For any unpaid contribution which he agreed in the certificate to make in the future
at the time and on the conditions stated in the certificate.
When return of contribution a matter of right. A limited partner holds as trustee for the partnership:
When Consent of all is NOT required: Where the return of the contribution may be rightfully (1) Specific property stated in the certificate as contributed by him, but which was not
demanded by the limited partners; contributed or which has been wrongfully returned, and
- (2ND par) may demand the return, as a matter of right, provided the conditions in (2) Money or other property wrongfully paid or conveyed to him on account of his
paragraph 1, Nos. 1 and 3 have been complied with — contribution.
Limited Partnership 9
(1) To the partnership. —Liability is to the partnership & not to the creditors of the Liability as trustee
partnership (since they are not principals in the transaction of a partnership) - Limited partner is considered as trustee for the partnership for:
BUT general partners cannot waive any liability of the limited partners to (1) Specific property stated in the certificate as contributed by him but which he had
the prejudice of such creditors. not contributed;
(2) To partnership creditors and other partners. (2) Specific property of the partnership which had been wrongfully returned to him;
Liable for partnership obligations when: (3) Money wrongfully paid or conveyed to him on account of his contribution; and
a. he contributes services instead of only money or property to the (4) Other property wrongfully paid or conveyed to him on account of his contribution.
partnership (Art. 1845.);
b. when he allows his surname to appear in the firm name (Art. 1846.);
c. when he fails to have a false statement in the certificate corrected,
knowing it to be false (Art. 1847); Requisites for waiver or compromise of liabilities.
d. when he takes part in the control of the business (Art. 1848.); (3rd par) The liabilities may be waived or compromised, provided:
e. when he receives partnership property as collateral security, payment, (1) The waiver or compromise is made with the consent of all the partners; and
conveyance, or release in fraud of partnership creditors (Art. 1854); (2) The waiver or compromise does not prejudice partnership creditors
f. and when there is failure to substantially comply with the legal a. Who extended credit or
requirements governing the formation of limited partnerships. (Art. b. Whose claims arose before the cancellation or amendment of the
1844, par. 2.) certificate
Note: limited partner is not prevented from giving advise or suggestions to the Liability for return of contribution lawfully received.
general partner as to the business; esp: in times of severe financial crisis. (4th par) limited partner is liable to the partnership for the return of contribution lawfully
o By having a material interest in the success of the business, the limited received by him to pay creditors who extended credit or whose claim arose before such
partner can interest himself in specific aspects of the business. return.
o The ff are NOT considered as “interfering in the business” so as to make - Liability cannot exceed the sum received by him with interest.
him liable personally:
When he sells assets and distributes them to the creditors after
the general partners have abandoned the business
He looked after the books and declared that he expected to
close the business to pay creditors, after general partner
became ill
Limited Partnership 10
5. Admission of additional limited partners (Art. 1849) The substitution of the assignee as a limited partner does not release the assignor from
Article 1849. After the formation of a lifted partnership, additional limited partners may liability to the partnership under articles 1847 and 1858.
be admitted upon filing an amendment to the original certificate in accordance with the
requirements of article 1865.
Rights of assignee of limited partner
The law requires that there is proper amendment to the certificate which must be His rights are similar to those of a person to whom a partner conveyed his whole
signed and sworn to by all of the partners, including the new limited partners, and interest in the partnership (Art. 1813)
filed in the Securities and exchange Commission pursuant to the requirements of The assignee has the right to:
Art. 1865. o Receive the share of the profits or other compensation by way of
income; or
o The return of the contribution to which the assignor would otherwise be
6. Change in the relationship of limited partner entitled.
How relation of limited partners changed The assignee has no right to:
1. Substitution of a person as a limited partner in place of an existing limited partner o Require any information or account of partnership transactions
(Art. 1859) o Inspect the partnership books
2. Withdrawal, death, insolvency, insanity, or civil interdiction of a limited partner The assignee acquires all the rights of the limited partner only when he becomes a
(Art. 1860) substituted limited partner
3. Addition of new limited partners (Art. 1849)
Note: The abovementioned does not necessarily dissolve the partnership. When assignee may become substituted limited partner
Substituted Limited Partner – person authorized to all the rights of a limited partner
a. Assignee of limited partner (Art. 1859) who has died or has assigned his interest in a partnership.
Requisites for substitution (CAR):
Article 1859. A limited partner's interest is assignable. a. All the members must consent to the assignee becoming a substituted
limited partner or the limited partner, being empowered by the
A substituted limited partner is a person admitted to all the rights of a limited partner certificate, must give the assignee the right to become a limited partner;
who has died or has assigned his interest in a partnership. b. The certificate must be amended in accordance with Art. 1865
c. The certificate as amended must be registered in the Securities and
An assignee, who does not become a substituted limited partner, has no right to require Exchange Commission
any information or account of the partnership transactions or to inspect the partnership
books; he is only entitled to receive the share of the profits or other compensation by Liability of substituted partner
way of income, or the return of his contribution, to which his assignor would otherwise The substituted limited partner is liable for all the liabilities of his assignor except
be entitled. only those of which he was (1) ignorant at the time he became a limited partner
and (2) which could not be ascertained from the certificate.
An assignee shall have the right to become a substituted limited partner if all the The assignor is liable:
members consent thereto or if the assignor, being thereunto empowered by the o For damage by reliance on a false statement in the certificate; and
certificate, gives the assignee that right. o To creditors who extended credit or whose claims arose before the
substitution
An assignee becomes a substituted limited partner when the certificate is appropriately
amended in accordance with article 1865. b. Retirement, death of limited partner, etc. (Arts. 1860, 1861)
The substituted limited partner has all the rights and powers, and is subject to all the Article 1860. The retirement, death, insolvency, insanity or civil interdiction of a general
restrictions and liabilities of his assignor, except those liabilities of which he was ignorant partner dissolves the partnership, unless the business is continued by the remaining general
at the time he became a limited partner and which could not be ascertained from the partners:
certificate.
Limited Partnership 11
(1) Under a right so to do stated in the certificate, or amount of the judgment debt may be redeemed with partnership property with the consent
of all the partners whose interests are not so charge (Art. 1814, par. 2 (1))
(2) With the consent of all members.
NOTE: The limited partners’ right under the exemption laws is also preserved under this
article since his interest in the partnership is actually his property (as compared to general
partners whose interest in the partnership is their share of the profits and surplus; see Art.
Effect of retirement, death, etc. of a General Partner v. Limited Partner 1812)
General Partner – dissolves the partnership
Limited partner – does not dissolve the partnership 7. Transactions of a limited partnership (Art. 1854)
o Exception: there is only one limited partner (see Art. 1843)
Article 1854. A limited partner also may loan money to and transact other business with
Note: If the business is continued by the remaining partners under the rights given in the
the partnership, and, unless he is also a general partner, receive on account of resulting
certificate or with the consent of all the members, the limited partnership is not dissolved
claims against the partnership, with general creditors, a pro rata share of the assets. No
but the certificate must be amended to reflect the change in order that the limited partners
limited partner shall in respect to any such claim:
may avail the protection granted by law. (Lowe v. Arizona Power & Light Co)
(1) Receive or hold as collateral security any partnership property, or
Article 1861. On the death of a limited partner his executor or administrator shall have
all the rights of a limited partner for the purpose of setting his estate, and such power as
(2) Receive from a general partner or the partnership any payment, conveyance, or release
the deceased had to constitute his assignee a substituted limited partner.
from liability if at the time the assets of the partnership are not sufficient to discharge
partnership liabilities to persons not claiming as general or limited partners.
The estate of a deceased limited partner shall be liable for all his liabilities as a limited
partner.
The receiving of collateral security, or payment, conveyance, or release in violation of the
Right of executor on death of a limited partner
foregoing provisions is a fraud on the creditors of the partnership.
On the death of a limited partner, his executor or administrator shall acquire:
o All the rights for purposes of settling the affairs of the limited partner
o The right to constitute the deceased’s assignee as substituted limited a. Allowable transactions
partner (ONLY IF the deceased partner was empowered to do so in the A limited partner (who is not also a general partner), being merely a contributor to the
certificate) partnership without the right to participate in its management, is not prohibited from:
a. Granting loans to the partnership;
c. Right of creditors of limited partner (Art. 1862) b. Transacting other business with it; and
c. Receiving a pro rata share of the partnership assets with general creditors if he is
not also a general partner
Article 1862. On due application to a court of competent jurisdiction by any creditor of a
limited partner, the court may charge the interest of the indebted limited partner with
payment of the unsatisfied amount of such claim, and may appoint a receiver, and make
b. Prohibited Transactions
The limited partner, in respect of any such claim, is prohibited from:
all other orders, directions and inquiries which the circumstances of the case may require.
a. Receiving or holding as collateral security any partnership property; or
b. Receiving any payment, conveyance, or release from liability if it will prejudice the
The interest may be redeemed with the separate property of any general partner, but may
right of third persons
not be redeemed with partnership property.
Notes
The remedies conferred by the first paragraph shall not be deemed exclusive of others
Any violation of the prohibition will give rise to the presumption that it has been
which may exist.
made to defraud partnership creditors.
Art. 1854 does not prohibit absolutely the taking as collateral security by a limited
Nothing in this Chapter shall be held to deprive a limited partner of his statutory partner of any partnership property. Nos. (1) and (2) of Art. 1854 are modified by
exemption. the requirement of sufficient assets to discharge the obligation of the partnership
when any payment or conveyance is made or release is given to the limited partner
NOTE: The interest of the debtor partner charged with the payment of the unsatisfied by, or when the receives security from, the partnership.
Limited Partnership 12
The claims of limited partners for profits and other compensation by way of in the first and second paragraphs as a person who must execute the writing refuses to do
income and return of capital contributions rate ahead with respect to all claims of so, may petition the court to order a cancellation or amendment thereof.
general partners.
For claims arising from individual loans to, or other business transactions with, the If the court finds that the petitioner has a right to have the writing executed by a person
partnership, other than for capital contributions, the limited partner is placed in who refuses to do so, it shall order the Office of the Securities and Exchange Commission
the same category as a non-member creditor. (Art. 1854, par. 1.) where the certificate is recorded, to record the cancellation or amendment of the
certificate; and when the certificate is to be amended, the court shall also cause to be filed
for record in the said office a certified copy of its decree setting forth the amendment.
A certificate is amended or cancelled when there is filed for record in the Office of the
9. Cancellation or Amendment of Certificate Securities and Exchange Commission, where the certificate is recorded:
ART. 1864. The certificate shall be cancelled when the partnership is dissolved or all limited (1) A writing in accordance with the provisions of the first or second paragraph; or
partners cease to be such. (2) A certified copy of the order in accordance with the provisions of the fourth paragraph;
(3) After the certificate is duly amended in accordance with this article, the amended
A certificate shall be amended when: certificate shall thereafter be for all purposes the certificate provided for in this Chapter.
(1) There is a change in the name of the partnership or in the amount or character of the Requirements for amendment and cancellation of certificate.
contribution of any limited partner; Requirements to amend/cancel a certificate:
(2) A person is substituted as a limited partner; a) The amendment must be in writing;
(3) An additional limited partner is admitted; b) It must be signed and sworn to by all the members including the new
(4) A person is admitted as a general partner; members, and the assigning limited partner in case of substitution or
(5) A general partner retires, dies, becomes insolvent or insane, or is sentenced to civil addition of a limited or general partner; and
interdiction and the business is continued under article 1860; c) The certificate, as amended, must be filed for record in the Securities
(6) There is change in the character of the business of the partnership; and Exchange Commission.
(7) There is a false or erroneous statement in the certificate; o From the moment the amended certificate or a certified copy of a court
(8) There is a change in the time as stated in the certificate for the dissolution of the order granting the petition for amendment has been filed, such amended
partnership or for the return of a contribution; certificate shall thereafter be for all purposes the certificate of the
(9) A time is fixed for the dissolution of the partnership, or the return of a contribution, no partnership under Article 1844.
time having been specified in the certificate; or
(10) The members desire to make a change in any other statement in the certificate in The approval by the Commission of the amendment or cancellation is not required.
order that it shall accurately represent the agreement among them.
10. Action against a limited partnership
ART. 1866. A contributor, unless he is a general partner, is not a proper party to
ART. 1865. The writing to amend a certificate shall: proceedings by or against a partnership, except where the object is to enforce a limited
partner’s right against or liability to the partnership.
(1) Conform to the requirements of article 1844 as far as necessary to set forth clearly the
change in the certificate which it is desired to make; and Limited partner, a mere contributor.
A limited partner is referred to in Article 1866 as mere contributor.
(2) Be signed and sworn to by all members, and an amendment substituting a limited
He is practically a stranger in the limited partnership whose liability is limited to his
partner or adding a limited or general partner shall be signed also by the member to be
interest in the firm (Art. 1843.), without any right and power to participate in the
substituted or added, and when a limited partner is to be substituted, the amendment shall
management and control of the business. (see Arts. 1848, 1851.)
also be signed by the assigning limited partner.
Unlike in the case of a general partner, the relationship between a limited partner,
on the one hand, and the other partners and the partnership, on the other hand, is
The writing to cancel a certificate shall be signed by all members.
not one of trust and confidence.
A limited partner is, therefore, not prohibited from engaging in business for
A person desiring the cancellation or amendment of a certificate, if any person designated
himself even in competition with that conducted by the partnership (see Arts.
Limited Partnership 14
1789, 1808.) and may transact business with the partnership for ordinary purposes
as though he were a stranger. (see Art. 1854.)