PARCOR FOR BASIC ACCOUNTANCY

Education

LEARNING MODULE

MODULE NO. 1

Introduction to Partnership

PARCOR
Accounting for Partnership and
Corporation

Prepared by:
Mr. Dave Mark P. Sumagaysay

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 Module 1: Introduction to Partnership

INTRODUCTION:

Partnership is a popular form of business because they are easy to form and because
they allow several individuals to combine their talents and skills in a particular business
venture. In addition, partnership provide a means of obtaining more capital than a
single individual can obtain and allow the sharing of risks for rapidly growing
businesses. Partnerships are particularly common in the service of professions,
especially law, medicine, and accounting. These professions have generally not adopted
the corporate form of business because of their long-standing tradition of close
professional’s association with clients and the total commitment of the professional’s
business and personal assets to the propriety of the advice and service given to clients.

OBJECTIVES:

To do well in this module, you need to remember and do the following:

1. To define and describe the concept of partnership
2. To enumerate and explain the essential requisites of partnership
3. To enumerate and illustrate the characteristics of the contract of partnership
4. To explain the advantages of partnership
5. To discuss the differences of partnership as compared to corporation type of business

DISCUSSION AND ACTIVITY 1:

Train of Thought
“In this new wave of technology, you can’t do it all yourself, you have to form alliances.” –
Carlos Slim Helu, 73, with $73 billion net worth, world’s richest (The World’s Billionaires,
Forbes, March 2013).
Telecommunications billionaire Carlos Slim Helu learned early in his career that
money partnering is critical to helping ensure success. While Helu made his money
creating Mexico’s first privately owned telecommunications company, Telmex, he had to
partner with French and American telecom companies in order to take his native
Mexico’s phone service away from the government.

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 Google Rocketed from being unknown to having the status of Apple or Microsoft
in a few years and in the October 2013 Forbes Richest Americans, Page and Brin are
ranked 13th anf 14th, respectively. Google is into satellite mapping, online payment
systems, news, Youtube and smartphones powered by Android. Brin heads Google X
division which is dedicated to breakthrough ideas like driverless cars and wearable
computers such as the Glass. Glass is an augmented-reality spectacle which allow user
to do everything from chat on video to view Google Maps while walking. At the outset
of their endeavor, the partnership form of business may have provided Brin and Page
the necessary advantages to start-up their software venture. How much should they
contribute to the business considering its business potential? In what form will the
investment be? How should the partners divide profits and losses? If ever, how should a
partner who leaves the entity compensated for his share of the business?

Let’s get to know more about accounting!

History of Partnership

Partnerships as a form of business organization are as ancient as the history of

human activity They were known to exist as early as in ancient Babylonia (2300 BC)
where Hammurabi’s Code regulated partnerships, ancient Greece and the Roman
Empire Roman Merchants introduced the partnership throughout Europe particularly in
the places which conquered by Roman legions. England was among the countries
adopted Roman form of partnership with modifications. US followed the English
common law form of partnership for some time until it codified its own partnership law.
The Uniform Partnership Act (UPA) which governs general partnerships, and the
Uniform Limited Partnership Act (ULPA) which governs limited partnership, and their
respective revisions are in effect in the United States.

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Definition of Partnership
1. The Civil Code of the Philippines, Article 1767 defines partnership as
follows:
“Two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profit among
themselves.”
“Two or more persons may also form a partnership for the exercise of a
profession” (1665a)
2. The section 6 of Uniform Partnership Act defines partnership as:

“An associate of two or more persons to carry on, as co-owners, a business

for profit.”

Characteristics of a Partnership

The basic characteristics of a partnership are briefly summarized below:

1. Mutual Agency. Each partner has the authority to act for the partnership and
to enter into contracts binding upon it, provided these are within his expressed
or implied authority. However, the acts of a partner that do not fall into the
category of carrying on business in the usual manner will not bind the
partnership unless specific authority has been given to the partner into such
transactions.
2. Limited life or Easily Dissolved. Since a partnership is based on a contract
between individuals, its life is limited to the duration of that contract. Any change
in the relationship among partners terminates the contract and therefore
dissolves the partnership. The addition of a new partner, death, insolvency or
withdrawal of a partner automatically dissolves the partnership.
3. Unlimited Liability. The liability of a partner for the partnership’s unpaid
obligations goes beyond the amount of his capital invested in the partnership. All
partners, except the limited partners, are liable to the creditors for the
partnership’s debts up to the extent of their personal assets. Partners, therefore,
may held personally liable and their separate assets may be attached to meet
partnership obligations.
4. Co-owners of Property. Assets invested in a partnership are no longer
separately owned but now belong to the partnership. Equipment invested in a
partnership by a partner ceases to be his own property. It becomes property of
the partnership.

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 5. Share in Partnership Profits. Each partner shares in the profits of the
partnership. The income earned or loss incurred from operations is divided
among the partners according to their agreement. The partners are entitled to
share in the firm’s profits as a return of their investment.
6. Separate Legal Entity. The partnership has a juridical personality separate and
distinct from the owners. A partnership can acquire assets or incur liabilities or
enter into a contract with third parties in its own name. It can sue and be sued.
7. Income Tax. Partnership, except general professional partnerships (i.e., are
those organized for the exercise of professional like CPAs, lawyers, engineers,
etc.) are subject to the 30% income tax
Essential Requisites of Partnership
 There must be a valid contract

 There must be a mutual contribution of money property or industry to a common

fund

 It must have a lawful object or purpose

 It must be established for the common benefit or interest of the partners.

Characteristics of a Contract of Partnership

 Consensual- It is perfected by the mere consent of the parties.

 Principal- It does not depend upon any other contract for its validity and
existence

 Bilateral or Multilateral- It is entered into by two or more persons whose

rights and obligations are reciprocal.
 Nominate- It has special name given it to by law.

 Onerous- The partners contribute money, property or industry to a common

fund.
 Preparatory- It is a means by which other contracts will be entered into as the
partnership pursues its business.

Advantages and Disadvantages of a Partnership

Advantages
 Easy to form, subject to less government requirements

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  More capitalization compared to sole proprietor

 Flexibility of operation
 More pooling of skills and expertise
Disadvantages
 Disagreements among partners may cause delay in decision-making
 Management that may be dependent on the capacity of the owner
 Easy dissolution through withdrawal, insolvency or death of a partner

 Unlimited liability of a general partner

Partnership as Distinguished from Corporation

Kinds of Partnership
1. According to the Activities or Purpose

a. A commercial partnership is a partnership whose main activity is the

manufacture or the purchase and sale of goods and services.
b. A professional partnership is a partnership organized for the purpose of
rendering professional services such as the professional firm of
accountants, lawyers, engineers, doctors, and others.

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2. According to the Liabilities of the Partners

a. A general partnership is one wherein all partners may publicly act on

behalf of the firm and each partner can held individually liable for the
obligations of the firm to the extent of their personal property.
b. A limited partnership is a partnership wherein one or more but not all the
partners have a limited liability. The law provides that at least one partner
of the limited partnership shall be a general partner.
3. According to the Object
a. A Universal Partnership of Profits comprises all that the partners may have
acquired by their industry or work during the existence of the partnership.
In a universal partnership of profits, the partners retain ownership of the
things they have placed at the disposal of the partnership and only the usufruct
of these things plus their industry work represent their actual contribution to the
partnership.

b. Universal Partnership of all Present Property - ART. 1778- A partnership of

all present property is that in which the partners contribute all the
property which actually belongs to them to a common fund, with the
intention of dividing the same among themselves, as well as all the profits
which they may acquire therewith.”
4. According to Legality of Existence
a. A de jure partnership is partnership that has complied with all the legal
requirements for its existence.

b. A de facto partnership is a partnership that has not complied with some

or all the legal requirements for its formation
5. According to Duration

a. A Partnership at will partnership’s term of existence is unlimited since no

period is fixed. However, it can be terminated any time by the agreement
of the partners.

b. A Partnership with a fixed term. The partnership has a specific period or

term for existence and the expiration thereof dissolves the partnership. If
the partnership was formed for a specific undertaking, it is terminated
upon completion of such undertaking.
6. According to the Manner of Creation

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 a. Orally agreed upon is when the partnership agreement was formed by
means of articulation.
b. Written in a public or private instrument

Public instrument - When the partnership agreement was incorporated in

article of co-partnership and approved by the SEC
Private instrument - When the partnership agreement was made in writing
was not submitted and approved by the SEC

Classification of Partners

1. As to Liability
a. General Partner. Liable to the extent of his separate property after all the
assets of the partnership have been exhausted.
b. Limited partner. Liable only to the extent of his capital contribution
c. General-Limited partner. Liable pro-rate to partnership creditors to the extent
of his separate property after the partnership assets have been exhausted,
but he can demand reimbursement of the amount he paid from the general
partners

2. As to Contribution
a. Capitalist partner. Contributes money or property to the common fund of the
partnership
b. Industrial partner. Contributes his knowledge or personal service to the
partnership.
c. Capitalist Industrial Partner. Contributes money, property and services to the
partnership

3. Other classifications
a. Managing Partner. Manages the business affairs of the partnership
b. Liquidating partner. Takes charge of winding up or settle the affairs of the
partnerships after it is dissolved.
c. Nominal Partner. Not an actual partner but who represents himself as one.
d. Ostensible partner. Active and known to the public as partner but who
represents himself as one.
e. Secret partner. One whose take active part in the business but connection
with the partnership is kept from the public.
f. Silent partner. Has no voice or active part in the management of the business
of the partnership, though he shares on the profit and losses and may be
known to the public as a partner.
g. Dormant partner. Does not participate in the management of the business
and is not known as a partner.

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 h. Nominal Partner or Partner by Estoppel. One who is actually not a partner
but represents himself as one.

Articles of Partnership

1. It is a formal document to be compiled and submitted by the business

partnership as basic requirement of the Securities and Exchange Commission
(SEC)
2. SEC is government body responsible in establishing policies, rules and regulation
to be observed in establishing business particularly partnership and corporation
form of business
3. The following are the fundamental contents or the essential provisions of the
Articles of Partnership;
a. Partnership name
b. Nature and purpose of the partnership
c. Principal location of the business
d. Partner’s names, citizenship and addresses
e. The duration or existence of the partnership
f. The details of the investments by each partner
g. The basis of valuation of the investments made by the partners
h. Rights, functions and duties of the partners.
i. Accounting method and period to be used by the partnership
j. Procedures and ways of allocating profit or losses of the business
k. Salary allowances, if any, to be allowed to partners
l. The process or provisions for arbitration of disputes, dissolution, and
liquidation

Rights of Partners
1. To share in the profits from business operations
2. Right over the funds or property of the partnerships
3. The partner has the right in the remaining assets after the liquidation
4. The right to manage the business operation of partnership assuming there is no
appointed as the manager of the business
5. A. partner has the right access over the accounting and financial records of the
business partnerships at the reasonable time and place

Registration with the Securities and Exchange Commission

"ART. 1772 - Every contract of partnership having a capital of three thousand pesos or
more in money or property shall appear in a public instrument which must be recorded
in the Office of the Securities and Exchange Commission. Even if it not registered, the
partnership having a capital of P3,000 or more is still valid and therefore has legal
personality.

To register a partnership with the SEC, here are the basic steps to follow:

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 Have your proposed business name verified in the verification unit of SEC
 Submit the following documents:
 Articles of Partnership
 Verification Slip for the Business Name
 Written undertaking to change business name if required
 Tax identification number of each partner and/or that of the partnership
 Registration data sheet for partnership duly accomplished in six copies
 Other documents that may be required
 Pay the registration/filing and miscellaneous fees;
 Forward documents to the SEC Commissioner for signature.

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