Limited Partnership

(Article 1843-1867)
 History
• The Qirad and Mudaraba institutions in Islamic law and economic
jurisprudence were similar to the modern limited partnership.
• In medieval Italy, a business organization known as the commenda appeared in the
10th century that was generally used for financing maritime trade. In a commenda,
the traveling trader of the ship had limited liability, and was not held responsible if
money was lost as long as the trader had not violated the rules of the contract.
• In contrast, his investment partners on land had unlimited liability and were
exposed to risk. As an institution, the commenda is very similar to the qirad but
whether the qirad transformed into the commenda, or the two institutions evolved
independently cannot be stated with certainty (Hillman, Robert H.; Limited Liability
in Historical Perspective, "Washington and Lee Law Review," Spring 1997)
 Concept (Article 1843)

The form of business association composed of one or more general partners

and one or more special partners, the latter not being liable for the partnership
debts.
The liability of limited partners is limited to a fixed amount – their capital
contributions or the amount they have invested in the partnership.
 Characteristics of limited partnership
• Formed by compliance with statutory requirements; (1844)
• One or more general partners control the business and are personally liable to
creditors;
• 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 capital contributions;
• The limited partners may ask for the return of their capital contributions under the
conditions prescribed by law; and
• The partnership debts are paid out of common fund and the individual properties
of the general partners.
Business reason and purpose of statutes authorizing
limited partnerships

1.) Secure capital from others for one’s business and still retain control;
2.) Share in profits of a business without risk of personal liability;
3.) Associate as partners with those having business skill
General partner/ partnership vs Limited
partner/partnership
 General partner Limited partner

Personally liable for partnership obligations. Liability extends only to his capital contribution.

When the manner of mgt has not been agreed No share in the mgt of a limited partnership. He
upon, all of the general partners have an equal becomes liable as a general partner if he takes
right in the mgt of the business. part in control of business.

May contribute money, property, or industry. Must contribute cash or property. Not services.

Proper party to proceedings by or against

NOT a proper party in such proceedings.
partnership.
 General partner Limited partner

His name may appear in the firm name. Generally, his name must not.

Prohibited from engaging in a business which is

of the kind of business in which the partnership
No such prohibition.
is engaged (if capitalist) or any business for
himself (if industrial).

His retirement, death, insanity, or insolvency His retirement, death, insanity, insolvency does
dissolves the partnership. not.

His interest cannot be assigned as to make the His interest is freely assignable, with the
assignee a new partner w/o the consent of the assignee acquiring all the rights of a limited
other partners. partner subject to certain qualifications.
Formal Requirements ( Article 1844)
Two or more persons desiring to form a limited partnership shall:
1.) Sign and swear to a certificate, which shall
state –
a.) The name of the partnership, adding thereto the word “Limited”;
b.) he character of the business;
c.) The location of the principal place of business;
d.) The name and place of residence of each member, general and limited
partners being respectively designated;
e.) The term for which the partnership is to exist; The amount of cash and a
description of and the agreed value of the other property contributed by each
limited partner;
f.) 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;
 g.) The time, if agreed upon, when the contribution of each limited partner is to be
returned; The share of the profits or the other compensation by way of income which each
limited partner shall receive by reason of his contribution; 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;
h.) The right, if given, of partners to admit additional limited partners;
i.) 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;
j.) .)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
k.) The right, if given, of a limited partner to demand and receive property other than cash
in return for his contribution.

2.) File for record the certificate in the Office of the Securities and Exchange Commission.
A limited partnership is formed if there has been substantial compliance in good faith with
the foregoing requirements.
 Substantial compliance in good faith sufficient
• Rules applicable where there is no substantial compliance – The firm
becomes a general partnership only as to its relation to 3rd persons. It is, in
form, still a limited partnership subject to all the rules applicable to a limited
partnership. Thus, a limited partner treated as a general partner as far as 3rd
persons are concerned is entitled to reimbursement from the general
partner for whatever obligations he might have paid to partnership creditors
beyond his capital contribution.
• Rule where partnership creditor guilty of estoppel – If attaching creditors
recognize and deal with a firm as a limited partnership, they will be
estopped from insisting that there is no such partnership, or that the terms
of the partnership were not sufficiently stated in the notice of its formation.
Art. 1845. The contributions of a limited partner may be cash or other property, but
not services.

Art. 1846. The surname of a limited partner shall not appear in the partnership name
unless:
1.) It is also the surname of a general partner; or
2.) Prior to the time when the limited partner became such, the business had been
carried on under a name in which his surname had appeared.
A limited partner whose surname appears in a partnership name contrary to the
provisions of the first paragraph 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.
 Liability for false statement in certificate
(Article 1847)
Under this provision, any partner to the certificate containing a false statement is
liable provided the following requisites are present:
• 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 file a petition for
its cancellation or amendment, he failed to do so;
• The person seeking to enforce liability has relied upon the false statement in
transacting business with the partnership; and
• The person suffered loss as a result of reliance upon such false statement.
Art. 1848. A limited partner shall not become liable as a general partner
unless, in addition to the exercise of his rights and powers as a limited partner,
he takes part in the control of the business.
“he takes part in the control of the business”
Such control contemplates active participation in the management of the partnership
business and does not comprehend the mere giving of advice to general partners.
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 people 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
The interference contemplated is with respect to an existing limited partnership. A limited
partner is not subject to general liability for taking part in the management of the firm
because he settles its affairs after dissolution.
 Admission of additional limited partners

Art. 1849. 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.
 Rights, powers, and liabilities of a general partner
(Article 1850)
A general partner shall have all the rights and powers and be subject to all the restrictions and liabilities
of a partner in a partnership without limited partners. 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:
(1) Do any act in contravention of the certificate;
(2) Do any act which would make it impossible to carry on the ordinary business of the partnership;
(3) Confess a judgment against the partnership;
(4) Possess partnership property, or assign their rights in specific partnership property, for other than a
partnership purpose;
(5) Admit a person as a general partner;
(6) Admit a person as a limited partner, unless the right so to do is given in the certificate;
(7) 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.
 Rights of a limited partner
Article 1851
A limited partner shall have the same rights as a general partner to:
1.) Have the partnership books kept at the principal place of business of the partnership, and
at a reasonable hour to inspect and copy any of them;
2.) Have on demand true and full information of all things affecting the partnership, and a
formal account of partnership affairs whenever circumstances render it just and reasonable;
and
3.) Have dissolution and winding up by decree of court.
A limited partner shall have the right to receive a share of the profits or other compensation
by way of income, and to the return of his contribution as provided in articles 1856 and 1857.
 Status of partner where there is failure to create
limited partnership

A limited partnership is formed when there is substantial compliance in good

faith with the requirements of the law. If not complied with, the limited
partner will have the liability of a general partner as to 3rd persons. Article 1852
provides for an exemption.
Conditions for exemption from liability as 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;
2.) His surname does not appear in the partnership name; and
3.) He does not participate in the management of the business.
 One person, both a general partner and a limited
partner

Art. 1853. 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 Art. 1844.
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.
Loan and other business transactions with limited
partnership vis-a-viz limited partner
Allowable transactions:
1.) Granting loans to the partnership;
2.) Transacting other business with it;
3.) Receiving a pro rata share of the partnership assets with general creditors if he is not also
a general partner.

Prohibited transactions:
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
3rd persons.
Any violation of the prohibition will give rise to the presumption that it has been made to
defraud partnership creditors.
 Preferred limited partners
By an agreement of all the members (general and limited) stated in the certificate,
priority 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.
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 to these matters.
 Compensation of limited partner

A limited partner may receive from the partnership the share of the profits or
the compensation by way of income stipulated for in the certificate; provided,
that after such payment is made, whether from the property of the
partnership or that of a general partner, the partnership assets are in excess of
all liabilities to limited partners on account of their contributions and to
general partners.
 Requisites for return of contribution of limited
partner (Article 1857)

1.) All liabilities of the partnership have been paid or if they have not yet been
paid, the assets of the partnership are sufficient to pay such liabilities;
2.) The consent of all members (general and limited) has been obtained
except when the return may be rightfully demanded; and
3.) The certificate is cancelled or so amended as to set forth the withdrawal or
reduction of the contribution.
 When return a matter of right
(Article 1857)

• On the dissolution of the partnership; or

• Upon arrival of the date specified in the certificate for the return; or
• After the expiration of the 6 months’ notice in writing given by him to the
other partners if no time is fixed in the certificate for the return of the
contribution or for the dissolution of the partnership.
 Right of limited partner to cash in return for
contribution (Article 1857)
General rule: Under the 3rd paragraph, even if a limited partner has
contributed property, he has only the right to demand and receive cash for his
contribution.
Exceptions:
1.) When there is stipulation to the contrary in the certificate; or
2.) Where all the partners (general and limited) consent to the return other
than in the form of cash.
 When limited partner may have the partnership
dissolved

1.) When his demand for the return of his contribution is denied although he
has a right to such return; or
2.) When his contribution is not paid although he is entitled to its return
because the other liabilities of the partnership have not been paid or the
partnership property insufficient for their payment.
The limited partner must first ask the other partners to have the partnership
dissolved; if they refuse, then he can seek the dissolution of the partnership by
judicial decree.
 Liabilities of a limited partner
(Article 1858)
To the partnership – Liability of limited partners is to partnership, not the creditors of the partnership.
To partnership creditors and other partners – A limited partner is liable for partnership obligations when:
1.) Contributes services;
2.) Allows his surname to appear in name of firm;
3.) Fails to have false statement in certificate corrected when he knew it to be false;
4.) Takes part in control of business;
5.) Receives partnership property as collateral security, payment, conveyance, or release in fraud of
partnership creditors;
6.) Failure to substantially comply with legal requirements of formation of limited partnership.
To separate creditors – Creditor of limited partner may also apply for a “charging order” subjecting the
interest in the partnership of the debtor partner for the payment of his obligation.
 Liabilities of a limited partner
Article 1858
Liability for unpaid contribution
• Limited partner liable not only for the difference between the amount of his actual contributions and
that stated in the certificate as having been made but also for any unpaid contribution he agreed to
make at a future time.
Liability as trustee
• Limited partner considered as trustee for the partnership for:
1.) Specific property stated in the certificate as contributed by him but which he had not contributed;
2.) Specific property of the partnership which had been wrongfully returned to him;
3.) Money wrongfully paid or conveyed to him on account of his contribution; and
4.) Other property wrongfully paid or conveyed to him on account of his contribution.
 Requisites for waiver or compromise of liabilities

1.) Waiver or compromise is made with the consent of all the partners; and
2.) The waiver or compromise does not prejudice partnership creditors who
extended credit or whose claims arose before the cancellation or amendment
of the certificate.
 Liability for return of contribution lawfully
received

• The limited partner is liable to the partnership for the return of contribution
lawfully received by him to pay creditors who extended credit or whose
claim arose before such return. His liability, of course, cannot exceed the
sum received by him with interest.
 Assignment of limited partner’s interest
(Article 1859)
Effect of change in the relation of limited partners
Does not necessarily dissolve the partnership. No limited partner, however, can withdraw his
contribution until all liabilities to creditors are paid.
Rights of assignee of limited partner
Assignee is only entitled to receive the share of the profits or other compensation by way of income
or the return of the contribution to which the assignor would otherwise be entitled. He has no right
to require any information or account of the partnership transactions or to inspect partnership
books.
The assignee acquires all the rights of the limited partner only when he becomes a substituted
limited partner.
When assignee may become substituted limited partner
Requisites:
1.) All the members must consent to the assignee becoming a substituted
limited partner or the limited partner, being empowered by the certificate,
must give the assignee the right to become a limited partner;
2.) The certificate must be amended;
3.) The certificate as amended must be registered in the SEC.
Liability of substituted partner and assignor
Substituted limited partner is liable for all the liabilities of his assignor except
only those of which he was ignorant at the time he became a limited partner
and which could not be ascertained from the certificate.
 Effect of retirement, death, insolvency, insanity
or civil interdiction of a general partner
• Effect - Dissolution of partnership unless business is continued by the
remaining general partners.
• If limited partner, does not dissolve partnership unless he is the only limited
partner .
• If the business is continued by the remaining partners under the rights given
in the certificate or with the consent of all members, no dissolution but
certificate must be amended for limited partners to still avail of limited
liability.
 Right of executor on death of a limited partner
(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 settling his estate, and such
power as the deceased had to constitute his assignee a substituted limited
partner.
The estate of a deceased limited partner shall liable for all his liabilities as a
limited partner.
 Rights of creditors of limited 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 all other orders, directions, and inquiries which the circumstances of the case may require.
• The interest may be redeemed with the separate property of any general partner, but may not be
redeemed with partnership property.
• The remedies conferred by the first paragraph shall not be deemed exclusive of others that may exist.
• Nothing in this Chapter shall be held to deprive a limited partner of his statutory exemption
 Dissolution of a limited partnership
(Article 1863)
The partnership liabilities shall be settled in the following order:
1.) Those due to creditors, including limited partners, except those on account of their contributions, in the order of priority
as provided by law;
2.) Those due to limited partners in respect to their share of the profits and other compensation by way of income on their
contributions;
3.) Those due to limited partners for the return of the capital contributed;
4.) Those due to general partners other than that for capital and profits;
5.) Those due to general partners in respect to profits; and
6.) Those due to general partners for the return of the capital contributed.
Partnership creditors are entitled to first distribution, followed by limited partners who take priority over general partners.
Note that in a general partnership, the claims of the general partners in respect of capital enjoy preference over those in
respect of profits.
 Shares of limited partners

In the absence of any statement in the certificate as to the share of the profits
which each partner shall receive by reason of his contribution and subject to
any subsequent agreement, limited partners share in the partnership assets in
respect to their claims for capital and profits in proportion to the respective
amounts of such claims.
 When certificate shall be cancelled or amended
(Article 1864)

The certificate shall be cancelled when the partnership is dissolved or all

limited partners cease to be such.
A certificate shall be amended when:
1.) There is a change in the name of the partnership or in the amount or
character of the contribution of any limited partner;
2.) A person is substituted as a limited partner;
3.) An additional limited partner is admitted;
4.) A person is admitted as a general partner;
5.) A general partner retires, dies, becomes insolvent or insane, or is sentenced
to civil interdiction and the business is continued under Article 1860;
 When certificate shall be cancelled or amended
(Article 1864)

6.) There is a change in the character of the business of the partnership;

7.) There is a false or erroneous statement in the certificate;
8.) There is a change in the time as stated in the certificate for the dissolution
of the partnership or for the return of a contribution;
9.) A time is fixed for the dissolution of the partnership, or the return of a
contribution, no time having been specified in the certificate; or
10.) The members desire to make a change in any other statement in the
certificate in order that it shall accurately represent the agreement among
them.
 Requirements for amendment and cancellation of certificate
The writing to amend a certificate shall:
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
2.) Be signed and sworn to by all members, and an amendment substituting a limited partner or adding a limited or
general partner shall be signed also by the member to be substituted or added, and when a limited partner is to be
substituted, the amendment shall also be signed by the assigning limited partner.

The writing to cancel a certificate shall be signed by all members.

A person desiring the cancellation or amendment of a certificate, if any person designated in the first and second
paragraphs as a person who must execute the writing refuses to do so, may petition the court to order a cancellation or
amendment thereof.
If the court finds that the petitioner has a right to have the writing executed by a person who refuses to do so, it shall
order the Office of the Securities and Exchange Commission 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 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 Securities and Exchange
Commission, where the certificate is recorded:
1.) A writing in accordance with the provisions of the first or second paragraph; or
2.) A certified copy of the order of court in accordance with the provisions of the fourth paragraph;
3.) After the certificate is duly amended in accordance with this article, the amended certificate shall thereafter be for
all purposes the certificate provided for in this Chapter.
 Limited partner, a mere contributor

A contributor, unless he is a general partner, is not a proper party to

proceedings by or against a partnership, except where the object is to
enforce a limited partner’s right against or liability to the partnership.
 When limited partner a proper party

• Where the object is to enforce limited partner’s individual rights against the
partnership, and to recover damages for violation of such right.
• When it’s a proceeding to enforce his liability to the partnership;
• Creditors may go against him if he had withdrawn sums from the capital of
the firm with outstanding debts on a voluntary dissolution.
END