Art. 1843. A limited partnership is one formed by two or more persons under the provisions of the following article, having as members one or more general partners and one or more limited partners. The limited partners as such shall not be bound by the obligations of the partnership.
Concept of limited partnership
this article defines a limited partnership
the correct usage of the term confines it to the form of business association composed of one or more general partners and one or more special partners, the latter not being personally liable for the partnership debts
Characteristic of limited partnership
a limited partnership is formed by compliance with the statutory requirements
one or more general partners control the business and are personally liable to the 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 their capital contributions
the limited partners may ask for the return of their capital contributions under the conditions prescribed by law
the partnership debts are paid out of the common fund and the individual properties of the general partners
limited partnership is composed of 2 classes of partners: general and limited
the liability of the limited partner is limited to the amount of money he has put into the partnership
it is an exception to the general rule that all partners including the industrial partners are liable pro rata of all their property for partnership debts
the limited partner has the same type of liability as a stockholder in a corporation
there is no prohibition for a limited partner to engage in a business for himself
in the absence of statutory restriction, a limited partner may carry on any business which could be carried on by a general partnership
Business reasons and purposes of statutes authorizing formation of limited partnerships
to secure capital from others for one‟s business and still retains control
to share in the profits of a business without the risk of personal liability
Differences between a general and a limited partnership General Partnership Limited Partnership
1. personally liable for partnership obligations 2. when the manner of management has not been agreed upon, all general partners have equal right in the management of the business whether or not the general partner has made any capital contribution
3. may contribute money, property, industry to the partnership
4. a general partner‟s interest to the partnership may not be assigned as to make the assignee a new partner without the consent of the other partners although he may associate a third person with him in his share 5. the name of the general partner may appear in the firm name
6. prohibited in engaging in business similar to that of the partnership
7. retirement, death, insolvency of a general partner dissolves the partnership
1. liability extends only to his capital contribution
2. has no share in the management of a limited partnership. His rights are limited to those enumerated in Article 1851
3. must contribute cash or property to the partnership but not services
4. not a proper party to proceedings by or against a partnership unless he is also a general partner or where the objects of the proceedings is to enforce a limited partner‟s right against or liability to the partnership
5. a limited partner‟s interest is freely assignable
6. the limited partner‟s name as a general rule, must not appear in the firm name 7. can engage in business since he is considered merely as a contributor to the partnership
8. retirement, death, insolvency of a limited partner does not dissolve the partnership
Art. 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) The 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;
(f) The amount of cash and a description of and the agreed value of the other property contributed by each limited partner;
(g) 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;
(h) The time, if agreed upon, when the contribution of each limited partner is to be returned;
(i) The share of the profits or the other compensation by way of income which each limited partner shall receive by reason of his contribution;
(j) 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; (k) The right, if given, of the partners to admit additional limited partners; (l) 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;
(m) 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 (n) 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.
Limited partnership not created by mere voluntary agreement
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
requirements given by statute must be followed so that public notice may be given to all who desire to know the essential features of the partnership
a limited partnership is formed if there is substantial compliance in good faith with the requirements set forth in the last paragraph of Art. 1844; otherwise, the partnership becomes a general partnership in which case all the members become liable as general partners
Requirements for formation of a limited partnership
a limited partnership cannot be constituted orally
2 essential requirements for the formation of a limited partnership
o Certificate of articles of the limited partnership which states the matters enumerated in the articles must be signed and sworn to
o Such certificate must be filed on record in the office of the SEC
The purpose of the of the filing of the certificate is to give an actual and constructive notice to potential creditors and persons dealing with the partnership of the limited liability of the limited partners
Presumption of a general partnership
A partnership transacting business is a prima facie a general partnership
Those who seek protection accorded to by the law to limited partnerships must show due compliance to the statutory requirements of Art. 1844
Art. 1845. The contributions of a limited partner may be cash or property, but not services.
Limited partner‟s contribution
Medium
o a limited partner is not allowed to contribute services
o he can contribute only money or property; otherwise he shall be considered an industrial AND general partner, in which case, he shall not be exempted from personal liability
o a partner may be 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 limited partner may not be an industrial partner in view of Art. 1845 which requires that a limited partner must be a capital contributor
Time – the contribution of each limited partner must be paid before the formation of the limited partnership, although with respect to the additional contributions they may be paid after the limited partnership has been formed
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 has been carried on under a name in which his surname 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.
Effect where the surname of the limited partner appears in the partnership name
The limited partner violating this article is liable, as a general rule, to partnership creditors, without, however, the rights of a general partner with respect to third persons with actual knowledge that he is only a limited partner
Art. 1847. If the certificate contains a false statement, one who suffers loss by reliance on such statement may hold liable any party to the certificate who knew the statement to be false:
(1) At the time he signed the certificate, or (2) Subsequently, but within a sufficient time before the statement was relied upon to enable him to cancel or amend the certificate, or to file a petition for its cancellation or amendment as provided in Article 1865.
Liability for false statement in certificate
Liability imposed is merely statutory penalty
Does not make the limited partner a general partner for all purposes
Requisites
o He knew the statement to be false at the time he signed the certificate (but having time to cancel or amend it, he failed to do so)
o Person seeking to enforce liability relied upon the false statement
o The person suffered a loss
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.
Liability of limited partner for participating in management of partnership
Important: take part in the management
Bare grant of apparent control to a limited partner is not sufficient to make limited partner liable as general partner
“control of business”: active participation in the management of the partnership business
o Not mere giving of advice
o Business carried on by a board of directors chosen by the limited partners o Appointee of limited partner becomes
directing manager of the firm
o Limited partner purchases entire property of the partnership and carries on the business in his own name
o Party to a contract with creditors
Art. 1849. After the formation of a lifted partnership, additional limited partners may be admitted upon filing an amendment to the original certificate in accordance with the requirements of Article 1865.
Admission of additional limited partners
There should be proper amendment to the certificate
Signed and sworn to by all of the partners
Filed with SEC pursuant to Art. 1865
Art. 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, powers and liabilities of a general partner
Right of control/ unlimited personal liability o Entire control of business subject to all
liabilities and restrictions
o In the absence of an agreement to the contrary, he is not entitled to compensation for his services beyond his share of the profits
Acts of administration/ acts of strict dominion o No power to do the specific acts under
Art. 1850
o Beyond the scope of the authority if a general partner
Other limitations
o General partners have no power to bind limited partners beyond the latter‟s investment
o No power to act beyond the purpose of the partnership
Art. 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.
Rights of a limited partner
Improper on the part of general partners may not give a limited partner greater rights than the law what his contract grants him
Specific rights
o To require the partnership books be kept at the principal place of business
o Inspect and copy at a reasonable hour partnership books
o Demand a formal account
o Ask for dissolution and winding up by decree of court
o Receive a share of the profits
o Receive the return of his contribution provided the partnership assets are in excess of all its liabilities
Art. 1852. Without prejudice to the provisions of Article 1848, a person who has contributed to the capital of a business conducted by a person or partnership erroneously believing that he has become a limited partner in a limited partnership, is not, by reason of his exercise of the rights of a limited partner, a general partner with the person or in the partnership carrying on the business, or bound by the obligations of such person or partnership, provided that on ascertaining the mistake he promptly renounces his interest in the profits of the business, or other compensation by way of income.
Status of partner where there is failure to create limited partnership
This article grants exemption from liability in favour of one who has contributed to the capital of a business, with the mistaken belief that there is only a limited partnership
Sometimes the limited partnership exists in spite of the failure of the firm to comply with the law
Limited partner is merely made liable for the debts of the firm as if he were a general partner
Status of person erroneously believing himself to be a limited partner
o If the person has contributed capital, he is not personally liable as a general partner
On ascertaining the mistake, he renounces his interest in the profits
His surname does not appear in the partnership name
He does not participate in the management of the business o Necessity of renouncing his interest
Renunciation before the partner- ship has become liable to 3rd persons
o Obligation to pay back profits and compensation already received
Renunciation should be on the profits or compensation not yet paid for
The other view says that the most that the statute could have intended was to put partnership creditors
Status of heirs of a deceased partner
o Right to elect to become general partner may be exercised
The heirs may disregard the limitation and elect to become a
collective or general partner (choice is personal)
o Right when given in articles of partnership may be waived
Heirs cannot be compelled to become general partners against their wishes
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 Article 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.
One person as general and limited partner
Such fact must be stated in the certificate
o Rights and powers are those of a general partner
o With respect to his contribution as limited partner, he is a limited partner insofar as other partners are concerned
While he is not relieved from personal liability to 3rd persons for partnership debts, he is entitled to recover from the general partners in the amount he has paid to such 3rd persons
In settling accounts after dissolution, he has priority over general partners in the return of their respective contributions
Art. 1854. A limited partner also may loan money to and transact other business with the partnership, and, unless he is also a general partner, receive on account of resulting claims against the partnership, with general creditors, a pro rata share of the assets. No limited partner shall in respect to any such claim:
(1) Receive or hold as collateral security and partnership property, or
(2) Receive from a general partner or the partnership any payment, conveyance, or release 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 receiving of collateral security, or payment, conveyance, or release in violation of the foregoing provisions is a fraud on the creditors of the partnership.
Loan and other business transactions with limited partnership
Allowable transactions
o Granting loans to the partnership
o Transacting other business
o Receiving a pro rata share of the partnership assets with general creditors
Prohibited transactions
o Receiving or holding as collateral security any partnership property o Receiving any payment, conveyance or
release from liability if it will prejudice the right of third persons
Any violation will give rise to the presumption that it has been to defraud partnership creditors
Preferential rights of 3rd persons
o Designed to prevent illegal competition between the limited partner and creditors of the partnership for the assets of the partnership in case there is insufficiency of partnership assets
Art. 1855. Where there are several limited partners the members may agree that one or more of the limited partners shall have a priority over other limited partners as to the 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 absence of such a statement all the limited partners shall stand upon equal footing.
Preferred limited partners
Priority over other limited partners as to the following:
o Return of their contributions o Compensation by way of income o Any other matter
In the absence of any agreement, all the limited partners shall stand on equal footing
Art. 1856. 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;