CHAPTER 4

LIMITED PARTNERSHIP

ARTICLE 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.

Characteristics of limited partnership

1. It is formed by compliance in good faith with the statutory requirements;
2. One or more general partners control the business and are personally liable to creditors;
3. One or more limited partners (also known as special partner/s) contribute to the capital and
share in the profits but do not participate in the management of the business;
4. The limited partners are not personally liable for partnership obligations beyond their capital
contributions;
5. The limited partners may ask for the return of their capital contributions; and
6. The partnership debts are paid out of the common fund and the separate properties of the
general partners.

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) 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 one or more of the limited 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.
ESSENTIAL REQUISITES IN THE FORMATION OF A LIMITED PARTNERSHIP
1. The certificate of limited partnership
It must be signed and sworn to. It must contain all the enumerated items in the above-
stated article.
2. The certificate of limited partnership must be filed in the Office of the Securities and Exchange
Commission.

Note:
 As compared to a general partnership which can be verbal, a limited partnership
must always be in writing (certificate of limited partnership).
 There is no limited partnership in case of non-compliance with the above
requirements. However, there can be a general partnership.

Presumption in favor of a general partnership

A partnership transacting business with third person is disputably presumed to be a general
partnership.

ARTICLE 1845
 The contributions of a limited partner may be cash or property, but not services.

Contribution of a limited partner

A limited partner can contribute only money or property or both. Consequently, an
industrial partner can only become a general partner.

ARTICLE 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 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.

The surname of a limited partner shall not appear in the partnership name
A limited partner violating this article is liable as a general partner only to the partnership
creditors who extend credit to the partnership without actual knowledge that he is not a general partner.
However, the said limited partner will not acquire the rights of a general partner.

ARTICLE 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 a false statement in the certificate

The one who suffers loss by reliance on such false statement may hold liable any party in the
certificate of limited partnership who is in bad faith.
ARTICLE 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 a limited partner who takes part in the control of the business.
The limited partner will be liable as a general partner. However, said limited partner does not
acquire the rights of a general partner.

ARTICLE 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.

Additional limited partners may be admitted after the formation

The only requirement is amendment of the original certificate of limited partnership which must
be signed and sworn to by all the partners, original partners and the newly admitted limited partners,
and filed with the Office of the Securities and Exchange Commission.

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 of 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 to do so 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 to do so is given
in the certificate.

Note:
 As a rule, just like the general partners in a general partnership, the general partners in a limited
partnership can do only acts of administration.
 The above enumerations pertain to acts of ownership. Thus, the general partners must secure
the written consent or ratification by all of the partners.

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.
Rights of a limited partner
1. The right to 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. The right to 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;
3. The right to have dissolution and winding up by decree of court;
4. The right to receive a share of the profits or other compensation by way of income; and
5. The right to receive return of his contribution if the partnership assets are in excess of the
partnership liabilities.

ARTICLE 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.

Contributor who erroneously believes that he has become a limited partner

He is not liable as a general partner provided that:
1. On ascertaining the mistake, he promptly renounces his interest in the profits of the business, or
other compensation by way of income; and
2. He does not take part in the control of the business.

ARTICLE 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.

General-Limited partner
A person may be a general partner and a limited partner at the same partnership at the same
time, provided that this fact shall be stated in the certificate of limited partnership.

Rights of a general-limited partner

His rights are those of a general partner.

Liabilities of a general-limited partner

 His liabilities are those of a general partner. Hence, as to partnership creditors, he is liable up to
the extent of his separate property.
 Nevertheless, as regards his contribution, his rights are those of a limited partner insofar as the
other partners are concerned.
ARTICLE 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.

Allowable business transactions of a limited partner with the partnership

1. To lend money to the partnership;
2. To transact business with the partnership; and
3. To receive on account of resulting claims against the partnership, with general creditors, a pro
rata share of the assets.

Prohibited business transactions of a limited partner with the partnership

1. Receive or hold as collateral security and partnership property;
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.

Rationale:
To prevent illegal competition between the limited partner and partnership creditors for the
assets of the partnership.

Note:
Violation of the prohibition as enumerated, will give rise to the disputable presumption of fraud
on the creditors of the partnership.

ARTICLE 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.

Preference to some limited partners

Preference may be given to some limited partners over other limited partners as to:
1. Return of their contributions;
2. Their compensation by way of income; or
3. Any other matter.

ARTICLE 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, provided that after such
payment is made, whether from property of the partnership or that of a general partner,
the partnership assets are in excess of all liabilities of the partnership except liabilities to
limited partners on account of their contributions and to general partners.

Share of the profits or compensation by way of income of a limited partner

 The requirements here is that the partnership assets are in excess of all liabilities of the
partnership to third persons after payment of the profits or compensation by way of income of a limited
partner.

ARTICLE 1857
 A limited partner shall not receive from a general partner or out of partnership property
any part of his contribution until:
(1) All liabilities of the partnership, except liabilities to general partners and to limited
partners on account of their contributions, have been paid or there remains
property of the partnership sufficient to pay them;
(2) The consent of all members is had, unless the return of the contribution may be
rightfully demanded under the provisions of the second paragraph; and
(3) The certificate is cancelled or so amended as to set forth the withdrawal or
reduction.
 Subject to the provisions of the first paragraph, a limited partner may rightfully demand
the return of his contribution:
(1) On the dissolution of a partnership; or
(2) When the date specified in the certificate for its return has arrived, or
(3) After he has given six months’ notice in writing to all other members, if no time is
specified in the certificate, either for the return of the contribution or for the
dissolution of the partnership.
 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 of his contribution.
 A limited partner may have the partnership dissolved and its affairs wound up when:
(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,
and the limited partner would otherwise be entitled to the return of his
contribution.

Requisites for the return of contributions of a limited partner

1. All liabilities of the partnership, except liabilities to general partners and to limited partners on
account of their contributions, have been paid or there remains the property of the partnership
sufficient to pay them;
2. The consent of all members (general and limited partners) is had, unless the return of the
contribution 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 can the contributions of a limited partner be returned?

1. On the dissolution of a partnership;
2. When the date specified in the certificate for its return has arrived; or
3. After he has given six months’ notice in writing to all other members, if no time is specified in
the certificate, either for the return of the contribution or for the dissolution of the partnership.

Right of a limited partner to demand and receive cash in return for his contribution
A limited partner, irrespective of the nature of his contribution, has only the right to demand and
receive cash in return for his contribution. The exceptions are:
1. Where there is stipulation to the contrary in the certificate of limited partnership; or
2. Where all the partners consent to the return of his contribution other than in the form of cash.

When may a limited partner have the partnership dissolved and liquidated?
A limited partner may have the partnership dissolved and its affairs wound up when:
1. He rightfully but unsuccessfully demands the return of his contribution, or
The other liabilities of the partnership have not been paid, or the partnership property is
insufficient for their payment and the limited partner would otherwise be entitled to the return
of his contribution.
ARTICLE 1858
 A limited partner is liable to the partnership:
(1) For the difference between his contribution as actually made and that stated in the
certificate as having been made; and
(2) 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.
 A limited partner holds as trustee for the partnership:
(1) Specific property stated in the certificate as contributed by him, but which was not
contributed or which has been wrongfully returned, and
(2) Money or other property wrongfully paid or conveyed to him on account of his
contribution.
 The liabilities of a limited partner as set forth in this article can be waived or
compromised only by the consent of all members; but a waiver or compromise shall not
affect the right of a creditor of a partnership who extended credit or whose claim arose
after the filing and before a cancellation or amendment of the certificate, to enforce
such liabilities.
 When a contributor has rightfully received the return in whole or in part of the capital of
his contribution, he is nevertheless liable to the partnership for any sum, not in excess of
such return with interest, necessary to discharge its liabilities to all creditors who
extended credit or whose claims arose before such return.

Liability of a limited partner for unpaid contribution to the partnership

1. For the difference between his contribution as actually made and that stated in the certificate as
having been made; and
2. 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.

Liability of a limited partner as a trustee to the partnership

1. Specific property stated in the certificate as contributed by him, but which was not contributed
or which has been wrongfully returned, and
2. Money or other property wrongfully paid or conveyed to him on account of his contribution.

Liabilities of a limited partner may be waived

The requisites are:
1. With the consent of all the other partners; and
2. The waiver or compromise shall not affect the right of partnership creditors who extended credit
or whose claim arose after the filing and before a cancellation or amendment of the certificate.

Liability of a limited partner despite return of his contribution

A limited partner is nevertheless liable to the partnership for any sum necessary to discharge its
liabilities to all creditors who extended credit or whose claims arose before such return. However, the
liability of that limited partner is up to the extent of his contribution.

ARTICLE 1859
 A limited partner’s interest is assignable.
 A substituted limited partner is a person admitted to all the rights of a limited partner
who has died or has assigned his interest in a partnership.
 An assignee, who does not become a substituted limited partner. Has no right to require
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
way of income, or the return of his contribution, to which his assignor would otherwise
be entitled.
 An assignee shall have the right to become a substituted limited partner if all the
members consent thereto or if the assignor, being thereunto empowered by the
certificate, gives the assignee that right.
 An assignee becomes a substituted limited partner when the certificate is appropriately
amended in accordance with Article 1865.
 The substituted limited partner has all the rights and powers, and is subject to all the
restrictions and liabilities