b. Rules to Determine Existence of a Partnership

General Rule

Except as provided in Article 1825, persons who are not partners as to each other are not partners as to third persons (Art. 1769[1]¹)

When Immovables or Real Rights Contributed

General Rule: Failure to comply with the requirement of appearance in public instrument and SEC Registration will not affect the liability of the partnership and the members thereof to third persons. (Art. 1772, [2])²

Exception: When immovable property or real rights are contributed, a public instrument is necessary. (Art. 1771)³

If immovable property is contributed, an inventory must also be made, signed by the parties, and attached to the public instrument. (Art. 1773)⁴

Note: Partnerships void under Art.1773, in relation to Art. 1771 may still be considered either de facto or estoppel partnerships vis-à-vis third persons; may even be treated as an ordinary contract from which rights and obligations may validly arise, although not exactly a partnership under the Civil Code. (Torres v. Court of Appeals and Manuel Torres, G.R. No. 134559, 9 December 1999)⁵

Failure to prepare an inventory of the immovable property contributed, in spite of Art. 1773 declaring the partnership void would not render the partnership void when:

• No third party is involved (since Art. 1773 was intended for the protection of 3rd parties);
• Partners have made a claim on the partnership agreement.

Other rules to determine whether a partnership exists (Art. 1769)

Co-ownership or co-possession and the sharing of gross returns do not, by themselves, establish a partnership. Receipt of a share of business profits is prima facie evidence of partnership, subject to the exceptions below:

• Co-ownership or co-possession
• Sharing of gross returns, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived
• Receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, unless such were received in payment as:
• Debt by installments or otherwise;
• Wages or rent;
• Annuity;
• Interest on loan;
• Consideration for sale of goodwill of business or other property by installments or otherwise

A partnership must have a lawful object or purpose and must be established for the common benefit or interest of the partners. (Art. 1770)⁸

Formation of Partnership

• How Partnership is Formed

General Rule: No special form is required for the validity of a contract. (Art. 1356)⁹

• Burden of Proof and Presumption

The existence of a partnership must be proven, not presumed. Persons acting as partners are presumed to have entered into a contract of partnership. The burden of proof is shifted to the party denying its existence.

An extant partnership is presumed to exist until proven terminated.

Use of the term “partner” does not necessarily show existence of partnership. Non-use of the terms “partnership” or “partners” are not conclusive as to non-existence or partnership but entitled to weight.