BAM 201 REVIEWER

PARTNERSHIP AND CORPORATION

DEFINITION Advantages vs CORPORATION

1. Easier and less expensive to organize
Civil Code of the Philippines, Article 1767 2. More personal and informal.
➢ In a contract of partnership, two (2) or
more persons bind themselves to Disadvantages
contribute money, property, or industry 1. Easily dissolved and thus unstable
to a common fund, with the intention of compared to corporation.
dividing the profit among themselves. 2. Mutual agency and unlimited liability
Two or more persons may also form a may create personal obligations to
partnership for the exercise of partners.
profession. 3. Less effective than a corporation in
raising large amounts of capital.
Civil Code of the Philippines, Article 1768
➢ The partnership has a juridical PARTNERSHIP DISTINGUISHED FROM
personality separate and distinct from CORPORATION
that each of the partners. Manner of Creation
Partnership: created by mere agreement of the
CHARACTERISTICS OF A PARTNERSHIP partners.
Corporation: created by operation of law.
• Mutual Contribution – money, property
or industry. Number of Persons
• Division of Profits or Losses – each Partnership: two or more persons.
partner must share in the profit or loss. Corporation: not exceeding fifteen (15).
• Co-ownership of Contributed Assets –
all assets contributed to the partnership Commencement of Juridical Personality
are owned by the partnership by virtue Partnership: from the execution of the articles
of its separate and distinct juridical of partnership.
personality. Corporation: from the issuance of certificate of
• Mutual Agency – bind by a contract. incorporation by the SEC.
• Limited Life – it may be dissolved by the
admission, death, insolvency, Management
incapacity, withdrawal, expiration of the Partnership: every partner is an agent of the
term. partnership if the partners did not appoint a
• Unlimited Liability – all partners, except managing partner.
limited partners, are personally liable for Corporation: vested on the Board of Directors.
all the debts incurred by the partnership.
• Income Taxes – partnerships, except Extend of Liability
general professional partnership, are Partnership: each of the partner except a
subject to tax of 30%. limited partner is liable to the extent of his
• Partner’s Equity Accounts – each personal assets.
partner has a capital account. Corporation: stockholder are liable only to the
extent of their interest or investment in the
ADVANTAGES AND DISADVANTAGES OF A corporation.
PARTNERSHIP
Right of Succession
Advantages vs PROPRIETORSHIP Partnership: there is no right of succession.
1. Brings greater financial capability to the Corporation: there is right of succession.
business.
2. Combines special skills, expertise and Terms of Existence
experience of the partners. Partnership: for any period of time stipulated by
3. Offers relative freedom and flexibility of partners.
action in decision-making. Corporation: shall have perpetual existence
unless its articles of incorporation provides
otherwise.
 BAM 201 REVIEWER
PARTNERSHIP AND CORPORATION

CLASSIFICATIONS OF PARTNERSHIP 3. Capitalist Partner – contributes money

1. According to object: or property
a. Universal partnership of all present 4. Industrial Partner – contributes his
property – all contributions become knowledge or personal service.
part of the partnership. 5. Managing Partner – appointed as
b. Universal partnership of profits – if manager of the partnership.
the articles of universal partnership 6. Liquidating Partner – settles the affairs
did not specify its nature, it will be of the partnership after dissolution.
considered a universal partnership 7. Dormant Partner – does not take active
of profits. part and not known as a partner.
c. Particular Partnership – the object 8. Silent Partner – does not take active
of the partnership is determinate. part though maybe known as partner.
9. Secret Partner – takes active part but
2. According to liability: not known as partner by outside parties.
a. General – all partners are liable to 10. Nominal Partner or Partner by Estoppel
the extent of their separate – not a partner but represents himself
properties. as one.
b. Limited – limited partners are liable
only to the extent of their personal PARTNERSHIP FORMATION
contributions. In a limited
partnership, the law states that there • Partnership is formed through a
shall be at least one general partner. contract – written or oral.

3. According to duration: Fair Market Value – price at which an asset or

a. Partnership with a fixed term or for liability could be exchange in a current
a particular undertaking. transaction between knowledgeable, unrelated
b. Partnership at will. No term is willing parties.
specified ad is not formed for any
particular undertaking. A. Individuals with no existing business
form a partnership – debit to asset
4. According to purpose: contributes and credit the liabilities
a. Commercial or Trading – formed for assumed and the capital account of
the transaction of business. each partner.
b. Professional or non-trading – B. A Sole proprietor and another individual
formed for the exercise of form a partnership – assets and
profession. liabilities of the proprietorship will be
transferred to the newly formed
5. According to legality of existence: partnership at values agreed upon by all
a. De Jure – complied with all the legal the partners or at their current.
requirements for its establishment. Steps:
b. De Facto – failed to comply with all 1. Adjust
the legal requirements for its 2. Close
establishment. 3. New Book of the Partnership
C. Two or more sole proprietorship form a
KINDS OF PARTNERS partnership.
1. General Partner – liable to the extent of
his separate property after all the assets
of the partnership are exhausted.
2. Limited Partner – liable only to the
extent of his capital contribution.
Illustration 1.1: Salaries (w/ remaining profit) – different P/L ratios
A and B’s partnership agreement provides for annual salary allowances of P50,000 for A and
P30,000 for B. The salary allowances are to be withdrawn throughout the period and are to be
debited to the partner’s respective capital accounts.

• The partners share profits equally and losses on a 60:40 ratio.

• The partnership earned profit of P100,000 before salary allowances.

➢ Compute for the respective shares of the partners in the profit.

Solution: A B Total
Amount being allocated 100,000
Allocation:
1. Salaries 50,000 30,000 80,000
2. Allocation of remaining profit (100K
profit – 80K salaries) = 20K
(20k x 50%); (20K x 50%)
10,000 10,000 20,000
As allocated 60,000 40,000 100,000

Note:
• Salaries are provided first and the remaining amount is allocated based on the profit
sharing ratio.
• The sum of the amounts allocated to the partners is equal to the amount being allocated
(i.e., 60K + 40K = 100K)

Illustration 1.2: Salaries (no remaining profit) – different P/L ratios

A and B formed a partnership. The partnership agreement stipulates the following:
• Annual salary allowances of P80,000 for A and P40,000 for B.
• The partners share profits equally and losses on a 60:40 ratio.

During the period the partnership earned profit of P100,000.

➢ Compute for the respective shares of the partners in the profit.

Solution: A B Total
Amount being allocated 100,000
Allocation:
1. Salaries 80,000 40,000 120,000
2. Allocation of remaining profit
(100K profit – 120K salaries) = -20K
(-20k x 60%); (-20K x 40%)
-12,000 -8,000 -20,000
As allocated 68,000 32,000 100,000

Note:
• After the salaries are provided, the remaining amount is negative (i.e., loss); thus, it is
allocated based on the stipulated loss ratio of 60:40.
• The sum of the amounts allocated to the partners is equal to the amount being allocated
(i.e., 68K + 32K = 100K)
Illustration 1.3: No Profit/Loss Ratio
A and B formed a partnership on January 1, 20x1. Their contributions were credited to their
respective capital accounts as follows:

Capital Accounts

A, Capital 150,000
B, Capital 250,000

400,000

During the year, the partnership earned profit of P1,000,000. There was no stipulation in the
agreement on how profits are to be shared by the partners.

➢ Compute for the respective shares of the partners in the profit.

Solution: A B Total
Amount being allocated 1,000,000
Allocation: (based on contributions)
1M x (150K/400K) 375,000 375,000
1M x (250K/400K) 625,000 625,000
As allocated 375,000 625,000 1,000,000

Illustration 2.1: Bonus (with profit)

A and B formed a partnership. The partnership agreement stipulates the following:
• Annual salary allowances of P48,000 for A and P30,000 for B.
• Bonus to A of 10% of the profit after partner’s salaries and the bonus.
• The partners share profits and losses on a 60:40 ratio.

During the period the partnership earned profit of P100,000 before deductions for salaries
and bonus.

➢ Compute for the respective share of the partners in the profit.

Solution: A B Total
Amount being allocated 100,000
Allocation:
48,000 30,000 78,000
1. Salaries
2. Bonus after bonusa 2,000 2,000
3. Allocation of remaining profit
(100K-78K-2K) = 20K 12,000 8,000 20,000
(20Kx60%); (20Kx40%)
As allocated 62,000 38,000 100,000
a
The bonus is computed as follows:

Profit before salaries and bonus 100,000

Salaries (78,000)
Profit after salaries but before deduction of 22,000
bonus The bonus
scheme is
“bonus after bonus.” The formula is as follows:

Where: B = bonus

P = profit before bonus and tax

Br = bonus rate or bonus percentage

Illustration 2.2: Bonus (with loss)

A and B formed a partnership. The partnership agreement stipulates the following
• Annual salary allowances of P25,000 for A and P4,000 for B.
• Bonus to A of 10% of the profit after partner’s salaries and bonus.
• The partners share profits and losses on a 60:40 ratio.
During the period the partnership incurred loss of P10,000 before deduction for salaries.
Requirements:

a. Compute for the respective shares of the partners in the profit.

b. By what amount did A’s capital account change?

Solutions:
Requirement (A)
A B Total

Amount being allocated (10,000)

Allocation:
1. Salaries 25,000 4,000 29,000
2. Bonus after bonusb - - -
3. Allocation of remaining loss
(-10K-29K) = -39K
(-39Kx60%); (-39Kx40%)

(23,400) (15,600) (39,000)

As allocated 1,600 (11,600) (10,000)
*No bonus is allocated because the partnership incurred a loss. However, salaries are provided
whether the partnership earns profit or incurs loss because salaries are compensation for services
rendered.
Illustration 2.3: Bonus – with limit
A and B formed a partnership. The partnership agreement stipulates the following:
• First, A shall receive 10% profit up to P100,000 and 20% over P100,000.
• Second, B shall receive 5% of the remaining profit over P150,000.
• Any remainder shall be shared equally.

During the year, the partnership earned profit of P280,000.

➢ Compute for the respective shares of the partners in the profit.

Solution:

Illustration 2.4: Bonus – choice of profit-sharing scheme

Mr. A, a partner in ABC Co., is deciding on whether to accept a salary of P8,000 or a salary of
P5,000 plus a bonus of 10% of profit. The bonus shall be computed on profit after salaries and
bonus. Salaries of the other partners amount to P20,000.

Requirement: What amount of profit would be necessary so that Mr. Awould be indifferent
between the choices?

Solution
An algebraic equation is developed from the two choices above.
Let X = profit after salaries and bonus
10%X = bonus after bonus
Choice #1 Choice #2
8,000 salary = 5,000 salary + 10%X
X is computed from the equation above as follows:

8,000 = 5,000 + 10%X

10%X = 8,000 – 5,000
X = 3,000 / 10%
X = 30,000

Profit after salaries and bonus (X) 30,000

Multiply by: Bonus rate 10%
Bonus 3,000

Profit after salaries and bonus 30,000

Add back: Salaries (5K to Mr. A + 20K to other 25,000
partners)
Add back: Bonus 3,000
Profit before salaries and bonus 58,000

If the profit of the partnership is P58,000, it does not matter whether Mr. A chooses to receive a
salary of P8,000 (‘choice #1’) or a salary of P5,000 plus a 10% bonus (choice #2); he will receive
the same amount.