AS TO the manner of distribution, profits and losses of a partnership (whether general or limited) shall be distributed/apportioned in accordance with the rules provided for under the New Civil Code (Code), as follows:
(1) As a general rule, profits and losses shall be distributed in conformity with the stipulations in the agreement (such as that agreed upon in the Articles of Partnership, if applicable). In case the partners agreed merely on the share/distribution of profits, it is understood that losses shall be in the same proportion (Article 1797 of the Code). Note that in the case of a limited partnership, an additional stipulation on the share of the profits (which each limited partner shall receive) may be found in the signed and sworn certificate as required by Article 1844 [1] [i] of the Code. This certification is filed and recorded in the Securities and Exchange Commission (SEC).
(2) In the absence of a stipulation, profits and losses shall generally be divided in proportion to the partners’ respective contributions (Article 1797 of the Code).
As to timing and frequency, we believe that a partnership (whether general or limited) may distribute profits anytime within a year and for as many times for as long as there exists profit. Since a partnership is essentially a contractual agreement between or among the partners, it follows that distribution of profits is governed by the agreement of the partners. This position is also supported by an examination of the rules governing general and limited partnerships alike, to wit:
For general partnerships. It may be noted that general partners have “unlimited liability” towards creditors, i.e. the liability of investors in a general partnership for all partnership debts shall extend pro rata to their personal properties (after the assets of the partnership are exhausted) (Article 1816 of the Code). Hence, in the event that a general partnership distributes profits during the year, and later on determines at year-end that it is in a deficit position, the partnership’s creditors may still have a recourse against the individual general partners to the extent of their own personal properties (after exhaustion of partnership assets).
Note that a general partnership is unlike a corporation, wherein stockholders have a limited liability towards creditors. Due to such nature of corporations, it becomes necessary for government bodies such as the SEC to regulate and monitor dividend declarations by requiring said corporations to submit an annual AFS (in order to determining the existence of unrestricted retained earnings/surplus profit) (SEC Memorandum Circular No. 11 dated December 5, 2008). As explained above, the determination of unrestricted retained earnings/surplus profits will not find application in the case of general partnerships due to the concept of “unlimited liability”.
As such, we believe that general partnerships may distribute profits anytime within a year and for as many times for as long as there exists profit (without the need of prior submission of AFS to the SEC).
For limited partnerships. – Although it may be noted that limited partners are accorded a “limited liability” towards creditors (similar to stockholders in a corporation), and such limited partners are not personally bound for the obligations of the partnership (Article 1843 of the Code), we believe that said limited partnership may, just the same, distribute profits anytime within the year and for as many times without the need to prior submission of AFS to the SEC (as in the case of general partnerships). This is because the Code (which governs partnerships) only require that the limited partnership’s assets must be in excess of all liabilities (except liabilities to limited partners on account of their contributions and to general partners) after payment of profits to limited partners are made (Article 1856 of the Code).
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