Are Informal Partners Personally Liable for Business Loans?
Introduction
Startup founders often begin operations through an informal joint venture, shared business name, or handshake partnership. While this arrangement may reduce initial costs, it can expose every participant to personal liability when the business borrows money or fails to pay its creditors.
The absence of Securities and Exchange Commission (SEC) registration does not necessarily mean that no partnership exists. Philippine law recognizes that a partnership may arise from the parties’ agreement, contributions, conduct, and sharing of profits. Registration generally gives notice to third persons; it does not erase liability to creditors.
However, the statement that all participants are automatically liable for the entire unpaid loan requires qualification. For ordinary partnership contracts, partners are generally liable pro rata and only after partnership assets have been exhausted. Solidary liability may arise when the law, the nature of the obligation, or the partners’ wrongful acts so require.
When Does an Informal Partnership Exist?
Under the Civil Code, a partnership exists when two or more persons agree to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. The agreement may generally be oral or written, unless a specific form is required by law.
The Supreme Court has held that a partnership may exist even when the parties do not use the words “partner” or “partnership.” Contributions to the business, participation in management, control over operations, and sharing of profits may establish the relationship. In [Angeles, et al. v. Secretary of Justice, et al., G.R. No. 142612, 2005](#J3.9), the Court ruled that the absence of a public instrument and SEC registration did not invalidate a partnership where its essential elements were present.
Similarly, in [Villanueva v. Coca-Cola Bottlers Phils., Inc., et al., G.R. No. 264746, 2024](#J1.22), the Court recognized that a partnership may be proved through evidence other than formal articles of partnership, particularly when the business was never formally organized.
Does SEC Registration Determine Liability?
No. Article 1772 of the Civil Code requires a partnership with capital of at least ₱3,000 in money or property to appear in a public instrument and be recorded with the SEC. Nevertheless, the same provision expressly states that failure to comply with these requirements does not affect the liability of the partnership or its members to third persons.
Thus, failure to register may create regulatory and evidentiary problems, but it does not permit the participants to avoid obligations incurred in the conduct of the business. As explained in [Villanueva v. Coca-Cola Bottlers Phils., Inc., et al., G.R. No. 264746, 2024](#J1.22), the lack of registration does not prevent third-party creditors from pursuing the partnership and the partners under applicable Civil Code provisions.
Article 1772 should also be distinguished from Article 1773. Where immovable property or real rights are contributed to a partnership, the law imposes additional formal requirements, including an inventory signed by the parties and attached to the public instrument. Failure to comply may affect the validity of the partnership under the circumstances described in the Civil Code.
Liability for Ordinary Business Loans
Article 1816 of the Civil Code provides the general rule for partnership liabilities. Partners, including industrial partners, are liable with all their property, but generally only pro rata and after the partnership assets have been exhausted, for contracts entered into in the partnership’s name and for its account by an authorized person.
Accordingly, when an informal partnership obtains a business loan and defaults, the creditor may generally proceed against partnership assets first. If those assets are insufficient, the partners may be held liable for their respective shares of the remaining debt, subject to the terms of the agreement and the evidence of their contributions.
In [Villanueva v. Coca-Cola Bottlers Phils., Inc., et al., G.R. No. 264746, 2024](#J1.24), the Court held that the partners of an unregistered partnership could be held individually liable on a pro rata basis after considering the partnership’s lack of distinct assets. Because there was no established agreement on the parties’ contributions, and no sufficient evidence to determine their respective shares, the Court applied the presumption of equal shares.
When May Liability Become Solidary?
Solidary liability means that the creditor may demand the entire obligation from any one of the liable parties, subject to the rules on reimbursement among them. It is not presumed merely because the business was informal or unregistered.
Under Article 1207 of the Civil Code, solidarity exists only when the obligation expressly provides for it, when the law requires it, or when the nature of the obligation requires it. Article 1816 generally establishes pro rata liability for partnership contracts, while other Civil Code provisions recognize exceptions.
Partners may be solidarily liable with the partnership for loss or injury caused to third persons by a wrongful act or omission of a partner acting in the ordinary course of business or with the authority of the co-partners. In [Bendecio, et al. v. Bautista, G.R. No. 242087, 2021](#J2.11), the Supreme Court discussed the general rule of pro rata liability and the statutory exceptions involving wrongful acts and other circumstances recognized under Articles 1822, 1823, and 1824 of the Civil Code.
Solidary liability may also be imposed where the loan documents themselves expressly make the borrowers solidary debtors, or where the participants signed as co-borrowers, sureties, or guarantors. The exact language of the promissory note, credit agreement, security documents, and related undertakings must therefore be examined.
What If One Founder Uses a Business Name?
A startup may operate under a business name registered in the name of only one founder even though several persons actually contributed money, labor, or management. This arrangement may create two separate forms of exposure.
First, the registered business-name owner may be directly liable to third parties who relied on the registration and dealt with that person as the business owner. Second, as between the participants, the registered owner may seek contribution or reimbursement from the other persons who were actually partners and benefited from the transaction.
[Villanueva v. Coca-Cola Bottlers Phils., Inc., G.R. No. 264746, 2024](#J1.22) illustrates this distinction. The registered owner could be held liable to the creditor, while the internal allocation of the obligation among the actual participants could be determined through partnership principles.
Liability When the Arrangement Is Called a Joint Venture
The label “joint venture” does not by itself eliminate personal exposure. Under Philippine jurisprudence, an unincorporated joint venture is generally treated as a form of partnership and is governed by partnership principles, unless the parties’ agreement provides otherwise and the arrangement is legally valid.
In [Marsman Drysdale Land, Inc. v. Philippine Geoanalytics, Inc., et al., G.R. No. 183374, 2010](#J4.8), the Court treated the joint venture as a partnership and held the joint venturers jointly liable to a third-party service provider. The private agreement allocating funding or responsibilities between the venturers could not be used to defeat the creditor’s claim when the creditor was not a party to that agreement.
A similar principle appears in [Tiosejo Investment Corp. v. Ang, et al., G.R. No. 174149, 2010](#J5.17), where the Court held that a joint venture is generally considered a form of partnership. The ruling further recognized circumstances in which partners may be solidarily liable for obligations chargeable to the partnership, including loss or injury caused by a wrongful act or omission in the ordinary course of business.
The result may differ when the joint venture is incorporated. SEC OGC Opinion No. 25-12 explains that an incorporated joint venture is governed by the Revised Corporation Code of the Philippines rather than by partnership law. In that case, stockholders are generally liable only to the extent of their subscribed shares, subject to statutory exceptions such as fraud, bad faith, or the proper grounds for piercing the corporate veil.
Common Startup Scenarios
Shared loan signed by all founders. If all founders sign a loan agreement as co-borrowers and the document states that their liability is solidary, the creditor may generally demand payment of the entire debt from any one of them, subject to the terms of the agreement and applicable defenses.
Loan obtained in the name of an informal partnership. If the loan was used for partnership operations and was obtained by an authorized participant, the partnership may be primarily liable. The partners may later be required to answer for the deficiency, generally on a pro rata basis after partnership assets are exhausted.
Loan obtained by one founder without authority. The partnership may dispute liability if the borrowing was outside the ordinary course of business and the lender knew, or should have known, that the founder lacked authority. The outcome depends on the founder’s actual or apparent authority and the creditor’s good faith.
One founder signs as sole proprietor while others share profits. The creditor may proceed against the person appearing as the business owner. The registered owner may then pursue contribution from the other participants if the evidence establishes an actual partnership and the debt benefited the business.
Corporation by Estoppel and Personal Exposure
Founders sometimes describe their business as a corporation even though no corporation was validly organized. Section 20 of the Revised Corporation Code provides that persons who knowingly act as a corporation without authority may be liable as general partners for debts, liabilities, and damages arising from their conduct.
The same provision prevents an ostensible corporation from using its lack of corporate personality as a defense when it is sued on a transaction entered into as a corporation or on a tort committed as such. A person who assumed an obligation to the ostensible corporation may likewise be unable to resist performance merely by arguing that no corporation existed.
This rule is separate from ordinary partnership liability but may produce a similar result: individuals who represented that a business had a corporate personality may face personal liability instead of enjoying the protection normally associated with a valid corporation.
What Founders Should Do Before Borrowing
Founders should first decide whether the business will operate as a partnership, an unincorporated joint venture, or a corporation. The chosen structure should be documented before funds are accepted, loans are obtained, or contracts are signed.
A written agreement should identify each participant’s contribution, ownership interest, authority to borrow, allocation of profits and losses, responsibility for existing debts, withdrawal rights, and dispute-resolution process. It should also state whether liability to third parties is intended to be joint or solidary, although a private agreement cannot defeat rights already granted to third-party creditors.
Before signing a loan, the founders should determine who will be named as borrower, co-borrower, surety, or guarantor. They should also review whether the lender requires personal guarantees, mortgages, pledges, or waivers that could create liability beyond the founders’ expected business contributions.
Finally, the parties should maintain separate business records, bank accounts, receipts, and authorization documents. Commingling funds and allowing one person to represent the group without written limits make it more difficult to deny partnership, agency, or apparent-authority claims.
Conclusion
Operating a joint venture or partnership without SEC registration does not automatically eliminate the business relationship or the participants’ liability to third-party creditors. Where the parties contributed resources, conducted business together, and shared profits, a court may recognize an informal partnership based on their conduct.
For ordinary partnership debts, the usual rule is pro rata liability after exhaustion of partnership assets. Personal or solidary liability may nevertheless arise from the loan documents, wrongful acts, guarantees, representations as partners or a corporation, or other statutory exceptions.
Startup founders should therefore document the business structure, obtain proper registration where appropriate, define borrowing authority, and review every credit instrument before signing. Registration is not a substitute for careful contracting, and an internal agreement allocating responsibility will not necessarily defeat a creditor’s claim.
About Nicolas and De Vega Law Offices
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