Starting a business is both an exciting and challenging time. It is important to sit down and consider what business structure to choose, as the structure can make or potentially break your business. We’ve put together a rundown of the advantages and disadvantages of a joint venture, to help you decide whether this business structure is best suited to your business.
What is a Joint Venture?
This business structure is commonly used particularly in high-risk activities. Joint ventures are designed to be able to bring in different skills or assets (or both) into a business or commercial activity for a finite period of time and with a goal to share in the product or end result of the joint venture. A joint venturer is both a principal and agent to the other joint venturers and must act within the scope of the joint venture agreement.
Some examples of when joint ventures are in property development, construction, manufacturing, entertainment, hospitality management or agriculture.
Though a fiduciary relationship may arise in a joint venture relationship, joint venturers are ordinarily not in a fiduciary relationship, and they do not owe a legal duty to act solely in another party’s interests unless contracted to do so or they act in a manner which implies that such a relationship does exist.
Governing Law
There is no governing law for joint ventures or a register for joint ventures. Joint ventures are bound in contract, and the principles of general law will apply. It is a good idea to have a solicitor draft your joint venture agreement before you partake in the activity to help limit the confusion or debates that can arise.
Advantages of Joint Ventures
Management and Control
Each party will bring their own sets of skills and working capital to the project. Therefore, the control exercised by each party will usually be limited by each person’s area of expertise.
In the case of a joint venture company, each participant will have shares in the company and will appoint directors to the board.
Liability
Liability is shared amongst the joint venturers. It is important that each participant maintain appropriate legal compliance to isolate their own liability for personal injuries or other breaches of the law.
Joint venturers may agree to share liability and if collectively they engage in an activity that breaches the law than they may become jointly and severally liable.
Capital
A joint venture allows for participants to pool physical, financial and human capital between them.
Incorporated joint ventures using a public company as a business structure have the flexibility to access funds from the general public.
Privacy
Unincorporated joint ventures can keep their business finance confidential. Incorporated joint ventures, utilising a large proprietary company or a public company, will have to disclose their financial statements publicly.
Disadvantages of Joint Ventures
Ease of Establishment
A joint venture is an association of natural or corporate persons, who agree by contract to engage in some common activity by combining their respective resources without forming a partnership or corporation. This agreement can be quite complex as it requires understanding the commercial objective and the role each person is to play.
Notwithstanding this, the courts have on occasion deemed a joint venture to be a partnership because of the activities of the parties.
Other Factors
Continuity of Existence
As a joint venture is not a separate legal entity, it will only last as long as the parties continue to act within the joint venture agreement.
Taxation
An unincorporated joint venture is not a separate legal entity; therefore, each party is responsible for his or hers own taxes. However, when a joint venture uses a company as its management body, then the taxation requirements of the company apply.
In deciding whether or not a joint venture is a structure best suited to your business, considering the legal issues along with the needs and growth of your business may be challenging. It is advisable to speak to one of our business lawyers to guide you through the legalities when structuring your business. Call us on 1300 544 755.
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