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If you are starting a business, it can be difficult to know whether to enter into a joint venture or partnership. What is the difference between the two arrangements? And what are the advantages and disadvantages of each? Before taking the first step, you should understand what both arrangements entail. You should also obtain legal and financial advice. This article explains the difference between a joint venture and partnership. It also sets out the advantages and disadvantages of each.

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What is a Joint Venture Agreement?

In a joint venture, two or more individuals or companies work together towards the same strategic goal. However, they all maintain their separate businesses while doing so. A business may decide to enter into a joint venture agreement for a number of short and long-term projects such as:

  • property development;
  • publishing agreements;
  • transportation agreements;
  • travel agreements (especially when operating overseas);
  • research and development agreements; and
  • mining syndicates.

Notably, each party is responsible for the debts incurred by them in the arrangement. However, the parties usually divide the profits between themselves at the end of the project. A written joint venture agreement governs the relationship between parties to a joint venture.

Advantages of a Joint Venture

Businesses of any size can benefit from a joint venture. This is because these types of arrangements allow for:

  • business expansion;
  • growth without borrowing money or seeking outside investment;
  • the development of new products and services;
  • greater access to resources and staff; and
  • a temporary commitment between the parties.

Disadvantages of a Joint Venture

You should also consider some of the downsides to joint venture arrangements. These include:

  • diificulties in finding people you trust to enter into an agreement with;
  • uncertainty as the success of a joint venture depends on working collaboratively and towards a common goal; and
  • risk of conflict or lack of commitment by parties to the joint venture agreement.

Key Terms of a Joint Venture Agreement 

There are a number of terms you should include in your joint venture agreement to ensure each of the parties are on the same page. Some of the key terms you should have are: 

  • details of the joint venture including structure and objectives;
  • each parties’ obligations and warranties;
  • financial contributions and division of profits and losses;
  • books of account and audit;
  • details on your approach to marketing matters;

Likewise, in drafting your joint venture agreement, have a detailed discussion with all parties. Indeed, consider the following questions:

  • Who will own the intellectual property created by the joint venture?
  • How will each party maintain confidentiality?
  • What happens if someone decides to leave or terminate the agreement?
  • What are the dispute resolution processes in the event of a dispute?

This is not an exhaustive list. You should seek legal advice if you need assistance drafting a joint venture agreement.

What is a Partnership Agreement?

Unlike a joint venture, which has an end, a partnership is an ongoing relationship between parties. It is usually limited to 20 partners and unlike a company, it is not a separate legal entity. Instead, the partners are jointly responsible for the activities of the partnership. For example, a partner will be liable for the partnership’s debts if the other partners are unable to pay. This is the main difference between a joint venture and partnership agreement.

A written partnership agreement governs the relationship between the parties in a partnership.

Advantages of a Partnership Agreement

The benefits of a partnership arrangement include:

  • easy establishment and lower start-up costs;
  • an opportunity for income splitting;
  • ability to easily change business structure down the track;
  • less external regulation than having a company; and
  • the business affairs of the partners remain private.

Disadvantages of a Partnership Agreement

However, there are disadvantages. These include:

  • each partner is jointly and severally liable for other partners’ debts;
  • each partner is responsible and liable for the actions and ommissions of the other partners;
  • profits must be shared with the other partners; and
  • the partners have unlimited liability. This means that, as a partner, your personal assets and finances may be used to pay the debts of the partnership.

Accordingly, these disadvantages makes it crucial to enter into partnership with someone you can trust. You should ensure you have weighed up the benefits against the negatives before entering into a partnership agreement.

Key Terms of a Partnership Agreement 

There are a number of terms you should include in your partnership agreement to ensure each of the parties are on the same page. Some of the key terms you should have are: 

  • details of how the partnership will work; 
  • what are the partners’ obligations under the agreement;
  • what are the business’ operating hours;
  • who owns the intellectual property created in the partnership;
  • how will you divide the assets;
  • how will you ensure confidentiality;
  • what are the dispute resolution processes in the event of a dispute; and
  • how should parties leave or terminate the agreement.

This is not an exhaustive list. You should seek legal advice if you need assistance drafting a partnership agreement.

Importantly, there is no one-size-fits-all approach. When weighing up the advantages and disadvantages between a joint venture and partnership, consider your business objectives. If you are simply looking to take on a short-term project to develop a new product, it may be more appropriate to enter into a joint venture agreement with someone with industry experience. Alternatively, a partnership may be more suitable if both parties are on the same page about bringing a business idea into fruition. 

Key Takeaways

Before entering into a joint venture or partnership arrangement, it is essential you understand the difference between a joint venture and partnership. In a joint venture, two or more individuals or companies work together towards the same strategic goal. Notably, there is a defined end for the project/relationship. Alternatively, a parnership is an ongoing relationship between parties. When weighing up the differences, you should also obtain legal and financial advice. Furthermore, it is important that you complete your due diligence to ensure the commercial relationship will flourish.

If you have any questions, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is a joint venture?

In a joint venture, two or more individuals or companies work together towards the same strategic goal. This project has a defined end date and can be short, medium or long term. 

What is a joint venture agreement?

A joint venture agreement is a written agreement that governs the relationship between parties to a joint venture.

What is a partnership?

Unlike a joint venture, which has an end, a partnership is an ongoing relationship between parties.

What is a partnership agreement?

A partnership agreement is a written agreement that governs the relationship between the parties in a partnership.

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