How Does a Joint Venture Work?

Businesses looking to expand into new markets or develop technology can do so more efficiently by sharing ideas, capital, resources and risk with another business. A joint venture describes a relationship between two or more parties (also called participants) working to accomplish a specific task or project. An advantage of the joint venture structure is its flexibility.

Unlike corporations and partnerships, onerous regulations don’t govern the relationship. Instead, a joint venture agreement sets out the rights and obligations of each party. We unpack how a joint venture works, the different structures and what key terms to look for in your agreement.

How Do Joint Ventures Differ From a Partnership?

We have summarised the key differences between a joint venture and partnership in the table below.

How Do I Structure My Joint Venture?

When setting up a joint venture, participants must decide whether to establish an ‘incorporated joint venture’ or ‘unincorporated joint venture’.

Incorporated Joint Venture

Parties incorporate a new company to undertake the joint venture project. Parties will then hold shares in the company proportionate to their interest in the joint venture. Following incorporation, parties enter into a joint venture agreement. The agreement is similar to a standard shareholders agreement but also includes the operational elements of the venture.

The new company would then: 

• own any property of the joint venture;
• manage the operations of the joint venture; and 
• operate specifically for the purpose of the joint venture. 

When the joint venture terminates, parties should wind-up the company.  

Unincorporated Joint Venture 

The joint venture agreement will document the relationship of the participants. Each participant owns a distinct share of the property of the joint venture (i.e. as tenants in common). 

A key consideration for participants when choosing a joint venture structure are the associated tax consequences. We then strongly recommend participants obtain separate tax advice.     

What are the Key Terms in a Joint Venture Agreement?

Both an incorporated and unincorporated joint venture will require a joint venture agreement. Standard clauses in a joint venture agreement are as follows.

Key Takeaways