How Does a Joint Venture Work?

May 30, 2017

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.

	Joint Venture	Partnership
Regulation	None aside from the joint venture agreement.	State and Territory-based Partnership Act.
Liability	Joint venture parties can specify in their agreement whether parties will share liabilities or each entity is separately responsible. The actions of parties in a joint venture don’t bind other participants without their consent.	Each partner is personally liable for the business’ debts. Each partner is also jointly and severally liable for the debts of each business partner(s). Partners can bind other partners through their actions. Partners owe fiduciary duties to the other partners.
Tax	Each participant in a joint venture can make and claim their own tax deductions.	Each partner pays tax on their share of the partnership profit at their individual tax rate.

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 Term	Description
Purpose	Participants should clearly define the purpose of the venture.
Participating Interest	The interest of each participant. Participating interest is expressed as a percentage of the total joint venture interest. The participating interest may change under certain scenarios. For instance, a participant does not fulfil its proportion of funding requirements, and so another participant of the venture fulfils their share. This may reduce the first-mentioned participant’s interest moving forward.
Costs of the Joint Venture	Participants contribute funds to the venture in proportion to their participating interest.
Joint Venture Committee	Participants provide representatives to form part of a joint venture committee. Committee operates like a board of directors and makes decisions about the operations of the joint venture and completion of any specific projects. Decisions of the Committee require a majority vote. The joint venture agreement should also set out a mechanism to break a deadlock. For instance, the party with the majority participating interest may have the right to a casting vote.
Default	Joint venture agreement sets out what circumstances amount to a default event. Examples of default events include a breach of the terms of the agreement, failing to provide funding on a cash call or failing to provide security with respect to external funding that the joint venture requires. If the participant does not remedy the default, the non-defaulting participant(s) may have the right to terminate the joint venture.
Term	Joint venture either terminates after a fixed period of time or continues until a specific termination event (e.g. mutual agreement or a default event).
Termination	Property of the joint venture will be distributed in proportion to each participant’s interest (unless stated in the agreement). For instance, a participant defaults under the joint venture agreement. As a result, they may only be entitled to their proportion of the property until the point in time when the default occurred. Some agreements may specify that the non-defaulting participant can choose to continue operating the joint venture until completion of the project.

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