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.
Sue Yim
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