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.
|Costs of the Joint Venture||
|Joint Venture Committee||
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