Legal Considerations When Collaborating With Another Business 

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Table of Contents

• Different Collaborative Business Arrangements
• Joint Ventures
• Other Arrangements for Collaborating With Another Business  
• Key Clauses of JV and Contract Services Agreements
• Key Takeaways

If you are a business owner, you may decide to deliver a new project, product or service by collaborating with another business. This can greatly benefit your business by combining your expertise with someone else and increasing your profits. However, to avoid any disputes, it is essential that you create a formal agreement on how your profits will be split. This article will explore the: 

• different kinds of collaborative business arrangements; 
• advantages and disadvantages of each; 
• appropriate agreement for your business arrangement; and 
• typical clauses you may find in each. 

Different Collaborative Business Arrangements

Collaborate business arrangements allow your business to work with other businesses, such as on a joint project. This can bring a multitude of opportunities for growth and success. Collaborative business arrangements can take the forms of: 

• incorporated joint ventures (JV); 
• unincorporated JVs; or 
• contractor services agreements with a profit share element. 

Joint Ventures

An incorporated JV involves you and the other party creating a new legal entity where you will become a shareholder in this new company. An incorporated JV has many benefits for your business, including: 

• limited legal liability; 
• combining resources with the other business to complete projects; 
• access to a larger customer base; and 
• greater opportunities for financial growth. 

However, incorporated JVs may also pose potential disadvantages for your business, such as: 

• difficulty ending the JV; 
• the new legal entity owning intellectual property (IP), rather than your business; and 
• time-consuming requirements such as separate bank accounts and tax returns for the entity. 

Alternatively, if you and the other business wish to remain separate rather than form a new company, you can pursue an unincorporated JV. Unincorporated JVs commonly appear as partnerships. An important benefit of this form of agreement is that it is only temporary, and you can easily separate from the other business once your joint project has finished. 

However, unincorporated JVs also come with their own disadvantages, including: 

• insufficient limited liability protections, which could expose your business to significant financial liabilities; 
• issues with contracting, where one business will serve as the contracting party and receive payments on behalf of the JV; 
• your business owing fiduciary obligations to the other party; 
• complex negotiations; and 
• tax implications.  

Both incorporated and unincorporated JVs require a JV agreement, which outlines the responsibilities of each business. This agreement should be in writing and include arrangements for profit distribution that reflect the parties’ responsibilities. By documenting the split of profits, you will be able to avoid any future disputes with the other business. 

An Example

Suppose that the clothing brand ‘A Fashion’ is collaborating with another business, ‘Z Fashion’, and wants to set up a JV. If they choose an incorporated JV, they will create a new legal entity, ‘AZ Fashion’. Both companies will become shareholders in AZ Fashion, which will contain all the assets, operations and profits of the JV. While this may take longer to establish, both brands will take on less legal and financial risks. 

On the other hand, in an unincorporated JV,  A Fashion and Z Fashion will remain separate entities and will collaborate directly using the agreed name ‘A x Z Fashion’. The brands can establish A x Z Fashion faster and with more flexibility. However, as there is no new legal entity, both companies have unlimited liability. 

As you can see, each approach is tailored to different circumstances and comes with its own advantages and risks. You should seek specific legal advice to see what best fits your business’ objectives before pursuing an arrangement for collaborating with another business.

Other Arrangements for Collaborating With Another Business  

If you do not want to incorporate a new company or set up an unincorporated JV, you can enter into a contractual services agreement. This involves one party serving as the principal and the other as a subcontractor. It is essential that you include a profit sharing clause in contractual services agreements, where the subcontractor is entitled to a share of the profits. 

Before entering into any agreement to solidify the collaborative business arrangement, there are several key terms the parties should carefully consider, outlined below.

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Key Clauses of JV and Contract Services Agreements

In either a JV agreement (incorporated or unincorporated) or a contract services agreement, you will need to consider the following key terms. 

Profit Sharing 

This provision should detail the profit split ratio (usually a percentage) and will also specify: 

• each party’s contribution; 
• how the profit will be calculated; 
• the timeline and frequency for profit distribution; and 
• when parties can expect to receive their share of profits. 

Termination 

Your agreement should outline terms for terminating an incorporated JV, including: 

• settling its debts, 
• liquidating its assets, and 
• distributing the remaining assets to the shareholders. 

Terminating an unincorporated JV is often simpler than an incorporated one. However, you must be careful to avoid potential disputes and legal complications. 

Termination clauses regarding JVs will usually include: 

• if there is a termination for convenience right; 
• the notice period required for termination; and 
• procedures for asset distribution and reconciliation of any outstanding obligations.   

Dispute Resolution

In the case of a disagreement, it is always best to have a dispute resolution clause that will help facilitate conflicts between you and the other business. Dispute resolution clauses are useful for reinforcing good faith and reducing the risk of a prolonged dispute. This clause should include:

• provisions for alternative dispute resolution, such as mediation; 
• procedures for notifying the other party of a dispute, 
• procedures of the dispute resolution process; and 
• the law which you will resolve disputes under.  

For example, mediation is a structured alternative dispute resolution (ADR) process whereby you and another party can solve disputes through engaging in conversation with a neutral mediator. This is an effective process because there is usually limited damage to business relationships and ample opportunities for solving problems creatively.

Confidentiality 

This clause will set clear expectations regarding the handling and safeguarding of confidential information, and will usually survive termination of the agreement. This clause should:

• define confidential information; 
• establish the obligations of each party to protect confidential information; and 
• outline any limitations for the duration of these obligations. 

Obligations 

This section should clearly define the roles and responsibilities of each business, including: 

• their individual tasks; 
• deadlines; and 
• obligations regarding IP, including duration and ownership rights. 

Indemnities and Liabilities 

If any issues arise under the agreement, indemnity and liability clauses outline how your business will be liable. They also indicate whether each party agrees to indemnify the other and if so, if there is any cap to each business’ liability. 

In addition, JV agreements will also include:

• how the JV will be managed; 
• the extent of any restraints; 
• when the JV will end; and 
• what will happen to shared assets upon termination. 

Key Takeaways

There are different kinds of collaborative business arrangements you can enter into for your commercial project, including JVs and contract services agreements. It is highly recommended to put a formal agreement in place to avoid a dispute with the other party over profit distribution or other areas of disagreement. The agreement should outline the: 

• division of profits;
• handling of confidential information and IP;
• roles and responsibilities of each party; and 
• procedures in the event of a dispute. 

If you need assistance choosing an arrangement for collaborating with another business, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.