The Pros and Cons of Joint Venture and Partnership Arrangements

When starting a business or commercial venture, you may seek to collaborate with another person or entity. You can do so in a number of different ways, such as operating as a joint venture (JV) or a partnership. This article sets out the key advantages and disadvantages of the two arrangements.

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What is a Joint Venture?

A joint venture is a commercial arrangement where two separate entities come together and enter a new business venture for a specific project. Each party will contribute various aspects to the arrangement, which the other may not be able to do on their own. The JV will be separate from each party’s other business operations.

A JV can last until a predetermined expiry date or can continue until one of the parties terminates the arrangement (following the appropriate process set out in the JV agreement). 

Joint Venture Agreement

A JV agreement is a legal document between two or more legal entities outlining the arrangements for a specific business activity or project. One of the key aspects of a JV is that each party remains its own separate legal entity and business outside of the JV relationship.

Broadly, the JV agreement will govern the parties’ relationship. It may set out their objectives and who is responsible for the overall or day-to-day management of the project (including financial matters). In a JV, each party is responsible for the debts they accrue. Likewise, you would divide profits between the parties according to the terms of the JV agreement. 

Incorporated JV vs Unincorporated JV 

Parties can structure the joint venture either as an incorporated joint venture or an unincorporated joint venture. 

Incorporated JV 

In an incorporated JV arrangement, a separate company (JV Entity) is incorporated, with the parties each becoming shareholders in the JV Entity. Commonly, each party will appoint directors to the JV Entity to act on behalf of the new company whilst keeping in mind the interests of the party that appointed it as director. Those directors still owe duties to the JV Entity, so they must keep this at the forefront of their minds.

In this arrangement, you can combine the JV and shareholders agreement into one document. It will set out the roles and responsibilities of each party and govern the general processes the JV Entity must follow. 

Another benefit to an incorporated JV arrangement is that each party’s liability is limited to the extent of the amount they have agreed to pay on the shares they own in the JV Entity.

Unincorporated JV

No separate entity is created in this arrangement. The parties will usually appoint a manager to operate the JV. The JV Agreement will determine how liability is shared or split between the participants. Otherwise, each participant’s liability is usually several between themselves. 

Benefits of a JV 

Benefits of a JV agreement include that the parties can:

• benefit from each other’s knowledge, skill and expertise;
• gain access to additional resources as they come together to pursue a mutual and specific goal;
• complete a project which they may not have had the finances or staff to complete on their own;
• allocate ownership of intellectual property that is developed as a result of the JV appropriately;
• specify the proportion of profits based on contribution to the JV;
• share risks and costs in a mutually advantageous way for the parties; and
• access increasing opportunities for growth, including financial growth.

Smaller entities may lack the funds to carry out the project by themselves, so they may choose to enter into a JV with another or several smaller entities or a larger entity.

Disadvantages of a JV

Disadvantages of a joint venture agreement include:

• dealing with different working arrangements, workplace cultures and management styles between the parties;
• either of the parties making poor tactical decisions which may affect the desired outcome of the project; and
• the joint venture parties may have a lack of commitment to the project.

What is a Partnership?

A partnership is a business structure where two or more legal entities work together to run an ongoing business and share in the profits, losses and risks. 

Each partner in the relationship is responsible for the actions of the other (i.e. they are jointly and severally liable for the partnership’s activities). The parties share the profits, responsibilities and risks in the business.

Partnerships in Australia are subject to certain laws. In NSW, this is the Partnership Act 1892. It is critical to have a written partnership agreement to manage the relationship between the parties and formalise the partners’ expectations. Without having this written agreement, the parties would need to rely solely on the Act to govern their partnership.

Advantages of a Partnership 

Benefits of a partnership include:

• low start-up costs;
• the business will usually have access to more capital and can borrow more money due to the number of parties involved;
• opportunities for income splitting; and
• limited external regulations.

It is critical to have a partnership agreement in place to:

• minimise the risk of disputes between the parties later down the track; and
• set out the expectations for the parties regarding the operation and management of the business.

Disadvantages of a Partnership 

Disadvantages of a partnership include that:

• each party is jointly and severally liable for the other parties’ debts and actions;
• the parties have unlimited liability;
• profits must be shared with the other partners under the terms of the partnership agreement;
• there is a risk of disagreement between the parties; and
• if a partner joins or leaves the partnership, it can be more difficult to transfer their interest in the partnership as the partnership’s assets will most likely need to be valued which can be costly.

Key Takeaways

It is important to obtain legal and financial advice before entering into a joint venture or partnership. Having a well-drafted agreement in place provides clear guidance for the parties concerning the management of the project/business. It provides a clear avenue for day-to-day and long-term processes and dispute resolution. A written agreement also formalises the expectations between the parties and sets up a strong foundation for parties moving forward. 

If you are thinking of entering into a joint venture or partnership, our experienced business 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.

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