Many people are confused about the differences between a joint venture agreement and a partnership agreement. If you are one of them, rest assured you are not alone. Below, we set out some of the key advantages and disadvantages of the two arrangements.
What is a Joint Venture Agreement?
A joint venture agreement is an agreement between two or more individuals or companies usually entered into with a specific goal in mind. Each party who enters into a joint venture agreement will want to maintain their separate business/entity and will enter into the business arrangement with a strategic goal in mind. In a joint venture, each party is responsible for their debts accrued and profit is typically divided between the parties under the terms of the agreement. It is prudent to draft a joint venture agreement governing the relationship and setting out the parties’ objectives and management of the project (including financial). A joint venture agreement differs from a partnership arrangement as it has a definite end.
Parties can structure the joint venture as either an unincorporated joint venture (i.e. the joint venture agreement includes the terms) or an incorporated joint venture (i.e. a separate company is incorporated with the parties each becoming shareholders in the company).
Benefits of a Joint Venture
Benefits of a joint venture agreement include:
- It is only a temporary arrangement between the parties;
- The parties have access to additional resources as they are coming together for a mutual and specific goal;
- The parties can complete a project which they may not have had the finances or staff to complete on their own;
- The parties can share risks and costs; and
- Increasing opportunities for growth of your business including financial growth.
Disadvantages of a Joint Venture
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
- Lack of commitment to the project by any of the parties.
What is a Partnership Agreement?
A partnership agreement differs from a joint venture agreement as it relates to an ongoing relationship between parties. 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). Two or more individuals or entities can enter into a partnership with each other. The parties share the profits, responsibilities and risks in the business.
A partnership may be a limited partnership or an incorporated limited partnership and is subject to the applicable state or territory’s Partnership Act. It’s also critical to have a written partnership agreement in place to manage the relationship between the parties and formalise the expectations of the partners. Without having this written agreement, the Act may be deemed to apply.
Advantages of a Partnership Agreement
Benefits of a partnership agreement include:
- Minimising the risk of disputes between the parties later down the track;
- Setting out the expectations for the parties regarding the operation and management of the business;
- 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;
- There are opportunities for income splitting; and
- There are limited external regulations.
Disadvantages of a Partnership Agreement
Disadvantages of a partnership agreement include:
- Each party is jointly and severally liable for the other parties debts;
- Each party is responsible for the actions of the other parties;
- 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, the partnership’s assets will most likely need to be valued and this can be costly.
It is important first to obtain legal and financial advice before entering into a joint venture agreement or partnership agreement. Having a well-drafted agreement in place provides clear guidance for the parties in relation to the management of the project/business and provides a clear avenue for 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 agreement or partnership agreement and require assistance with drafting, reviewing or negotiating the terms of such arrangement, get in touch with our business structure specialists on 1300 544 755.