If you are starting a business, it can be difficult to know whether to enter into a joint venture or partnership. What is the difference between the two arrangements? And what are the advantages and disadvantages of each? Before taking the first step, you should understand what both arrangements entail. You should also obtain legal and financial advice. This article explains the difference between a joint venture and a partnership. It also sets out the advantages and disadvantages of each business structure.
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What is a Joint Venture Agreement?
In a joint venture, two or more individuals or companies work together towards the same strategic goal. However, they all maintain their separate businesses while doing so. A business may decide to enter into a joint venture agreement for a number of short and long-term projects, such as:
- property development;
- publishing agreements;
- transportation agreements;
- travel agreements (especially when operating overseas);
- research and development agreements; and
- mining syndicates.
Notably, each party is responsible for the debts incurred by them in the arrangement. However, the parties usually divide the profits between themselves at the end of the project. A written joint venture agreement governs the relationship between parties to a joint venture.
Advantages of a Joint Venture
Businesses of any size can benefit from a joint venture. This is because these types of arrangements allow for:
- business expansion;
- growth without borrowing money or seeking outside investment;
- the development of new products and services;
- greater access to resources and staff; and
- a temporary commitment between the parties.
Disadvantages of a Joint Venture
You should also consider some of the downsides to joint venture arrangements. These include:
- difficulties in finding people you trust to enter into an agreement with;
- uncertainty as the success of a joint venture depends on working collaboratively and towards a common goal; and
- risk of conflict or lack of commitment by parties to the joint venture agreement.
Key Terms of a Joint Venture Agreement
There are a number of terms you should include in your joint venture agreement to ensure each of the parties are on the same page. Some of the key terms you should have are:
- details of the joint venture, including structure and objectives;
- each party’s obligations and warranties;
- financial contributions and division of profits and losses;
- books of account and audit; and
- details on your approach to marketing matters.
Likewise, in drafting your joint venture agreement, have a detailed discussion with all parties. Indeed, consider the following questions:
- Who will own the intellectual property created by the joint venture?
- How will each party maintain confidentiality?
- What happens if someone decides to leave or terminate the agreement?
- What are the dispute resolution processes in the event of a dispute?
What is a Partnership Agreement?
Unlike a joint venture, which has an end, a partnership is an ongoing relationship between parties. It is usually limited to 20 partners, and unlike a company, it is not a separate legal entity. Instead, the partners are jointly responsible for the activities of the partnership. For example, a partner will be liable for the partnership’s debts if the other partners are unable to pay. This is the main difference between a joint venture and a partnership agreement.
A written partnership agreement governs the relationship between the parties in a partnership.
Advantages of a Partnership Agreement
The benefits of a partnership arrangement include:
- easy establishment and lower start-up costs;
- an opportunity for income splitting;
- ability to easily change business structure down the track;
- less external regulation than having a company; and
- the business affairs of the partners remain private.
Disadvantages of a Partnership Agreement
However, there are disadvantages. These include:
- each partner is jointly and severally liable for other partners’ debts;
- each partner is responsible and liable for the actions and omissions of the other partners;
- profits must be shared with the other partners; and
- the partners have unlimited liability. This means that, as a partner, your personal assets and finances may be used to pay the debts of the partnership.
Accordingly, these disadvantages make it crucial to enter into a partnership with someone you can trust. You should ensure you have weighed up the benefits against the negatives before entering into a partnership agreement.
Key Terms of a Partnership Agreement
There are a number of terms you should include in your partnership agreement to ensure each of the parties are on the same page. Some of the key terms you should have are:
- details of how the partnership will work;
- what are the partners’ obligations under the agreement;
- what are the business’ operating hours;
- who owns the intellectual property created in the partnership;
- how will you divide the assets;
- how will you ensure confidentiality;
- what are the dispute resolution processes in the event of a dispute; and
- how should parties leave or terminate the agreement.
This is not an exhaustive list. You should seek legal advice if you need assistance drafting a partnership agreement.
Continue reading this article below the formKey Takeaways
Before entering into a joint venture or partnership arrangement, it is essential you understand the difference between a joint venture and a partnership. In a joint venture, two or more individuals or companies work together towards the same strategic goal. Notably, there is a defined end for the project/relationship. Alternatively, a partnership is an ongoing relationship between parties. When weighing up the differences, you should also obtain legal and financial advice. Furthermore, it is important that you complete your due diligence to ensure the commercial relationship will flourish.
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Frequently Asked Questions
In a joint venture, two or more individuals or companies work together towards the same strategic goal. This project has a defined end date and can be short, medium or long term. A joint venture agreement will govern the relationship between parties to a joint venture.
Unlike a joint venture, which has an end, a partnership is an ongoing relationship between parties. A partnership agreement is a written agreement that will govern the relationship between the parties in a partnership.
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