In our experience, clients commonly confuse the differences between a joint venture and partnership. Below, we aim to set out the respective advantages and disadvantages of the two as well as what to look out for before entering into a Joint Venture or Partnership Agreement.
What is a Joint Venture Agreement?
A joint venture is an agreement between two or more individuals or companies where parties will work together towards the same strategic goal while maintaining their separate businesses/entities. Each of the parties to the joint venture will also be responsible for their debts incurred in the project and, at the end of the project, will usually divide the profits between themselves. A written joint venture agreement typically governs the relationship.
Who Enters into a Joint Venture Agreement?
Businesses may choose to enter into a joint venture agreement for a number of short and long-term projects. Examples of joint ventures include:
- Property development;
- Publishing agreements;
- Transportation agreements;
- Travel agreements (particularly when operating overseas);
- Research and development agreements; and
- Mining syndicates.
Advantages of a Joint Venture
Businesses of any size can benefit from a joint venture. This is because these types of arrangements can allow for:
- Business expansion;
- Growth without borrowing money or seeking outside investment;
- The development of new products and services and provide access to greater resources to the parties involved in the venture;
- Gaining access to additional resources including specialist staff and technology; and
- Only a temporary commitment between the parties.
If structured correctly, they can be high profitable. Joint ventures can be used for parties to collaborate on short-term projects and to strengthen long-term projects.
Disadvantages of a Joint Venture
Disadvantages of a joint venture include:
- Finding the right people and building a strong and trusting relationship can be difficult;
- The parties must clearly understand the objective, terms and goals of the venture to avoid conflict with the business partners; and
- Business partners may not commit to the project as required by the joint venture agreement.
How is a Joint Venture Governed?
The agreement’s terms, common law and contract law governs the joint venture. In the event a separate legal entity is also incorporated for the joint venture, then the Corporations Act will also apply.
What Key Terms Should a Joint-Venture Agreement Include?
Some of the key provisions which a written joint venture agreement shoud include are as follows:
- Details of the joint venture including structure and objectives;
- Financial contributions and division of profits and losses;
- The committee/management team (including powers and duties);
- Finance and expenses;
- Books of account and audit;
- Obligations and warranties;
- Intellectual property created by the joint venture;
- Distribution of proceeds of the joint venture;
- Equipment and assets;
- Default and termination (i.e. exit strategy);
- Dispute resolution procedure; and
- General provisions.
What is a Partnership Agreement?
A partnership is an ongoing relationship between parties. It is usually limited to 20 partners and unlike a company, is not a separate legal entity. Instead, each partner is responsible for the actions of the other. This is one of the key differences between a partnership agreement and a joint venture agreement, in that the partners are jointly and severally responsible for the activities of the partnership. Consequently, one partner will be liable for the partnership’s debts if the other partner(s) cannot pay. Another key difference between a partnership agreement and a joint venture agreement is that a joint venture does not manage an ongoing relationship between the parties and usually has a definitive end.
Advantages of a Partnership Agreement
There are many benefits to a partnership arrangement including:
- Easy establishment and lower start-up costs;
- An opportunity for income splitting;
- You can quickly change your business structure down the track;
- There is less external regulation then having a company; and
- The business affairs of the partners are private.
Disadvantages of a Partnership Agreement
As there are benefits to most arrangements, there are also disadvantages. For a partnership, these include:
- Each partner is jointly and severally liable for the other partners debts;
- Each partner is responsible and liable for the actions of the other partners;
- Profits must be shared with others; and
- Unlimited liability.
How is a Partnership Governed?
A written partnership agreement generally governs the relationship between the parties along with the applicable State Partnership Act. The relevant Acts contain rules that all partners share the capital and profits of the partnership equally and must contribute equally to the losses.
What Key Terms Should a Partnership Agreement Include?
Some of the key provisions which should be included in a written Partnership Agreement include:
- The business of the partnership;
- Financial matters (including financial contributions);
- Party requirements;
- The operation of business;
- Transfer of interests;
- Intellectual property;
- Dispute resolution provisions;
- Restrictions on parties;
- An exit strategy; and
- General provisions.
Before entering into a joint venture or partnership arrangement, it is important first to obtain legal and financial advice. It is also important that you complete your due diligence to assist in ensuring that the commercial relationship will flourish and that each party can achieve their desired objectives from the relationship. If you have any questions as to whether a joint venture or partnership best suits your business needs, get in touch with our business lawyers on 1300 544 755.