Joint venture vs. partnership

It can be difficult to differentiate a joint venture and a partnership. What’s more, knowing which structure best suits your business and your objectives can be confusing. Despite their similarities, each has its own unique characteristics, resulting in varying legal rights and obligations.

To ensure you use the appropriate vehicle for your circumstances, it’s important you understand the key points of difference between a joint venture and a partnership. We’re here to explain the differences and highlight the pros and cons of each. So, let’s get started…

What is a joint venture?

A joint venture is an arrangement between two or more parties (either individuals or entities) where each party retains its separate identity, but works together through the joint venture, for a specific purpose, and typically for a limited time.

A joint venture can be structured in two ways:

• As an unincorporated joint venture – this is a contractual joint venture where the agreement contains all the terms; or
• As an incorporated joint venture – this involves establishing a new company to run the mutual business activity.

Parties in a joint venture enjoy rights and assume obligations, which are often several and determined by contributions of capital made or ownership of shares. The joint venture agreement determines how profits and losses are shared.

A clearly written joint venture agreement (whether it is an agreement establishing an unincorporated joint venture or a constitution and shareholders’ agreement governing an incorporated joint venture) is essential in outlining the rights and obligations of the parties. It is the main source of regulation between the parties and its importance is further highlighted where, as in the case of many unincorporated joint ventures, the parties seek to exclude the operation of laws relating specifically to partnerships.

A joint venture has both pros and cons. You should consider the advantages and disadvantages before deciding to enter such arrangement. We run through some of these below.

Pros of a joint venture

Some of the pros of a joint venture include:

• An attractive vehicle for short-term or one-off projects;
• Offer a way for two parties to combine resources without merging or changing the ownership of their existing assets or businesses;
• Present a way of raising capital without obtaining outside loans but can also raise loan funds;
• Allow businesses to access new markets or gain new expertise;
• Liability of parties to third-parties is several rather than joint;
• There is no requirement to prepare and lodge an income tax return for the joint venture; and
• One party does not have the capacity to bind the joint venture and other parties in the joint venture.

Cons of a joint venture

Some of the cons of a joint venture include:

• The joint venture being treated as a partnership;
• Parties do not show equal level of commitment to the joint venture;
• Parties disagree or fail to co-operate; and
• More onerous reporting and auditing requirements for incorporated joint ventures.

What is a partnership?

A partnership is the relationship between two or more parties – up to 20 (either individuals or entities) carrying on a business, in common, with a view of profit. A partnership is an ongoing relationship between the partners, unlike a joint venture which is usually for a limited period. A partnership is not a separate legal entity.

In a partnership, each partner is:

• Jointly liable for all debts and obligations of the partnership, incurred whilst a partner;
• Jointly and severally liable in tort for the wrongful acts or omissions of any of the other partners acting in the ordinary course of the partnership business; and
• An agent of the other partners for the purpose of the partnership business.

Partners have a fiduciary relationship with each other, which means good faith is an essential element.

A partnership is governed by statute, with each Australian state and territory having its own version of the Partnership Act. Some jurisdictions also have regulatory instruments concerning partnerships.

However, the partnership relationship is primarily based in contract. Consequently, it is essential to have a clearly drafted partnership agreement in place to establish the basis of the relationship between the parties in the partnership business.

Like a joint venture, a partnership has advantages and disadvantages. You should weigh up the pros and cons before entering a partnership structure. We outline some of these below.

Pros of a partnership

Some of the pros of a partnership include:

• Inexpensive to set-up and low on-going costs;
• Provides for combined work, expertise, management and financial resources;
• All partners are entitled to participate in management of the business;
• The agreement can be drafted to vary profit/losses between partners on an annual basis; and
• The structure can easily be varied down the track.

Cons of a partnership

Some of the cons of a partnership includes:

• Inflexible and onerous fiduciary duties between the partners during, and at times, after the duration of a partnership;
• The necessity of preparing and lodging an income tax return for the partnership;
• The capacity of one party to bind the others in accordance with the laws of partnership;
• Partners are not entitled to remuneration for their efforts in running the business;
• Joint rather than several liability for debts of the partnership; and
• Joint and several liability in tort for the actions of any of the other partners undertaken in the ordinary course of the business.

Before entering into any type of arrangement, be it a joint venture, partnership or other, it’s essential you take into account the various business-relationship options available. Get in touch with the team at Lawthentic… We’ll consider your specific venture, advise you on the best vehicle, and equip you with a well-drafted agreement to establish a strong foundation for your business to thrive.