Co-authored by Olivia Camilleri
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 unclear given their similarities. Irrespective, 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.
This article will explain what a joint venture and partnership are. It will highlight the differences as well as the pros and cons of each structure.
What is a joint venture?
A joint venture is an arrangement between two or more parties (either individuals or entities). 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. These rights and obligations are 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. 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.
Joint ventures have proven to be successful in providing entities with the ability to develop and enhance business in a capacity they otherwise wouldn’t be able to do on their own. An example of the success of joint ventures is one between Mirvac Group and Ping An Group of China. The entities entered into a joint venture to develop residential properties in Australian cities. Since the success of their first development, known as ‘The Finery’ comprising of 226 apartments in Waterloo, the entities pursued a second joint venture by co-developing apartment buildings containing 500 residences in St Leonards.
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
Pros of a joint venture include:
- An attractive vehicle for short-term or one-off projects;
- Offering a way for two parties to combine resources without merging or changing the ownership of their existing assets or businesses;
- Presenting a way to raise capital without obtaining outside loans but also raise loan funds;
- Allowing businesses to access new markets, resources and gain new expertise;
- Liability of parties to third-parties is several rather than joint;
- 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:
- Treating the joint venture as a partnership;
- Parties not showing an equal level of commitment to the joint venture;
- Parties disagreeing or failing 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. It is not a separate legal entity. A partnership is an ongoing relationship between the partners, unlike a joint venture which is usually for a limited period.
The relationship between Australian pet retailer, Petbarn, and animal welfare organisation, RSPCA NSW, over the last 13 years is likely to be a partnership arrangement due to its long-standing nature. Petbarn and RSCPA partner to care for and rehome animals through shared resources by establishing adoption centres across Petbarn stores in NSW that contain RSPCA shelter animals.
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
Pros of a partnership include:
- Inexpensive to set-up and low ongoing 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
Cons of a partnership include:
- 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.
The key takeaway
Each structure has its own distinct characteristics as well as different legal rights and obligations. 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, their pros and cons, as well as your objectives.
For more information on if a joint venture or a partnership is the right arrangement for you, please contact Coleman Greig’s Commercial Advice team.
