Blog

When To Use A Joint Venture

A new year is often the time business owners take on new ventures with the hope of growing their business or increasing revenue. They’ll often collaborate with another business or business owner to do so. Such collaborations are most commonly accomplished through either a partnership or a joint venture.

Partnerships and joint ventures are cooperative commercial enterprises undertaken jointly by two or more parties. Both are formed and governed by a contract between the parties.

Joint Ventures

Joint ventures usually are used for one-off projects. They’re limited in time and scope – you’re not working together on everything, and they’ll often have an expiration date, which allows parties to renew or eject.

Joint ventures are particularly useful when you’ll all be putting in different skills and assets, in different quantities. Joint ventures don’t create a separate business entity, and generally are not registered with the government. You’ll work together to the extent that’s agreed on in the contract, and that’s it.

Partnerships

Partnerships, on the other hand, create an ongoing business relationship through a partnership agreement.

The partners pool their resources and share in the profits or losses according to the partnership agreement. Creditors can look to each partners’ assets to satisfy debts owed by the partnership. Partnership income is paid out to the partners, and each is taxed separately.

Key Terms in the Contract

Terms common to both joint ventures and partnerships include:

  • Length of the agreement and conditions for renewal
  • What the business will and will not do
  • What money, assets or skills each party is contributing
  • Share of profits and losses, salaries, and expenses
  • Calculation of profits
  • Duties and responsibilities of each party
  • Management structure
  • Indemnity between the parties
  • Dispute resolution

Terms of a joint venture agreement – or JVA – include:

  • Limits on time or scope of work
  • Termination, including how to divide up assets
  • Ownership of co-created assets and intellectual property
  • Assigning liability for actions of the other party
  • Accounting between the parties, record keeping, bank accounts, and insurance
  • Division of expenses and revenues

Ownership of Property

Ownership of property contributed to a joint venture remains the property of each party. The party who owns the asset may use it for other purposes without the consent of the joint venture unless it’s otherwise agreed on.

Assets contributed to a partnership are considered the property of the partnership and not of the individual partners.

Income Tax

The distribution of profits in both is governed by the agreement. In a joint venture, each party assesses its taxes based on its own expenses and share of the revenues from the joint venture.

Partners in a partnership are taxed based on the net profits of the partnership. The net profits are distributed to the partners according to their share of the partnership, and taxed at the partners’ normal income tax rate.

The choice between partnership or JVA makes a big difference if one party is spending more than the others. In a partnership, a party with higher expenditures would not be able to claim that amount individually.

Fiscal Year

The parties to a joint venture report their share of income and losses based on each party’s tax year. A partnership will have its own fiscal year end.

Corporate partners in a partnership are required to claim income (but not losses) for the period between the end of the partnership’s tax year and the corporation’s tax year.

Liability

Parties in a joint venture are liable for their own debts and obligations, and can limit their liability based on the joint venture agreement. That way a creditor can’t go after one party for the debts of the other. The parties can agree to share responsibility for liabilities taken on during the project, or can split them up however they see fit.

Partners in a partnership, on the other hand, are “jointly and severally liable” for the debts, obligations and misconduct of the partnership and the other partners. “Joint and several liability” is a legal term meaning a creditor can go after the other partners to settle one partner’s debt.

The liability can be limited by creating a “Limited Partnership” where a “general partner” takes the excess of any liability that the other partners can’t cover. Each other partner is only on the hook for their own debts or misconduct up to a fixed amount.

Both joint ventures and partnerships can agree to assume only their own liability, but there is more risk involved in a partnership if the at-fault partner cannot cover the loss.

Summary

Where two or more parties want to join forces together for a one-off project rather than becoming co-owners of a business, a joint venture is typically the way to go.

Whichever business structure is chosen, the choice should be clearly set out in the agreement between all parties involved. Though joint ventures and partnerships may have many characteristics in common, the legal differences between the two significant and worth considering.


Back To Blog »

Contact CLC Today