A joint venture involves two or more persons or entities joining together for a particular project.
A partnership is described as a relationship which exists between people carrying on a business, with a common view of making a profit. It also includes incorporated limited partnerships.
Before entering into a joint venture or partnership arrangement, it is essential you understand the difference between a joint venture and partnership.
What is the difference between joint ventures and partnerships?
Parties usually form a joint venture for a single goal or project, whereas partnerships are more often formed with the intention of continual business. A joint venture arrangement might commonly apply or be used for a project like a property development where the parties embark in a “one off” investment venture together. A partnership will more likely apply where the parties intend to continue to operate a business together on an ongoing basis.
Three main things that set joint ventures and partnerships apart are legal regulations, liability burdens and taxation consequences.
The regulations that apply to a joint venture, are the actual joint venture agreement, the common law and contract law. If the parties to the venture are corporations, the Corporations Act 2001 (Cth) will also regulate the joint venture.
Partnerships are governed by State and Territory-based Partnership Acts. For example, the Partnership Act 1891, governs partnerships in South Australia.
Parties in a joint venture can include a clause in their joint venture agreement as to whether the parties will share liabilities or whether each party will be held separately responsible for a division of them.
As opposed to a partnership, the actions of parties involved in a joint venture do not bind other parties without those other parties’ consent to being bound.
In a partnership, each partner is personally liable for:
- the business’ debts;
- each partner is jointly and severally liable for the debts of each business partner(s);
- partners can bind other partners by their actions;
- partners owe fiduciary duties (the duty to act in their best interests) to all other partners.
All parties involved in a joint venture can make and claim their own tax deductions as opposed to business partners who must pay tax on their share of the partnership profit, at their individual tax rate.
If you are wanting to start a business and are not sure whether to enter into a joint venture or partnership it is very important to firstly understand the differences discussed above and the advantages and disadvantages of each structure.
Avoiding the presumption that a partnership exists
It can be difficult to differentiate between a partnership and a joint venture. Even the courts have, in the past, decided that some joint venture agreements were, in actuality, partnership agreements. This is why it is very important to ensure you have a joint venture agreement in place in order to avoid confusion and disputes down the track.
It is important the joint venture agreement clearly states the intent of the parties to enter into a joint venture and that the joint venture is being formed for a specific purpose and limited duration.
Joint venture agreements can be complex so we recommend you speak with a legal professional before entering into any joint venture agreement.
Importance of a joint venture agreement
As discussed above, joint venture agreements are important not only to ensure that you avoid the presumption of a partnership but also to ensure every party involved in the venture understands the venture’s goals, and their respective rights and responsibilities to the venture.
Below is a list of factors that should be included in a joint venture agreement:
- the details of the joint venture including structure, goals and objectives;
- financial contributions and division of profits and losses between parties;
- the books of accounts and audit;
- the parties’ obligations and warranties;
- which party owns the intellectual property created by the joint venture and confidentiality;
- procedure for a party wishing to leave or terminate the agreement; and
- clearly outlined dispute resolution processes.
The above list is not exhaustive, and relevant factors can also differ depending on the type of joint venture agreement. This is why we recommend you seek legal advice if you need assistance drafting a joint venture agreement.
Parties usually form a joint venture for a single goal or project, whereas partnerships are usually formed with the intention of continual business. It can, at times, be difficult to differentiate between a partnership and a joint venture.
It is very important to ensure you have a joint venture agreement that clearly states the intent of the parties to enter into a joint venture and that the joint venture is being formed for a specific purpose and limited duration.
To ensure you understand your rights and responsibilities in a joint venture agreement, we recommend you speak to one of our experienced lawyers.
If you need assistance or advice on how to proceed please contact us on (08) 8344 6422 or email [email protected].