Deciding between a joint venture and a partnership for your next project and the importance of having a written agreement in place

There are a number of reasons for setting up a joint venture or partnership arrangement. It may be that you have decided to pursue that project you have been brainstorming with friends or you have decided to bring your friend in on a business opportunity. But how do you know which arrangement is the most suitable for your circumstances? And what can you do to protect yourself down the track?

Difference between Partnership and Joint Venture

A joint venture is an arrangement between different parties in which both parties contribute their respective resources to accomplish a single goal or project. This arrangement is suitable when there is a defined ending to your project.

The main characteristics of a joint venture are:

1. Parties will maintain their separate businesses whilst undertaking the project;
2. Considered ‘separate entities’;
3. Usually have a defined end to the venture; and
4. Governed by a joint venture agreement (and in the case of incorporated Joint Ventures, the Corporations Act 2001 (Cth)).

For more information on joint ventures, click here.

In comparison, a partnership is a type of business structure, in which two or more individuals carry on an ongoing business in common with the goal of making a profit.

The main characteristics of a partnership are:

1. Each partner is, jointly with the other partners, personally liable for all debts and obligations of the partnership;
2. Partners have fiduciary duties to each other;
3. No more than 20 partners (with certain exceptions, i.e. accountants, lawyers, architects);
4. Profits are shared amongst the partners; and
5. Governed by Partnership laws and a Partnership Agreement.

For an outline of partnerships, click here.

Deciding on the type of arrangement will depend on a range of factors, but the most important considerations include the type of project/work you will be undertaking and the intention of the business partners. However, it is important to seek legal and financial advice before entering into either arrangement, to ensure you are aware of your legal and financial obligations as a business partner.

Disputes can arise

When you form a partnership or undertake a joint venture, you don’t expect for the relationship to deteriorate and a dispute to arise.

Too many clients come to us for assistance when there is already a dispute. More often than not, these clients do not have an adequate or well drafted joint venture or partnership agreement in place to govern their business relationship and clarify each party’s rights and obligations in the partnership or joint venture.

Some important issues to consider (and address in any written agreement) include:

How will profits and liabilities will be split?

If there is no agreement in place, disputes about the distribution of profits can easily arise. An agreement will set out a clear method for calculating profits of the joint venture or partnership, and for the distribution of such profits.

Do you have a plan of how to resolve any future disputes?

Will the dispute be referred to mediation? What are the time frames in which any dispute resolution must take place? You also need to consider what will happen if a dispute cannot be resolved.

Whist no-one plans to have a dispute, a well-drafted dispute resolution clause can provide a framework to help parties reach a prompt and cost effective resolution if a dispute does arise.

Have you thought about who owns the assets?

Whether the property of a partner becomes partnership property depends on the agreement of the parties. In the absence of an express agreement, the Courts may be called on to look closely at the conduct of the parties as evidence of intention.

It is especially important to think about assets such as intellectual property. Setting out clear terms concerning the use and ownership of intellectual property is essential. If you have brought intellectual property into the business, there should be terms in the agreement that protect your ownership and set out how it can be used.

An agreement should also address what would happen to the jointly owned property should the parties go their separate ways.

How about if you want to get out of the business?

Where one party wants to leave the business venture, but an agreement cannot be reached about the future operation of the business or the value of the existing party’s share, how will this be addressed?  If a dispute cannot be resolved, what procedures exist to allow one party to terminate their interest in the joint venture or partnership to the remaining party or a third party?

An agreement should document how and when a party may transfer its interest, what the procedure is, if there are to be pre-emptive rights that allow a participant the opportunity to purchase the interest of the exiting party and how any interest is to be valued.

A termination of a partnership or joint venture agreement without consent may lead to protracted and costly litigation and as such, an agreement should also clearly address each parties’ termination rights.

You also need to consider how a change in ownership is dealt with and the procedure to allow a new party or partner to join.

How can you avoid a dispute with your business partner?

Whilst disputes happen, a well-drafted agreement tailored to your particular business venture and reflecting all parties joint intentions can minimise the risk of a dispute and provide clarity if a dispute arises.

At Coulter Legal, our lawyers are able to advise on whether a joint venture or a partnership is the most appropriate collaborative business agreement for your activities and provide advice as to alternate business structures and agreements, where appropriate.

When establishing a partnership or a joint venture, it is strongly recommended that a formal, written agreement is entered into.  You need to ensure that the agreement has clauses that are relevant to your business activities that will genuinely assist you if an issue arises and clearly sets out your rights and obligations with respect to your business venture.

Our experienced Corporate & Commercial team can draft joint venture and partnership agreements tailored to your activities and provide advice on any documentation.

If you have already established a partnership or joint venture but don’t have an agreement in place, we recommended you take the opportunity to enter into a written agreement reflecting the agreement reached for the ongoing operation of your business venture.  This is particular important to do at an early stage, while you maintain a good relationship with your business partner, allowing you to clearly set out your intentions and clarify your obligations for the period of your joint venture or partnership.