Joint Venture or Partnership? Understanding the difference

Joint venture or partnership agreements

What’s the difference between Joint Venture & Partnership Agreements?

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.

Parties usually form a joint venture for a single goal or project, whereas partnerships are more often formed with the intention of continual business. 

The three main things that set joint ventures and partnerships apart are regulations, liability and tax.

Joint Venture Regulations

Regulations

The regulations that apply to a joint venture are the actual joint venture agreement, the common 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 1892 governs partnerships in New South Wales.

Liability

Parties in a joint venture can include a clause in their agreement as to whether parties will share liabilities or whether each party will be held separately responsible.

As opposed to a partnership, the actions of parties involved in a joint venture do not bind other parties without the other parties’ consent to being bound.

In a partnership, each partner:

  • is personally liable for the business’ debts;
  • is jointly and severally liable for the debts of each business partner(s);
  • can bind other partners by their actions;
  • owes fiduciary duties to all other partners.
Tax Deductions

Tax

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.

We recommend you seek legal advice before making a decision.

Avoiding the presumption that a partnership exists

It can be difficult to differentiate between a partnership and a joint venture, and, in the past, even courts have 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 presumption of a partnership but also to ensure every party involved in the venture understands the venture’s goals, their 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 account 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.

Conclusion

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.

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