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Joint Venture or Partnership? Understanding the difference

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 an ongoing business relationship.

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

Regulations

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 1895, governs partnerships in Western Australia.

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;
  • 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 to all other partners.

Tax

All parties involved in a joint venture can make their own tax arrangements 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.  Even courts have, in the past, decided that some joint venture agreements were, in fact, 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 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.

Conclusion

Parties usually form a joint venture for a single goal or project, whereas partnerships are usually formed with the intention of an ongoing business relationship. 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.

If you or someone you know wants more information or needs help or advice, please contact Ian Tait on 08 9422 8111 or email buslaw@taitlegal.com.au.