Partnerships and joint ventures are both valid structures for businesses, but there may be factors in place that prompt you to choose one over the other when it comes to deciding what’s best for your business. In some instances, a joint venture might be the preferred structure for the situation as is required.
A joint venture, for example, is different from a typical business partnership. For one, it’s not a partnership as such, but rather an agreement or arrangement between two or more individuals or companies (and usually entered into with a specific goal in mind).
A joint venture essentially is an agreement to work with another business in a specific limited way, e.g a business requires a way to sell a product, and another business has the means to do so. This can be done in an internal manner (if you, for example, own two businesses) or externally (coming to an agreement with an outside party). A joint venture can either be structured as an unincorporated business or as an incorporated business.
- An unincorporated joint venture (i.e. the joint venture agreement includes the terms); or
- An incorporated joint venture (i.e. a separate company is incorporated, with the parties each becoming shareholders in the company).
A key difference between a business partnership and a joint venture is that there is generally an agreed-upon, clearly defined end or outcome that will conclude the joint venture. Rather than tying the two businesses together for the foreseeable future, a joint venture generally is a short-term arrangement that sets out to accomplish a goal.
Entering into a joint venture is a good business move if both parties are looking to breach into new markets or distribution channels, but are lacking in something that the other can provide. This allows businesses to work together on larger scale projects that they may not have been able to handle individually or independently.
Each party that enters into a joint venture agreement maintains their business as a distinct legal entity from the other in the agreement. This agreement should govern the relationship between the parties, and set out their objective and the management of the project (including financial matters).
Each party is legally responsible for the debts that they accrue while in the joint venture, and the profit is typically divided between the two parties according to the terms set out in the agreement. Both parties contribute assets to the joint venture, while also agreeing on how to divide up the income and expenses in pursuing the goal. This means that they should be able to garner more capital overall individually and lessen the overall financial burden and risks.
If you’re looking at a joint venture agreement for your business, you must carefully consider the benefits and disadvantages of choosing to enter into one.
Benefits of a Joint Venture
Benefits of a joint venture agreement include that the parties:
- are only bound by a temporary arrangement;
- gain access to additional resources as they come together to pursue a mutual and specific goal;
- may complete a project which they may not have had the finances or staff to complete on their own;
- can share risks and costs; and
- can access increasing opportunities for growth, including financial growth.
Disadvantages of a Joint Venture
Disadvantages of a joint venture agreement include:
- dealing with different working arrangements, workplace cultures and management styles between the parties;
- either of the parties making poor tactical decisions which may affect the desired outcome of the project; and
- the joint venture parties may have a lack of commitment to the project.
For a joint venture to reach the predetermined goal set forth in the agreement, it is critical to ensure:
- That all parties involved in the venture are in accordance with one another, are unified in their goals and objectives and share all information regarding the venture openly.
- That there are clear lines of communication between the established key players of the joint venture.
- That regular reviews are conducted on the progress towards the goal, for improvement to the processes, effectiveness, efficiency and to check for changes to the situation.
- That the agreement states all of the rights and obligations of your business as a party, as well as the other involved pirates.
How the venture is to be structured should be discussed with both the parties and their business planning advisors. It would be advisable to contact and speak with us prior to entering into a joint venture agreement to ensure that the agreement maintains the separate statuses of the businesses from one another and be beneficial to both parties.