Joint Venture or Partnership? How to Know Which One Is Right for You
Partnerships and Joint Ventures may have some overlapping features, but they are very different in practice. Read about them in this guide.
When starting a business the first thing you need to decide on is what structure your business will have. Partnerships and Joint Ventures are two of these structures which can seem similar in some respects. Both of these structures come with advantages and disadvantages. Ultimately, choosing which of these structures is right for your business depends on your individual circumstances and the nature of your business. You will also need to consider the legal liabilities, tax implications, costs, flexibility and future needs of your business.
If you decide to start a partnership or a joint venture, here are a few helpful tips that can assist you in your decision.
If you and two or more individuals are seeking to carry out a business together, then you may consider a partnership. This form is then divided into two main categories of general and limited partnership. A general partnership is where all the individuals to the partnership agreement are equally responsible for the management of the business. Also, each individual will have unlimited liability. On the other hand, a limited liability is where one or more individuals are general partners that have limited liability while the other partners are limited in liability by the proportion of investment in your business. Furthermore, Partnerships are governed by the Partnership Act 1892 (NSW).
Advantages of a Partnership
- Jointly owning a business allows you to share ideas and maintain efficiency;
- Sharing of profits and losses with other partners;
- Costs of starting a partnership are low and capital is easier to borrow;
- The structure is flexible for future adjustments; and
- Having equal managerial rights.
Disadvantages of a Partnership
- Debt liabilities are unlimited where each partner is jointly and severally liable for their own and each others debts;
- Risk of conflicts between partners may arise causing managerial issues; and
- Each partner is liable for the acts or omission of other partners.
If you are planning on entering into a temporary agreement with two or more companies you may consider creating a joint venture. This form will allow both companies to mutually benefit under a specific contract or through a product. Moreover, a joint venture can be divided into two different categories which are unincorporated and incorporated. An unincorporated joint venture is more suitable for a single project. This does not imply that there is an extensive form of partnership. Whereas, an incorporated joint venture means that you will have a mutually held company or trust. Both parties will need to set out their rights and obligations in a shareholder agreement or trust deed. These instruments will govern any disputes that may arise between the parties. If not, then the Corporations Act 2001 (NSW), the company or trust constitution.
Advantages of a Joint Venture
- It can be a temporary arrangement;
- Finances are equally shared among the parties for a mutual a goal; and
- Parties share risks and costs, and consequently, have equal liability.
Disadvantages of a Joint Venture
- Working with different managerial styles may create conflict; and
- The outcome of the project may not meet expectations as a result of poor decision-making or a lack of commitment.
If you require further assistance on the type of business structure to decide upon, it recommended that you contact a Business Lawyer.
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Tashfia is a Legal Tech Intern at Lawpath as part of the Content Team. She is in her second year of Bachelor of Laws and third year in Bachelor of Business Administration at Macquarie University. She is interested in Social Justice and Commercial Law.