A common mistake often made is the interchangeable nuance of the terms ‘partnership agreement’ and ‘joint venture agreement’. Although the two are seemingly similar on the face of it, there are in fact distinct differences. Despite the fact that it may seem like the two are hard to differentiate there are a few key differences.
What are the differences?
To distinguish the two, a partnership agreement is a legal agreement that covers the terms of your line of work, essentially aiming to protect the interests and intentions of fellow partners.
Should I use a partnership agreement?
A partnership agreement is a legal relationship between two or more people, carrying on a business in common with a view of profit. To ensure a professional relationship between partners, it is essential that mutual aims and intentions are agreed upon and shared.
The creation of a formal partnership agreement is accommodating to mitigate any chances of potential partner conflict from arising in the future. It allows partners duties and obligations to clearly be specified and followed. Read more about forming a partnership agreement here.
Whereas, a joint venture agreement is strikingly more undefined. To put it plainly, a joint venture agreement is a type of a partnership agreement. The joint venture is a legal relationship which may be formed informally, however, the essential terms should be set out in a written joint venture agreement. In saying this, there is no correct ‘legal’ definition, however, this legal relationship usually involves an unincorporated joint venture. A formalised joint venture agreement commonly identifies that the individuals have not formed a partnership.
OR should I use a joint venture agreement?
A joint venture agreement allows the individuals to have access to new markets, technology and staff. If flexibility is a key feature you’re looking for in a partnership business then the joint venture agreement may be more fitting for you. With the ability to share financial risks individuals are able to approach each other (even if they’re competitors!). This can provide business opportunities, although not ongoing, it can enable a one off ‘undertaking’ with the ability to go back to being competitors in the business world.
Advantages of a Joint Venture Agreement
- Greater flexibility in terms of tax
- Liability for debts of joint ventures is stipulated to be separate
- Partners are not bound to other partners
Disadvantages of Joint Venture Agreement:
- Joint venture parties are able to avoid fiduciary duties
- No joint enterprise
- Potential conflicts and disputes without the help of a written partnership agreement
Advantages of a Partnership Agreement:
- Partnerships are subject to regulation acts of their respective states and territories, enforcing accountability
- Selling and/or receiving income jointly
- Internal rights to control/manage the partnership
Disadvantages of a Partnership Agreement:
- Partners are jointly and severally liable for debts incurred in the course of their partnership
- Partners cannot enter into their own financing agreements
- Complex issues arise around the way in which assets are held
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