Joint Ventures

A joint venture has no specific legal meaning, but can loosely be described grouping of two or more independent parties for a specific business purpose. It may take several different forms, depending on the requirements of the parties. These are:

  • Partnership
  • Limited company
  • Limited Liability Partnership (LLP)
  • Main contractor/subcontractor relationship
  • Association

Each of these has advantages and disadvantages, largely in terms of the sharing of the liabilities and profits of the business and its owners, and the cost of administration.  There are also likely to be benefits or disadvantages in tax treatment, and anybody considering entering into a joint venture should seek specialist tax advice before making any decisions. While there are exceptions in specific cases, the main differences are set out in below.

Partnership

  • A partnership consists of two or more legal entities (which may be individuals or companies)
  • The partnership has no separate legal identity of its own. Any contracts with third parties will generally be made by the one or more partners on behalf of the entire partnership and all the partners will be liable under that contract
  • Liability for the partners is unlimited and they are jointly responsible for all debts, contracts and liabilities of the business
  • The partnership must file a tax return, but the partners are personally responsible for their own taxes
  • Any property or assets in the business are owned by one or more of the partners personally
  • Unless the partners agree otherwise, all profits and losses are shared equally by all the partners
  • There is no requirement to file any information publicly
  • In order for a joint venture partnership to function correctly, there must be a partnership agreement

Pros of joint venture partnerships

  • they are easily set up, with minimal on-going administrative requirements
  • they can be quickly and easily dissolved when the joint venture project is complete
  • as there is no new legal entity, there are often no concerns with matters such as credit ratings or proving past history

Cons of joint venture partnerships

  • the joint venture parties cannot ring-fence the liabilities of the joint venture from their other interests
  • third parties are sometimes wary of entering into contracts with partnerships, if the partners are not all individuals
  • it can be difficult to determine which joint venture partner is entitled to which assets on dissolution

Limited Company

  • A company must have at least one shareholder (which may be an individual or company). A joint venture company will always have at least two shareholders
  • The company has its own legal identity, separate from its shareholders . The company will enter into contracts with third parties in its own right
  • Liability for the shareholders is generally limited to the nominal value of their shares. The company itself, and not its shareholders, is responsible for all debts, contracts and liabilities of the business
  • The company must file a tax return and pay taxes
  • While companies generally own any property or assets used in their business, in joint venture companies it is common for one of the shareholders to provide its assets for use in the business, although those assets will not be owned by the company
  • The profit of the business belongs to the company. It may be distributed to the shareholders by way of dividend
  • Information on the shareholders and directors of the company must be filed annually, as must annual accounts. This information is available to the public
  • The company makes its own decisions (through its directors), but the shareholders may agree between themselves how the relations between them is to be governed In order for a joint venture company to function correctly, it is essential that there be a shareholder agreement. Click here for more details on shareholders agreements.

Pros of joint venture companies

  • because the company has its own legal identity, it can enter into contracts in its own right
  • the liabilities of the joint venture can be kept separate from the other interests of the joint venture parties
  • it is easy to invest in the joint venture company by way of loans or capital
  • costs and expenses are easily shared

Cons of joint venture companies

  • because the company is a new legal entity, third parties and lenders may require the joint venture parties to guarantee liabilities or otherwise prove creditworthiness
  • there are on-going administrative costs and requirements, although these are no more onerous than for any limited company

Limited Liability Partnership LLP

  • An LLP consists of two or more legal entities (which may be individuals or companies), known as members
  • The LLP has its own legal identity, separate from its members. The LLP may enter into contracts with third parties in its own right
  • Liability for the members is generally limited to the capital they have invested in the business. The LLP itself, and not its members, is responsible for all debts, contracts and liabilities of the business
  • The LLP must file a tax return, but generally the members are personally responsible for their own taxes
  • The LLP may own any property or assets in the business, but in a joint venture LLP it is common for the members to provide assets or property for use in the joint venture
  • Unless the members agree otherwise, all profits and losses are shared equally by all the members
  • Information on the members of the LLP must be filed annually, as must annual accounts. This information is available to the public
  • For a joint venture LLP to operate properly, it is important that there be an LLP agreement.

The pros and cons of using LLPs for joint ventures are broadly the same as for limited companies.

Main contractor/subcontractor relationship

  • The joint venture parties will not create any new structure together for the purpose of the joint venture, but will remain separate and distinct legal entities. One will be designated main contractor and the others will be subcontractors
  • The main contractor will enter into any contracts with third parties (the Head Contracts) in its own name and will be solely liable under such contracts, regardless of which of the joint venture parties will carry out the relevant work
  • The main contractor and the subcontractors will enter into separate contracts under which the subcontractor agrees with the main contractor that the subcontractor will carry out certain of the main contractor’s obligations under the Head Contract. The liability to the third party will remain with the main contractor, even though the subcontractor is doing the work. The subcontractor will be liable to the main contractor
  • The third party will pay the main contractor, which will in turn pay the subcontractor. The subcontractor will generally have no right to seek payment form the third party, nor will the main contractor be entitled to refuse to pay the subcontractor if it has not itself been paid by the third party, unless the joint venture parties have specifically agreed differently

Pros of a main contractor/subcontractor relationship in joint ventures

  • the joint venture parties retain their separate legal identities
  • for the subcontractor, there is the advantage that it does not have any direct liabilities to the third party
  • for the main contractor, it retains the sole relationship and goodwill with the third party
  • it is often only the main contractor that need prove its credentials with third parties

Cons of a main contractor/subcontractor relationship in joint ventures

  • for the main contractor, it will be liable to third parties for wrongdoings of the subcontractor
  • for the subcontractor, there is no guarantee that the main contractor will pay it, even if it has been paid by the third party
  • for the main contractor, it remains liable to pay the subcontractor even if it has not itself been paid
  • for the subcontractor, it may find it difficult to build up goodwill with third parties as it is not the visible trading partner
  • it can be difficult to properly share costs and expenses

Association

This is not a recognised legal term. It is a useful word to describe a loose collection of legal entities who have agreed to adopt a common approach to business without forming any particular legal structure.

  • the parties will agree to a broadly common approach to business matters
  • no new or formal legal entity will be created
  • each joint venture partner will enter into its own contracts with third parties and will earn separate profits bear its own liabilities

Pros of an association

  • each party retains its own separate legal identity, making it easier to leave the joint venture at any time
  • each party has no exposure to the liabilities or obligations of the other
  • each party is free to take part or not to take part in any particular project
  • there is no additional administrative requirement

Cons of an association

  • it can be an unattractive for third parties to do business with associations, as it must contract with each joint venture party separately
  • it can be hard to share resources or profits
  • as no member is tied in, the joint venture will lack cohesion and potentially commitment as well
  • there are limited controls over the activities of each joint venture party

The next steps

Once the structure has been chosen, the joint venture may use the resources of the joint venture members, or it may effectively become a completely new business, with its own employees, premises and contracts. In that event, there will be numerous issues to be addressed, such as:

How can we help?

We have a wealth of experience in assisting businesses considering entering into joint ventures and can offer advice on the best structure to use in the particular circumstances. We can also help with the formalities of setting up companies and LLPs and with partnership, LLP and shareholders agreements.

Once the formalities of setting up a joint venture are out of the way, we can advise on property and employment matters and all kinds of commercial agreements. If you have any questions or are looking for information on anything relating to a joint venture, or any other business law matter please contact Catherine Drew