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If you’re looking for the most suitable structure for your business, you’ve got a few options to look at. A common one is a partnership, as it’s cheaper to set up and not too complex to manage. But how is this different to a joint venture?
In this article, we’ll go through the key differences between a joint venture and a partnership. If you’re choosing between the two, it’s important to know the pros and cons before making a final decision, and the kind of agreements you’d need to have.
What Are The Differences?
A partnership is an agreement between two or more parties (usually up to 20) to conduct business together. This kind of arrangement is usually longer in duration as it is an ongoing business relationship, whereas a joint venture is more focused on a specific goal. As such, businesses usually opt for a joint venture for short term projects (although it doesn’t have to be).
Another important difference is that in a joint venture, the parties aren’t jointly or severally liable. If one business is in debt, the other business in the venture will not be liable for this. This is because they are still separate entities, but are choosing to work towards a goal for a temporary period.
A partnership, on the other hand, has joint liability. This means that one partner’s liability will extend to the other partners. Similarly, if the business runs into trouble, the partners will be personally liable under the doctrine of unlimited liability (we’ll cover this later).
So, in summary, the key differences between a joint venture and a partnership are:
- Liabilities of the parties
- Responsibilities of the parties (in terms of costs)
- The way business is conducted (for example, together or separately)
- Duration of the arrangement
- The overall goal
What Is A Joint Venture?
A joint venture is when two or more people (or companies) work towards a common goal, but remain separate entities outside of the venture. For example, they might choose to start a short term project for business expansion. You may know about Uber’s collaboration with Volvo to provide a self-driving car as part of Uber’s services – this is a joint venture!
Put simply, this kind of arrangement involves two separate parties who combine resources and work together to achieve a shared goal, but their liabilities and responsibilities remain separate. This means that both parties are still responsible for the costs they incur during the venture, and the profit is divided later according to their preference.
Joint Venture Agreement
Since a joint venture requires collaboration with another entity, it’s a good idea to have a Joint Venture Agreement in place. This will set out the key terms around the relationship and should manage the risks of dealing with another entity. So, your agreement should consider the following:
- Role of each party
- Division of profit
- How costs will be covered
- Duration of the venture
- Intellectual Property (and confidentiality)
- Dispute resolution
- Liability
- Termination
It’s a good idea to familiarise yourself with How A Joint Venture Agreement Works before you speak to a lawyer.
Pros Of A Joint Venture
A joint venture is a popular option for many reasons. You might consider it because it:
- Is suitable for businesses of any size
- Has opportunities for expansion without borrowing money externally
- Provides access to more resources
- Arranges a legally binding commitment between two parties (two heads are better than one!)
Cons Of A Joint Venture
Like anything else, a joint venture also has it downsides:
- Trusting the other party can be difficult
- The other party might not perform to the required standard, or may not pull their own weight
- Risk of an ulterior motive
- Conflict may arise later down the track
What Is A Partnership?
A partnership is a type of business structure that involves at least 2 people running a business together. Unlike a joint venture, it doesn’t usually involve 2 different entities who do their own thing – it is a combined effort to drive a business. While a joint venture comes to an end, a partnership is an ongoing commitment.
A partnership has limited liability, like sole traders. So, if one partner falls into debt, the other partners will be liable for this too. Joint ventures don’t have this kind of shared liability. Instead, the businesses have their own responsibilities and costs while working together.
The key difference between the two is that a joint venture focuses on a single goal, whereas a partnership is formed with the vision of a long-term business journey, and the losses or liabilities of the business will be personally tied to the partners.
Pros Of A Partnership
When setting up a business or choosing a business structure, a partnership tends to be a popular option for a number of reasons:
- It is cheaper to set up
- It is flexible – you can Change Your Business Structure later
- You can split the income
Cons Of A Partnership
One of the main disadvantages of a partnership is the rules around liability. If the business runs into trouble, who is responsible?
Joint Liability
When one partner runs into trouble (for example, if they owe money to a third party), then the other partners will be liable for this too. This is joint liability.
It’s one of the downsides to a partnership as there is a greater risk of being liable for other’s debts, and it can also damage the personal relationships between partners if things go wrong. If you opt for a partnership, you’d need to ensure that your Agreement covers dispute resolution in case there are issues around liability later on.
Unlimited Liability
Partnerships also have unlimited liability. You may have heard of the separate legal entity doctrine (which applies to companies). This just means that the business is separate from its owners, so if the business owes money, this liability does not extend to the owners – this is limited liability.
However, if a partnership were to run into trouble, the partners would be personally liable for this. This is unlimited liability.
As such, your Agreement would need to cover the details around how losses would be divided between the partners.
Partnership Agreement
A Partnership Agreement should set out the key details around the business relationship, particularly around liability. For example, consider:
- The roles and responsibilities of each partner
- How profits and losses will be shared or divided between partners
- How decisions will be made
- How disputes will be handled if issues arise
- What will happen if a partner wants to leave
Since partnerships involve working closely with other parties and being tied to each other;s liabilities, you want to make sure that your Agreement covers the key risks. It’s a good idea to have a Partnership Agreement drafted by a lawyer to avoid any mishaps or misunderstandings later down the track.
Need Help?
Choosing a business structure can be a hard decision. Each structure has its pros and cons, and everyone has a unique situation. Speaking to a lawyer will help you decide what is best for your business’ specific needs, and help you decide what is easier in terms of costs and risks.
Whether you’re looking for the most suitable business structure or you’re looking to have an Agreement drafted, Sprintlaw has a team of experienced lawyers who can help. You can reach out to us at team@sprintlaw.com.au or contact us on 1800 730 617 for an obligation-free chat.
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