Joint Ventures vs Partnerships: Which is Right For You?

If you’re considering a business collaboration or perhaps thinking about partnering with another business for a new project, then you need to choose the right business arrangement. This is more than just putting pen to paper. The structure you choose – whether a joint venture or a more structured partnership – makes a difference. And each has its benefits and disadvantages.

In this article, we’ll cover joint venture vs partnership, highlight their differences, discuss the pros and cons of each and share some insight on when each might be appropriate, so you’ll be ready to start your new joint project!

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Joint ventures vs partnerships

When it comes to your business collaboration, there are two options to consider. The first is the joint venture. The second is a partnership. So what’s the difference?

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What is a joint venture?

A joint venture is an agreement between two or more parties to work together on a specific project. This might include creating a new product, offering a new service or launching in a new market. The project may be short or long-term but tends to be for a single ‘thing’ rather than a long-term, more general collaboration. In a joint venture, each party has their own rights and responsibilities – which may be equal or unequal –and is liable for all the costs and risks associated with the project.

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Often businesses choose the joint venture arrangement because it can help them accomplish more in business than they can on their own. A great example of a joint venture is Google and NASA pooling their resources and expertise to create Google Earth. This isn’t something that either could do on their own, necessarily. But they could bring together their expertise to create something new together.

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A well-drafted joint venture agreement is imperative for a successful joint venture. This document will set out the objectives, initial contributions, day-to-day operations, rights to profits, responsibilities for losses, and all other claims and obligations of each party. It’s really important that it’s drafted carefully to minimise the risk of disputes or litigation. 

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Two types of joint ventures

There are two types of joint ventures. 

1. Incorporated joint venture / joint venture company. This is when the parties create a separate legal entity for the purpose of the project. While this clearly separates your new venture from any other businesses you have, it may also necessitate additional financial and tax obligations. 
2. Unincorporated joint venture / contractual joint venture. This is when the parties don’t create a separate company but instead produce a legally binding contract for the joint venture. This contract stipulates the terms and describes how the new project, product or service will be managed.

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Pros and cons of a joint venture

Pros: 

• Temporary arrangement
• Can combine resources and expertise without merging
• Possibility of growth without external investment
• Access to new markets
• Some liability and tax benefits
• Shared costs
• Shared risks

Cons: 

• Risk of being treated as a partnership
• Risk of unequal commitment or input from parties
• Risk of conflict
• Risk of reporting and auditing challenges

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What is a partnership?

A partnership is a business structure that contractually sets an ongoing relationship between two or more parties with a shared goal of making a profit. As opposed to a joint venture structure, in a partnership, typically, all parties share the legal and financial liabilities equally, as well as the profits. They’re also personally responsible for the debts the partnership takes on. 

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The specific rights and obligations of parties should be set out in your partnership agreement. This agreement should also spell out who owns what portion of the business, the roles and duties of each party and how the profits and losses will be split.

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Pros and cons of a partnership

Pros: 

• Ongoing arrangement
• Low setup and ongoing costs
• Combined resources and management
• Flexibility around the distribution of profits and losses

Cons: 

• High fiduciary duties and inflexibility
• Additional tax and legal obligations
• Liability issues
• No compensation for partners’ efforts
• Each partner can be liable for the actions and debts of other partners

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Key differences between joint venture vs partnership

It is important to remember that the regulations that apply to a joint venture vs partnership will differ. For a joint venture, parties will be bound by their joint venture agreement, as well as the common and contract law. 

Partnerships are regulated by laws specific to the state or territory where they’re organised. For partnerships in NSW, that’s the Partnership Act 1892. In both cases if the parties involved are corporations, they will also need to adhere to the Corporations Act 2001 (Cth).

There are other key differences as well, namely:

• Duration: Joint ventures are short-term, usually for the life of a single project. Partnerships, however, are designed to last for the life of the business.
• Parties: A partnership is comprised of two or more people who form a legally recognised association for the purpose of running a business. On the other hand, the parties in a joint venture can be individuals, corporations, businesses or even governments. 
• Purpose: A joint venture is usually limited to one specific goal, and each party contributes to achieving that goal. Partnerships, however, are focused on a long-term enterprise and making a profit.
• Formation: A partnership can be formed via a partnership agreement or a contract between the parties. A joint venture is usually formed by a joint venture agreement but can still exist when there is no agreement in place.
• Scope: Joint ventures are limited in their scope, but partnerships can be huge. For example, in 2020 Coles formed a partnership with the world’s largest youth-focused telco brand BOOST MOBILE to sell unlocked phones with prepaid cards.

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How to choose the right structure for you

When it comes to deciding between a joint venture vs partnership, you need to have a good understanding of each structure’s characteristics, the pros and cons, legal implications and suitability for your business needs. 

If you’re collaborating for the release of a single, limited-edition product, a joint venture might be the right choice. If you’re creating a new set of services that utilises your expertise and that of your collaborators and you expect to offer these services for the long term, then a partnership might be the better choice,

If you choose a joint venture, ensure you have a joint venture agreement that clearly states your intention to enter into a joint venture. You’ll want to clearly set out that it’s being formed for a specific purpose and limited duration. Alternatively, if you choose a partnership, ensure you have a partnership agreement that clearly defines the terms of the relationship.

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Seek expert advice

Regardless of which structure you choose, sound legal and financial advice will make all the difference. You’ll be able to enjoy a successful business endeavour without wasting your time, money and resources on avoidable disputes and litigation.

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