Joint ventures and partnerships are common forms of legal structures used by business owners to combine resources, talents, or skills with another person or business. Often, business owners mistakenly interchange the two terms to define the association with the misunderstanding that they are one and the same. Although these legal arrangements share many similarities there are significant differences business owners should be aware of when attempting to form an alliance with another enterprise. Evaluating the pros and cons of each agreement in advance will empower businesses to make the best strategic decision to help them achieve their goals.
In order to properly distinguish between a joint venture and partnership, it helps to start with the definitions and a simple example.
Partnership. A partnership is often described as a voluntary association of two or more people who jointly own and carry on a business for profit. For example, partners in a law firm who work together to provide legal services for profit.
Joint Venture. A joint venture can be described as a business undertaking by two or more people engaged in a single defined project. The creation of a joint venture is a question of fact that will be determined by the circumstances. The necessary elements are: an express or implied agreement; a common purpose that the group intends to carry out; shared profits and losses; and each member’s equal voice in controlling the project. For example, Sony-Ericsson was a joint venture by the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones.
These definitions overlap in certain ways. Both a joint venture and a partnership consist of co-owners of a business enterprise sharing the profits and losses. However, typically a joint venture is set up for one transaction or a series of transactions. Therefore, joint ventures are generally distinguished from partnerships by being more limited in both scope and duration. A partnership, on the other hand, ordinarily engages in an ongoing business for an indefinite period of time. Further, in a joint venture, it may not be just profit that binds the parties together. Joint ventures can be formed for specific purposes such as when parties engage in research and development, which would otherwise be cost prohibitive to do individually. Nevertheless, these distinctions are not ironclad and a court may determine a partnership was formed even for a single business transaction.
One of the main reasons business owners should be concerned about the election between a partnership and a joint venture is taxes. Partnerships are considered “pass through” tax entities, meaning all of the profits and losses of the partnership pass through the business to the partners. The partners then each pay taxes on their share of the profits (or deduct their share of the losses) on their individual income tax returns. Depending on the circumstances, joint ventures may be taxed as a corporation or partnership. Entities that are taxed as corporations are subject to tax at both the corporate and shareholder levels, commonly referred to as double taxation.
There are positives and negatives to each form of taxation. One benefit of partnerships is that they offer greater flexibility with regard to the allocation of gains and losses. For example, you might be able to structure your partnership so that one partner receives 50% of the gains generated by the business and 99% of the losses, something that might benefit the individuals in your group. However, you or others in your group might not want to report income on your personal returns and would therefore corporate tax treatment might be better.
Another issue to consider in deciding between a joint venture and partnership is liability. Generally, partners in a partnership are jointly and severally liable for the partnership’s obligations. This means that every partner is liable for his or her own actions, the actions of the other partners, and the actions of employees of the business. In general, the members of a joint venture that is set up as a separate corporation or limited liability company (LLC) will only be liable to the extent of their investment in the corporation’s stock or their interest in the LLC. If the joint venture is established by contract (as opposed to a separate legal entity), then the parties are personally exposed to liabilities incurred pursuant to the venture, similar to a partnership.
A partner in a general partnership owes a fiduciary duty to the partnership and the other partners. This includes duties of loyalty, care, and good faith to the other partners and the partnership. The fiduciary duties of co-venturers are similar to those owed by a partner in a partnership, although joint ventures are not treated in all respects as identical with a partnership. For instance, the fiduciary duties of a member of a joint venture are often deemed finite and tailored to the business and activities of the venture, while partnership fiduciary duties are more broadly construed.
Whether you have established a partnership or joint venture will depend on a number of factors including:
Business owners should be careful to understand which type of arrangement they are entering and the consequences of that choice.