Business owners often mistakenly interchange the two business structures with the misunderstanding that they're one and the same. Although these legal arrangements share many similarities, there are significant differences that business owners should be aware of when attempting to form an alliance with another enterprise.
By evaluating the pros and cons of each relationship in advance, you can be empowered to make the best strategic decision for your business.
In order to properly distinguish between a JV and a partnership, it helps to start with the definitions and some simple examples.
A partnership is often described as a voluntary association of two or more people who jointly own and manage a business for profit. Partnerships are usually ongoing relationships defined by a partnership agreement.
For example, suppose two friends fresh out of law school want to join together to start an animal rights law firm. They write up a partnership agreement that divides up their responsibilities and duties as partners in the firm. They've started a partnership.
Alternatively, consider a hairstylist and independent accountant who want to combine their respective talents to open a salon. They enter into a business partnership where the hairstylist provides services to clients and the accountant takes care of the salon's finances.
A JV can be described as a business undertaking by two or more people engaged in a single defined project. The creation of a JV is a question of fact that's determined by the circumstances.
The necessary elements of a JV are:
For example, Sony Ericsson Mobile Communications was a JV started in 2001 by the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones. Sony contributed its expertise in manufacturing electronic products and Ericsson contributed its mobile and internet communications services.
These definitions overlap in certain ways. Both JVs and partnerships consist of co-owners of a business enterprise sharing the profits and losses. But these business structures also have key distinctions.
JVs differ in how they're formed, why they're formed, and for how long they're formed.
Formation. Partnerships are established when two or more people enter into business together. This business association is usually evidenced by a partnership agreement. Sometimes, partners form limited partnerships or limited liability partnerships, which require an official state filing. While JVs are also usually formed by an agreement—usually called a "joint venture agreement"—they don't necessarily result in the formation of a single business. A separate business can be created for the purpose of fulfilling the goals of the JV, but it's not necessary—unlike a partnership.
Scope and duration. A JV is typically set up for one transaction or a series of transactions. Therefore, JVs are generally distinguished from partnerships by their limited scopes and durations. A partnership, on the other hand, ordinarily engages in an ongoing business for an indefinite period of time.
Specific purpose. In a JV, it might not be just profit that binds the parties together. JVs can be formed for specific purposes such as when parties engage in research and development—activities that would otherwise be cost-prohibitive to do individually.
Ownership and control. In a partnership, generally, the partners share equally in the ownership and control of the business. But the partnership agreement can spell out each owner's ownership share and duties in the partnership. In a JV, each party's share of ownership, profits, and control is usually outlined in the joint venture agreement. If a new business entity is started to run the venture, then the type of entity—such as a corporation or limited liability company (LLC)—can determine how the parties own and manage the business.
However, these distinctions between the business structures aren't ironclad, and a court could 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 JV is taxes.
Partnerships are considered "pass-through" tax entities where all of the profits and losses of the partnership pass through the business to the partners. The partners each pay taxes on their share of the profits (or deduct their share of the losses) on their individual income tax returns.
As a pass-through business entity owner, partners in a partnership might be able to take advantage of the 20% pass-through deduction established under the Tax Cuts and Jobs Act (TCJA). With this tax deduction, if a partner makes $100,000 in income, they might only be taxed on $80,000 (or 80% of their income). This tax break can result in significant savings, and partners can even qualify for a lower tax bracket with a lower rate.
For additional information, read how partnerships are taxed.
Depending on the circumstances, JVs can be taxed either as a
Entities that are taxed as corporations are subject to tax at both the corporate and shareholder levels, commonly referred to as double taxation. The TCJA established a single flat tax rate of 21% for corporations—a significant change that made the corporate tax rate lower than the top five individual tax rates.
There are advantages and disadvantages 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—an arrangement 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 therefore corporate tax treatment might be better.
Your decision might also depend on whether you can take the 20% tax deduction available to partners or if your overall tax rate is better with a flat 21% corporate rate.
Another issue to consider in deciding between a JV and a partnership is liability. Generally, partners in a partnership are jointly and severally liable for the partnership's obligations. So, every partner is personally liable for:
In general, the members of a JV that's been set up as a separate corporation or LLC will only be liable to the extent of their investment in the corporation's stock or their interest in the LLC. But there are situations where JV members will become personally liable for the corporation or LLC's debts and obligations.
If the JV is established by contract (as opposed to a separate legal entity), then the parties are personally exposed to liabilities related to the venture, similar to a partnership.
A partner in a general partnership owes a fiduciary duty to the partnership and to the other partners. This duty 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, JVs aren't always treated the same as partnerships. For instance, the fiduciary duties of a member of a JV are often deemed finite and tailored to the business and activities of the venture, while partnership fiduciary duties are more broadly applied.
Whether you have established a partnership or JV will depend on a number of factors including:
Business owners should be careful to understand which type of arrangement they're entering into and the consequences of that choice.
If you're considering entering into a business relationship with another person or business entity, you're bound to have questions or concerns. If you've entered into business contracts before, then you can likely navigate the situation on your own. But business arrangements can often become complicated, and it's important to define your business relationship at the start before any issues can arise.
If you have legal questions specific to your situation or you and your partner or co-venturer have different opinions about how the business arrangement should look, you should talk to a business lawyer. An attorney can help you negotiate terms with the other party and draft an agreement to govern your business relationship.