<img height="1" width="1" style="display:none;" alt="" src="https://px.ads.linkedin.com/collect/?pid=1556145&amp;fmt=gif">

08 June 2017

How a joint venture works

A joint venture is an arrangement where different people or businesses combine resources to achieve a common objective. In some cases, they create a new company (an 'incorporated joint venture'), and in others, they don't (an 'unincorporated joint venture').


Unincorporated joint ventures

Perhaps the most common type of joint venture is an 'unincorporated joint venture'. 

This is where the parties agree to work together using their existing corporate structures, without creating a new entity. For example, two companies might decide to work together to try to secure a new project. If they don't incorporate a new company for this venture, this arrangement would be an unincorporated joint venture.

You don't need to put anything in writing to form an unincorporated joint venture, which is why they are the most common. All that is required is a shared intent to work together. However problems can arise if a written contract isn't put in place.

One of the main functions of a joint venture agreement is to explain the nature of the relationship between the parties. For example, you need to think carefully about whether the relationship is intended to operate as a partnership, or whether it is to involve parties working together at arm's length. There are important differences between the two.

Download your free Shareholders Agreement Guide here.

For example, in a partnership arrangement, the parties will owe fiduciary duties to one another. That usually means that the partners must avoid conflicts of interest, and they cannot take advantage of opportunities that come to them through the venture to the exclusion of the other partners. The members of a partnership are jointly and severally liable for the actions of their partners - meaning that they can be held liable for things they know nothing about. Those duties and liabilities will not necessarily arise outside of a partnership arrangement, depending on how the agreement has been established.

A good joint venture agreement for an unincorporated joint venture will make it clear whether there is a partnership. This isn't just saying, 'This is (or is not) a partnership'. It's about clearly defining the parties' expectations of one another, and what they are committing to do as part of the venture (and what they are not).

The joint venture agreement will also cover things such as:

  • Who will be contributing what to the venture; in terms of money, skills, resources, intellectual property or anything else of value.
  • How the venture will be managed. For example, which entity (or entities) will be contracting with third parties on the venture's behalf.
  • How liability will be apportioned between the parties.
  • How profits will be shared.
  • Who will own any intellectual property created by the venture.
  • The extent (or absence) of any restraints, so that the parties understand what they are permitted to do outside the venture.
  • When the venture will end, and what will happen when it does.
  • How disputes will be resolved.

If you don't have a written joint venture agreement, the law will determine the rules that apply. Sometimes those rules may not be obvious to the joint venture participants. Joint venture agreements are extremely helpful in minimising the potential for disputes later, and to ensure everyone is joining the venture with a common understanding.

Incorporated joint ventures

As the name suggests, incorporated joint ventures are different to unincorporated ones in that they involve the creation of a new company through which the venture will be operated. 

In this situation, the joint venture parties will be shareholders of the new company and will appoint its directors. That company will operate the business of the joint venture, and will usually own (or at least licence) the venture's assets.

Incorporated joint ventures provide significantly better asset protection to the joint venture parties than unincorporated ones. This is because the liabilities of the venture will usually be contained in, and limited to, the joint venture company, rather than being borne by the joint venturers directly.

To document an incorporated joint venture arrangement, the parties will usually sign a shareholders agreement. The types of things addressed in a shareholders agreement are very similar to those described above in the context of an unincorporated joint venture. (You can read more about this here, and access our comprehensive guide to shareholders agreements here.) 

Trusts

Some joint ventures use a unit trust structure. Under this arrangement:

  • the parties incorporate a new company to be the trustee of the trust;
  • the parties appoint the directors of the trusee company and own shares in that company; and
  • the parties own units in the trust.

Again, these types of arrangements are established through a written joint venture agreement that covers similar territory to that described above. This joint venture agreement is prepared in conjunction with the unit trust deed and the trustee company's constitution, so that all three documents work together harmoniously.

Which structure is best for you?

There is no simple answer to this question, as it depends totally on your circumstances.

The different structures can have different tax consequences, and this can often be an important consideration. The nature of the existing relationship between the parties and the nature and size of the opportunity will always be relevant.

Because of the different options available and the different legal and tax consequences they may have, it's an area where specialist legal and tax advice should be sought. 

Guide to Shareholders Agreements

About the Author

Bill Henry | Principal

Bill is a principal at Turtons and one of Australia's most highly credentialed commercial lawyers. Bill has set up and remained involved with a number of SMEs, has served as an independent director, chairman and advisory board member.


bill.henry@turtons.com | (02) 9229 2992

About Turtons

Turtons is a commercial law firm in Sydney with specialist expertise in privately owned construction and technology businesses.

Bill Henry | Principal

Author

Bill Henry | Principal

bill.henry@turtons.com

Bill is a principal at Turtons and one of Australia's most highly credentialed commercial lawyers. Bill has set up and remained involved with a number of SMEs, has served as an independent director, chairman and advisory board member.


bill.henry@turtons.com | (02) 9229 2992

Join our free construction law newsletter.

Monthly insights and practical tips delivered straight to your inbox.

Resources