What is a Joint Venture?

There is no one way to set up a joint venture or a collaboration arrangement. A joint venture is a commercial arrangement between two or more parties who are looking to pool their resources. A joint venture can be set up for a specific project or for a continuing business relationship.

Different Joint Venture Structures

A joint venture can be operated through a number of structures, the most common being a company but a joint venture can be set up as a partnership or as a contractual arrangement. In the following, we will consider the advantages and disadvantages of each type of arrangement.

Company Structure

Advantages

  • Comprehensive statutory framework in the Companies Act 2006 to support the contractual obligations. Universally recognised with an established corporate governance regime.
  • A company has a separate legal personality – assets can be held by the joint venture company in its own name, the joint venture company can conduct business in its own name so there is a clear separation between the business of the company and management.
  • Limited liability – the shareholders are not liable for the debts of the company over and above their equity investment unless they have agreed otherwise e.g. given personal guarantees.
  • Tailored share rights can reflect the contributions of the joint venture parties.
  • Flexibility – particularly in raising finance as the separate legal personality means the joint venture company can obtain finance in its own name.
  • Publicity – companies are required to file constitutional documents, annual accounts and a Confirmation Statement which means they are transparent.

Disadvantages

  • The statutory framework can restrict flexibility.
  • There are a number of statutory provisions which cannot be overridden in the contractual documentation so the joint venture parties cannot place obligations on the company which could be viewed as restricting or fettering its statutory powers.
  • Potential for double taxation as the company is taxed on its profits and the joint venture parties are taxed when they receive profits or realise their investment but this is dependent on the nature of the joint venture party whether it is a company or individual.
  • Reporting and compliance obligations – increased administration and public disclosure.
  • Limited liability can be undermined by the giving of personal guarantees by the joint venture parties.

General Partnership Structure

Advantages

  • Flexible – it is governed by the agreement between the joint venture parties.
  • The joint venture parties own their own assets.
  • Each joint venture party is taxed on its own profits so it is fiscally transparent.
  • There are no publicly available records so sensitive information about the joint venture can be kept private.

Disadvantages

  • No separate legal personality so it can be hard to raise finance – it cannot hold its own assets so cannot grant certain security for financing.
  • Unlimited liability – each joint venture party is liable for the whole of the liabilities of the joint venture. This can be reduced to some extent by setting up a limited partnership but this structure is not suitable for commercial ventures as limited partners cannot get involved in the day-to-day management of the joint venture as they will lose the benefit of limited liability.
  • Any change to the identity of the joint venture parties will require a new partnership agreement which can be costly and time consuming.

Limited Liability Partnership

Advantages

  • It has a clear legislative framework.
  • Separate legal entity – this means it has a clear corporate identity.
  • Limited liability of members – this can be undermined by the giving of personal guarantees.
  • Tax transparent – it is treated as a partnership for tax purposes so each joint venture party is taxed directly on its share of the profits and losses of the joint venture. The limited partnership will not be taxed on its share of the profits as long as it is carrying on a trade or business for profit.

Disadvantages

  • The legislative framework is not as comprehensive as for a company so allows for more flexibility.
  • Public filings are required but not as extensive as for a private limited company.
  • Although now being used for commercial ventures and not solely professional partnerships, the roles and responsibilities of the limited liability partners are not as familiar as for directors.

Contractual Structure

Advantages

  • It can be set up and dismantled easily and can be useful to achieve short term goals.
  • No separate legal liability so the joint venture parties hold their own assets.
  • Each joint venture party is not liable for the debts of the other joint venture parties unless it is specifically agreed in documentation with third parties.
  • Joint venture parties are taxed on their share of the profits and losses of the joint venture.
  • No public filings so potentially sensitive matters do not need to be disclosed.

Disadvantages

  • Lacks a clear identity and this can impact on dealings internally and with third parties.
  • Risk of creating a partnership which would mean each of the joint venture parties is jointly and severally liable for the debts of the other joint venture parties.
  • Not a separate legal identity so the parties may have issues raising finance.

As one of the key factors that will determine your choice of joint venture structure is the taxation treatment of each joint venture party and where relevant the joint venture vehicle, it is important that you discuss your proposed joint venture structure with your tax adviser so that you understand fully the tax implications for you of the proposed structure. Please do contact us if you have any questions regarding a joint venture project.

Please contact us if you need any further information on joint venture structures.