In the current economic climate, would-be entrepreneurs would be wise to consider the joint venture business model. Entering into a joint venture allows for a pooling of risk, resources and market share.
In particular, during this period of reduced bank lending and low interest rates, getting a ‘sleeping partner’ on board offers businesses access to precious capital, and offers a higher return for investors jaded by traditional bank savings.
There are various ways in which a joint venture can be structured, some of which are considered below . . .
The term ‘joint venture’ has no fixed legal definition and can be used to describe any relationship where there is collaboration between parties and sharing of related profits. But what form should your collaboration take?
A limited company has its own legal personality, distinct from its members. It is run according to its Articles of Association, and can be set up quickly and cheaply. A limited company must submit accounts and annual returns to the registrar of companies annually, which are available to view by the general public.
Choosing this structure offers you flexibility: profits can be shared in proportion to shareholdings, or varied by issuing different classes of shares. Since a company is managed by its board of directors, control of the venture can be shared, since each party can appoint directors to the board.
Limitation of personal liability is often cited as a benefit of choosing a limited company, since shareholders are usually not liable to pay the debts of the company on winding up. This may appear to be an attractive benefit, but care should be taken in the early stages – the new company may not have an impressive balance sheet and creditors may insist on personal guarantees from shareholders to secure lending.
Unlike a limited company, a partnership does not need to be incorporated, coming into effect automatically when two or more people (or companies) carry on a business, with a view to making a profit. Most partnerships ask their solicitor to draw up a Partnership Agreement governing how the business will be run, as there are default regulations in place which apply in the absence of an agreement, which may not suit.
Partnerships are often chosen for tax reasons. Each partner is responsible for the tax arising on its share of the profits. Where the business makes a loss in its early years, corporate partners may be able to offset these losses against their own profits to gain a tax advantage.
Unlike shareholders in a limited company, each partner is liable for all of the debts of the partnership. Where one of the partners becomes insolvent, this could mean that one partner is left to foot the bill by liquidating its personal assets.
An alternative is to enter into a ‘contractual’ joint venture. Here, the parties can work together on a business enterprise, without committing themselves to become partners or shareholders in a limited company. The relationship is governed by an agreement drawn up at the start of the venture, and each party maintains its own assets, liabilities and legal personality.
Because there is no conjunction between parties, the enterprise is easily dismantled, since there are no assets to distribute or liabilities to apportion. This makes it an ideal choice for short term projects, or those where each party specialises in a particular area – for example, where an inventor requires a manufacturer to produce the product that it has designed.
What happens when it all goes wrong may be the last thing on your mind when you are setting out on your new and promising joint venture. However, spending a little time and money getting sound documentation in place at the outset could save you a fortune if the worst should happen. At the very least, your agreement should cover the following:
- Are you and your partner clear as to precisely what the business activities of the venture will be? Where they will take place geographically? Who will be responsible for obtaining consents or licences required for the business activities?
- Financial disputes often bring joint ventures to a premature end. How much capital will each party contribute? Who will provide security for external finance, and what form will this security take? Are you prepared for an initial investment to be non-cash? Will you be obliged to continue to contribute financially? What are the tax implications of your arrangements?
- What will happen to joint assets on termination? If they include property, will you be transferring the property outright, or licensing its use to the venture? How will you value assets? What about intangible assets such as goodwill, or intellectual property?
- What will happen if one party wants out of the venture early? If you have chosen to use a partnership, this will often mean that the partnership will have to dissolve. If a limited company, who will be entitled to purchase the shares of the exiting party? How will the board of directors be appointed?
- Will there be obligations on the parties to refer certain levels of business to the venture? What information will the parties be required to supply? How will a deadlock situation be resolved?
Make sure that you seek sound advice from the outset. We will be able to help you choose the most appropriate structure, and draft a set of documents setting out the parties’ rights and responsibilities clearly. This will leave you free to concentrate on making your business a success, so that you can take the best advantage of this safe and flexible way of doing business. Good luck!
For further information, please contact Barry Riley on 0117 9453 042 or firstname.lastname@example.org
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