Joint Ventures

Aligned goals. Shared success.

When businesses join forces, choosing the right structure is crucial for success.

Our corporate lawyers advise on both corporate and contractual joint ventures, helping determine the best way to structure a new venture between independent parties.

What are Joint Ventures?

A joint venture has no specific legal definition but can be described as a grouping of two or more independent parties for a specific business purpose. It may take several different forms, depending on the requirements. These include:

• Partnership
• Limited company
• Limited Liability Partnership (LLP)
• Contractual joint venture

The options have different features and advantages/disadvantages, particularly in terms of liability, the sharing of profits, decision making and the cost of administration. There are also differing tax treatments, requiring specialist tax advice.

While there are exceptions in specific cases, the main differences are set out below:

Partnership

• No separate legal personality
• No need to make public filings
• Unlimited liability
• Tax transparent

Advantages

• They are easily set up, flexible and have minimal on-going administrative requirements
• Commercially sensitive issues can remain private
• Tax transparent, meaning that the partnership is not taxed separately to the partners
• As there is no new legal entity, there are often no concerns with matters such as credit ratings or proving past credit or trading history

Disadvantages

• The joint venture parties cannot ring-fence the liabilities of the joint venture from their other business
• Unlimited liability (unless the parties are also limited companies)
• Third parties are sometimes wary of entering into contracts with partnerships as no separate legal personality
• Not easy to change JV parties

Limited Company

• Each JV party will be a shareholder in the company and appoint a director to the board
• Separate legal personality
• Need to make public filings
• Limited liability
• Not tax transparent

Advantages

• The company has its own legal identity and it can enter into contracts in its own right
• Liability for the JV party shareholders is generally limited to the nominal value of their shares and the company (rather than its shareholders) is responsible for all debts, contracts and liabilities of the business
• The liabilities of the joint venture company can be kept separate from the other interests of the joint venture parties
• The joint venture company has the benefit of a mature set of rules governing its organisation by virtue of the Companies Act 2006
• Employee share incentive schemes can be deployed
• Realising value by way of a sale of shares will not disrupt legal ownership of the underlying business

Disadvantages

• There are on-going administrative costs and requirements in operating a limited company, along with public disclosure of information via filings at Companies House
• Possible double taxation (i.e. tax at the JV company level and again on the JV parties when they extract profits). Specialist advice is needed as this will depend on the nature of the JV parties (e.g. whether they are also limited companies in which case dividends received may be tax free)
• The legislative framework can reduce flexibility

Limited Liability Partnership LLP

• Each JV party will be a member (usually a designated member) of the LLP.
• Separate legal personality
• No need to make public filings
• Limited liability
• Tax transparent

Advantages

• The members have limited liability up to the amount agreed between them and the LLP (rather than its members) is responsible for the debts, contracts and liabilities of the business
• Tax transparent, meaning that the LLP is not taxed separately to the partners and instead, each JV party is taxed directly on its share of profits and losses
• Greater organisational flexibility as, whilst some rules applying to companies also apply to LLPs, they are not governed by such comprehensive legislation
• Separate legal identity with a clear corporate identity both internally and externally

Disadvantages

• Unlike limited companies, LLP members do not have such a familiar and clear separation in relation to management and ownership roles (as opposed to directors and shareholders)
• The LLP must make public disclosure of information at Companies House
• Guarantees and security may be required from LLP members

Contractual Joint Venture

• No separate legal personality
• No need to make public filings
• Unlimited liability
• Tax transparent

Advantages

• The JV is created by setting out rights and responsibilities in a contract. This is an extremely flexible option and easy to set up and terminate. This is often a good choice for a shorter term ‘project-based’ joint venture
• The joint venture parties retain their separate legal identities
• The parties to the JV retain ownership of their assets
• Depending on the terms of the JV contract, each party will usually only be liable for its debts and share liability on third party arrangements
• The JV parties are taxed separately on their share of the profits/losses

Disadvantages

• Lacks separate legal personality and has a structure which can negatively affect internal operations and dealings with third parties
• If not properly documented and operated, there is a risk that a partnership will be created which will result in unlimited joint and several liability
• There can be issues with obtaining loan finance and it is complex process for the JV to be sold

The next steps

The right structure will depend on a number of matters such as the objectives of the JV, it’s proposed duration, whether there is any intention to sell the business operated by it, the contributions made by the partners and the tax considerations.

We can advise on the choice of structure and, once chosen, our team of experts can document the JV by drafting a JV shareholders agreement / articles, partnership deed, LLP Agreement or Joint Venture Contract, as appropriate.

Along with the structural documents, there are other matters to bear in mind. For instance, the joint venture may use the resources of the joint venture members exclusively, or effectively become a completely new business, with its own employees, premises and contracts. Alternatively it may be a combination of both.

In that event, you will also want to consider matters such as:

• Terms and conditions of the JV business
• Employment contracts for the staff working within the JV business
• Premises (including the granting of leases and licences by a JV partner)
• Commercial contracts
• The on-going administrative duties of limited companies and LLPs