Both arrangements are common in Australia, but which will best suit your business needs?
Are you contemplating a business venture with others? You may need to consider whether a partnership agreement or joint venture is an appropriate business arrangement. But which do you choose? In many ways, they’re similar. However, each has its distinct legal meanings and uses, so understanding how each works and when to use them will help you make an informed decision when structuring your commercial relationships.
What is a partnership agreement?
A partnership is a business structure between two or more people (partners). It’s an ongoing arrangement where the partners agree on how to:
- Run the business
- Share profits and losses
Partnership agreements are usually recorded in a document that sets out:
- The terms of the relationship
- The partners’ rights and obligations to each other
- The partners’ rights and obligations to third parties
A partnership isn’t a separate legal entity. In other words, it’s not like a company that is distinct from its owners or shareholders, can sue and be sued, and where liability for debts and other legal obligations is limited to the company. On the other hand, partners are personally liable for the debts and legal obligations of the business. They also have joint and several liability for the other partners’ debts.
One partner can enter into agreements on behalf of the whole partnership, meaning that one partner’s actions can bind all partners. And every partner must act in the best interests of
In Victoria, the Partnership Act regulates partnerships.
What are the advantages and disadvantages of partnerships?
Business operators often favour partnerships because they can be easy and inexpensive to establish, depending on the partnership terms. There’s often less paperwork than for joint ventures (depending on the terms of the partnership agreement). Usually, the individual partners pay income tax based on the partnership’s income.
However, there are also downsides.
For example, joint and several liability means that partners can bear personal responsibility for each other’s actions and the partnership’s debts. It means that partnership debts can be settled with partners’ personal assets.
The success of partnerships depends on a high degree of trust and cooperation between partners. Sometimes, it’s difficult to predict how partners may behave in a partnership, so it’s also difficult to determine whether a partnership is likely to be in the business’s best interests.
What is a joint venture agreement?
In a joint venture, two or more parties collaborate while remaining separate legal entities. Typically, the parties are companies or organisations whose collaboration is for a defined period or to achieve a specific goal.
They make an agreement that sets out how the joint venture will operate. It may have terms that cover:
- Contributing resources
- Sharing profits
- Dividing costs
- Managing losses
- Intellectual property ownership
- Dispute resolution processes
While partnerships are ongoing, joint ventures are temporary arrangements with a defined date or event that will bring them to an end. For example, two mining companies can decide to enter into a joint venture to explore potential new mining sites. They remain separate entities but collaborate on the exploration. They agree on how the joint venture will work, what resources they will contribute, and how they will use the research.
What are the advantages and disadvantages of joint ventures?
Joint ventures allow businesses to grow strategically without needing external finance. They provide access to resources outside their operations, for example:
- Intellectual property
Because joint ventures are temporary, the commitment is limited. In many ways, this helps reduce obstacles when deciding on this type of arrangement.
The biggest negotiation points are usually financial. So, if the joint venture incurs debt, each party is responsible for its share. Usually, the joint venture agreement will clarify this.
Australian laws allow joint ventures to operate efficiently without the complexities of a partnership’s shared liabilities. This distinction is crucial in industries like mining and petroleum, where the scale and risk of projects are significant. Joint ventures can adapt to the needs of each project, allowing greater flexibility in governance and decision-making. It means that resource allocation, risk management and project execution are often more efficient. These advantages are significant, especially for industries that operate projects worth millions – or even billions – of dollars.
However, on the flip side, joint ventures require careful planning for risk management. It’s crucial to choose trustworthy partners, monitor their involvement, and to be clear about:
- Conflicts of interest
Without these fundamentals, the joint venture may hit rocky times. So it’s not as quick and easy to enter into a joint venture compared with a partnership agreement. If time isn’t on your side, you need to consider whether a joint venture will work in your circumstances.
Other issues may arise when combining different workplaces. How things are done and how they are managed may cause conflict between the parties. You may need to consider ways to minimise these potential issues.
Expectations of outcomes and commitment to the project must also align.
You need to manage potential issues with:
- Careful negotiation
- Attention to detail
- Thorough documentation
- Clear communication
What are the main differences between partnership agreements and joint ventures?
While partnership agreements and joint venture agreements are often confused, there are important distinctions under Australian commercial law:
Joint Venture Agreement
Operate a business for profit
Collaborate on a specific goal or project
Ongoing, without a defined end date
Temporary arrangements with a defined end date or event
Partners are jointly and severally liable for each other's actions and the partnership's debts
Joint venturers are solely liable for their own obligations
Partners share equally in managing the business
Joint ventures have governance structures that are separate from the parties' businesses
Partners share the total profits of the business
Only the project profits are shared
Individual partners pay income tax, not the partnership itself
Taxation requirements vary based on the structure and agreement specifics.
Which should I choose?
Sometimes, it’s unclear whether a partnership or joint venture is the best choice. However, case law suggests that relevant considerations may include:
- Whether all parties intend to generate profit
- Whether there is profit-sharing
- Whether the parties will act in their own best interests and whether they will consider the consequences of their actions on the other parties
- Whether the parties contribute money, skills and other resources
- Whether there is joint control over the project
One of the most important considerations is to define the project’s purpose: are there specific goals? What do the parties intend? More than any other criteria, this may indicate whether a partnership or joint venture is the right choice.
Why do I need a documented agreement?
For partnership agreements and joint ventures, taking the time to document the terms is essential. It may be the difference between a successful collaboration and one that fails because putting it in writing helps to ensure clarity and avoid disputes.
Agreements should have these key elements:
- Scope and purpose
Define the project or business activity, including its objectives, duration, and geographic scope.
Set out what each party will contribute, for example, capital, resources, expertise and assets.
Establish the ownership structure, including the percentage of ownership for each party.
Manage voting rights and set out procedures for major decisions.
- Profit and loss
Clarify the distribution of profits and losses.
Set out the roles and responsibilities of each party in the joint venture’s operations.
- Dispute resolution
Include a clear process for resolving disagreements. It will help prevent disputes from escalating.
- Confidentiality clauses
Protect sensitive information.
- Non-competition clauses
Restrict parties from engaging in competing activities.
Outline the circumstances under which the agreement can be terminated or a party can exit.
- Intellectual property
Define how any intellectual property will be owned, used, and protected.
Ensure the arrangement complies with relevant laws and regulations.
The final word
Partnership agreement or joint venture? Working out which is best for your situation can be a complex exercise. We recommend seeking legal advice from one of our commercial lawyers before you commit. We can review the information and draft a clear agreement to protect your interests and clarify everyone’s rights, responsibilities and liabilities.