Joint Ventures and Partnerships
Sometimes, businesses will want to join forces and work together towards a common goal as both (or more) parties feel that it is in their best interests to pool their resources for either a specific project or for something more long-term and permanent into Joint Ventures and Partnerships. There are many reasons why businesses might be instigated to join up with other businesses, one common cause is the application of tenders as tenders might have set criteria that both businesses are unable to fulfil on their own.
There are two common ways in which businesses come together into Joint Ventures and Partnerships:
Both joint ventures and partnerships work best when parties can exist in a symbiotic relationship.
Joint ventures
Joint ventures tend to be more fleeting in nature; its structure is well-suited for projects. Joint ventures offer businesses a chance to tap into another business’ resources for the duration of the agreement without having to acquire that business. Businesses are able to benefit from the other party’s networks and expertise. This, in turn, may save a business from having to start from nothing, especially when exploring a new geographical market.
Businesses keep their own identities when they enter into a joint venture agreement, although they do have a choice of keeping the joint venture agreement unincorporated or to incorporate. As such, each party’s business structure need not be affected by the entering into a joint venture agreement.
Although some might think that a handshake is all that is needed, it is judicious to have a carefully drafted written joint venture agreement. The written agreement should set out the roles and responsibilities of each party as well as the aim of the joint venture. It should also clearly set out how the risks and rewards are going to be divided up between the parties. This lowers the risk of unmanaged expectations and miscommunication relating to the nature of the joint venture.
Although there are many advantages to having a joint venture, parties should still approach with appropriate levels of diligence as entering into a joint venture is not without risks. Unfortunately, sometimes parties will fail to be reliable, or they may choose to exit the joint venture prematurely. Parties should carefully weigh the benefits against potential liability before committing to a joint venture.
Partnerships
Partnerships tend to be more permanent in nature, and partnership agreements tend to govern a continuing relationship between two parties. Normally, partnerships go beyond just the single project and partners usually have a more long-term view of working together. Partners are often jointly and severally liable. This means that each party takes on the responsibility of every partner’s mistake. Often, it does not matter what percentage of stakes each partner has (unlike a corporation).
Further, each party is held personally liable, unlike in a corporation, where shareholders are shielded from personal liability (as a general rule) by the corporate veil. Partnerships are governed by each state’s own Partnership Act. Nonetheless, it is still good practice to have a well thought out written partnership agreement in place.
Another step to note is that a partnership needs to obtain a separate Tax File Number (TFN). However, this does not indicate that a partnership is a separate entity. Each partner will be paying tax on the share of income they receive from the partnership. Further, if the annual income turnover is equal to or higher than $75,000, the partnership needs to be registered for GST.
Some of the benefits of a partnership include income splitting, which may help reduce the total tax liabilities. Additionally, the start-up costs are usually lower than setting up a company.
Black cladding
One of the ways partnerships and joint ventures have been misused is through that of “black-cladding”. In the words of Mr Warren Mundine, Aboriginal leader and former National President of the Australian Labor Party, organisations may take part in “‘black-cladding’ where businesses have Indigenous shareholders and/or directors, who provide an Indigenous face, but no meaningful control or involvement in day-to-day operations of the business”.
To prevent perpetuating such behaviour, businesses looking to work with Indigenous businesses, whether as partners, through joint ventures, or any other business relationship should do a thorough check on any business claiming to be Indigenous. For example, Supply Nation has a policy of having its registered suppliers own at least 50% of the business, and for certified suppliers to own at least 51%, managed and controlled. Having policies like these help to minimise the risk of black-cladding. You can read more about Supply Nation Joint Ventures and Partnerships certification criteria.
What to look out for
Whether you are looking to work together with another party via a joint ventures or a partnerships, it pays to draft a clear and unambiguous (as much as possible) agreement. Although this might seem excessive especially when the parties are already business partners or are good personal friends, an agreement is not there to undermine the trust between the parties but to express explicitly what the obligations of each party are. Additionally, a written agreement leaves no doubt as to how risks and rewards are shared between the parties.
This could potentially mitigate future conflicts as parties can simply refer back to the agreement if they disagree about an issue that has been sufficiently covered by the written agreement.
Other things to look out for is to ensure that the person you are dealing with has the authority to enter into the joint venture or partnership agreement on behalf of their business. This could potentially save you a lot of trouble. Additionally, you might want to perform a due diligence check to ensure that the business you are entering into an agreement with is every bit as good as what you think it is.
Essentially, you need to do is to weigh up the pros and cons of entering into a joint ventures or a partnerships. Consider whether the arrangement would suit your business vision and needs.
AMK Law can advise on all commercial and property matters. If you have any queries related to Joint Ventures and Partnerships, feel free to contact us.
This information is of a general nature only and it is not, nor is intended to be, legal advice. If you wish to take any action based on the content of this publication, we recommend that you seek professional legal advice.