The Structure of Joint Ventures: Understand your Partnership
Getting to grips with joint ventures – such as doing your due diligence or research into its value for you as a business person – will only ever bring about benefits. As such, you should be fully informed and aware of the different structures of joint ventures available. By not understanding these particular partnerships’ aspects, you won’t know which one is most suitable for your specific situation.
But why should you enter into a joint venture in the first place?
In the property market, experience goes a long way. Therefore, a joint venture agreement is your opportunity to gain the necessary experience while sharing the responsibilities and, ultimately, the profits. And, who knows, you could potentially strike up a partnership that will expand to multiple projects.
Perhaps you don’t have the complete funds to strike that deal for your chosen property development on your own. Or maybe you want to lower your overall risks. In joint venture agreements, you and your partner can spread these out between you. Whatever the deal, joint ventures can provide many benefits, and these usually outweigh all the negatives!
Joint Venture Structures
There are at least four forms of joint venture agreements. Each one comes with pros and cons; but, all are viable options you should consider. Be sure to carefully assess them separately and come to a decision which you think is most appropriate.
- General/Limited Partnership
General partnerships are your bog-standard form of a joint venture. They are either informal, verbal agreements or more formal contractual agreements between two parties. Liability is unlimited, meaning you and your partner are both responsible for everything in the venture.
A limited partnership, on the other hand, includes both general and limited partners. General partners have unlimited liability, while limited partners are somewhat restricted to what they invest. The former is more ‘hands-on’ while the latter is involved with management and is interested in a lucrative investment return. This would all be agreed upon previously in the contractual stages.
These types of partnerships can be flexible, transparent in some areas and private in other sensitive areas. The partnership is also not taxed on its profits either, but both individual parties are taxed directly instead. Thus, limited/general partnerships can fit all sorts of scenarios.
On the downside, limited partnerships may seem unfair to many as one party has less to do and limited liability, which could lead to disputes. Also, any partner changing their identity during this process can lead to a new partnership arrangement which is expensive and laborious.
- Limited Liability Partnership
Not to be confused with limited partnerships, limited liability partnerships mean some or all partners have limited liability. In the UK, they have a collective responsibility and no individual responsibility for each other’s actions. Members also cannot lose more than they invest.
Like limited partnerships, one advantage is fiscal transparency, where you and your partner are taxed directly and not as a whole entity. Another is the legislative framework which allows greater flexibility. Limited liability partnerships can be used as a vehicle for commercial ventures. On top of this is the limited liability of members, which has already been discussed.
One disadvantage, however, is the lack of defined roles. These partnerships also only require a small amount of public filing. Another disadvantage is that guarantees and security may undermine limited liability partnerships.
- Company Limited by Shares
A company limited by shares is structured to exist as a separate legal entity from the individual owners. Personal finances are therefore protected as the owners have limited financial liability. So, if they encounter a financial problem, they will be completely secure.
Benefits include a clear structure, a comprehensive legislative framework, and the ability to sue and be sued. You can even sell shares to raise capital or grow the business if need be.
If you choose to go with this option, you need to watch out in case you are taxed twice. Double taxation can occur as the tax applied to your joint venture company could be charged to both parties when taking profits out. On the other hand, you may also find the framework too restrictive, so give this some thought.
- Contractual Venture
As it says on the tin, these joint ventures involve both parties signing a contract. This written agreement marks your acceptance of everything outlined in the terms and conditions. A contractual venture essentially makes official your shared goals and objectives, as well as any individual roles that each party must fulfil. Many partners find these agreements help incentivise each to pull their own weight.
These contracts can be flexible and can include as much or as little detail as you wish. Ultimately, these agreements aimed to ensure the venture is as successful as possible. However, in some cases, these joint ventures can cause disagreements before the project truly gets going. This is where your due diligence comes into play. You need to partner with someone you can work with and keep to their promises in the contract.
It is also worth noting, each party will be taxed directly within contractual ventures and will retain ownership of their own assets.
Where to go next.
For more information on our joint venture agreements, then please get in touch. Send your queries to firstname.lastname@example.org, and we will reply as soon as possible.
If you would like to joint venture with me, please fill in an application form here. Then, we can discuss the terms of our joint venture agreement and which partnerships best suits you (and me!) in our initial meetings.
We hope to hear from you soon and welcome any potential interest!