Joint ventures are usually the result of commercial agreements between two businesses, whereby those businesses collaborate to work towards a common goal. Each party will bring something to the table, such as expertise, equity or some other valuable input.
The commercial agreement will specify what each party will contribute, and what each party will receive in return from the arrangement. To ensure smooth operation of the joint venture, it is perhaps most important to properly consider what trading structure, or ‘joint venture vehicle’ is to be adopted.
Joint Venture Vehicles
The two main types of vehicle used in the United Kingdom are companies and partnerships, each with their own implications. From tax treatment to liability and transparency, the advantages and disadvantages of each structure should be considered when setting up a joint venture.
Joint Venture Companies
Governed by the Companies Act 2006, companies are entities that are distinct from their owners, having a separate corporate personality. This means the company is able to perform tasks such as taking out loans, purchasing and owning assets, and entering into contracts in its own name.
Companies can either have limited or unlimited liability. This does not mean that the liability of the company is limited; it means the shareholders liability for the company’s debts is limited. Any creditors to whom the company owes money cannot pursue claims against the shareholders, as their liability is restricted to the amount they invested into the company. Limited liability provides a safety net for investors, and makes limited companies a popular choice for commercial vehicles, as any risk is essentially ‘ring-fenced’.
Companies can then be divided into two further sub-categories; private and public. Private companies are much more common because ownership is controlled by a select few, usually owned and controlled by the same members. Public companies can apply to be listed on a stock exchange, where they can raise equity finance through the sale of ownership. Public companies usually have a large number of owners, who appoint directors to run the company on their behalf. To protect the public, public companies have very burdensome reporting and transparency rules.
Joint Venture Partnerships
There are three different models of partnership; the traditional model, the limited partnership, and the limited liability partnership.
In order to establish a traditional partnership, there are no formal requirements. This area is governed by the Partnership Act 1890, which describes a partnership in s.1 (1) as ‘a relationship between persons carrying on a business in common with a view to making a profit’. This potentially causes problems as partnerships can be created without either party’s knowledge. As the partnership is not a separate legal entity, the party’s liability is unlimited, meaning creditors could pursue partnership debts against individual members.
Limited Partnerships are different in that they offer partners limited liability, but only if they are not involved in the day-to-day management of the business. Limited Liability Partnerships provide a flexible option; a partnership which is a legal body corporate and is treated as a separate legal entity from its owners. As the LLP is not taxed but the members are, it provides a flexible business vehicle for joint ventures, as it still provides the limited liability that a private limited company would offer.
Conclusion
Joint venture agreements should not be entered into lightly. Due consideration should be given to potential partners, the choice of vehicle and the project itself. Rollingsons has experienced lawyers who can assist you with specialist legal advice. For more information please contact James Crichton via e-mail jcrichton@rollingsons.co.uk or by telephone on 0207 611 4848.
