How do joint ventures work? Legal considerations

Collaborations are commonplace in the sports, music and entertainment industry, be it a famous athlete advertising a particular brand of sportswear or an artist inviting another to collaborate on their song. The business world is no different; such collaborations are called joint ventures.

What is a joint venture?

A joint venture is an arrangement between two or more companies that wish to work together to achieve a specific goal.

This goal could be that Company A has a particular product that it would like to sell in a new sector, industry or market but does not have the contacts to do so. Company B has these contacts and can assist Company A in breaking into that market. Company B will provide its connections and, in return, will be paid a commission or fee for every sale that Company A makes.

Joint ventures are also useful for companies that do not have the required personnel to break into a new sector or market. In the example above, Company B may be able to provide Company A with some of its employees to work on the project.

This collaboration is also useful if new technologies are to be developed and the companies can share the cost and risk.

How do joint ventures work?

There is no set form for a joint venture in England and Wales, so the parties to such a collaboration are free to choose the format that suits them best.

The options available to parties who wish to enter into a joint venture can be divided into two categories;

• Forming a separate legal entity
• The parties enter into a contractual agreement for the joint venture

Dealing with the formation of a separate legal entity, the parties can either set up a separate private limited company

Alternatively, the parties can either enter into a contractual agreement where they work together or enter into a general or limited partnership.

A joint venture agreement will govern both categories. This agreement will set out exactly how the risk and reward are shared between the parties to the joint venture.

The pros and cons of each joint venture structure

When the limited company and the limited liability partnership are formed

The advantage for both the limited company and the limited liability partnership is that these are both separate legal entities from the parties to the joint venture. This means they can own their assets, enter into their contracts and sue and be sued in their own right.

Limiting liability is also an advantage as the parties’ liability is limited to the share capital each party contributed.

The disadvantage is that there may be double taxation as the joint venture company will be taxed, and any profits taken out of the joint venture company may also be taxed again.

When there is a contractual partnership

No separate legal entity is created with a contractual relationship and the general or limited partnership. The advantage of this is that it is more flexible than setting up a separate entity and can be useful for a short-term collaboration which can be ended easily through the termination of the contract.

One disadvantage is that the lack of a separate legal entity will mean that there may be issues with there not being a clear management structure and the further disadvantage of unlimited liability for all the losses incurred where a partnership is created.

The legal considerations

Joint ventures in England are not governed by one particular law. The regulation is derived from the relationship between the parties involved in the joint venture.

The applicable rules will be a mixture of common law rules, the provisions of company and partnership law (depending on the format of the joint venture chosen), tax laws, competition law, intellectual property law as well as the terms of the joint venture agreement itself.

The joint venture agreement

The joint venture agreement should deal with which structure is to be adopted by the limited company, limited liability partnership or ordinary partnership. It should deal with the territory of the parties and whether it will involve a cross-border collaboration between the parties.

The agreement should also consider how the joint venture is financed, the contribution by the parties of assets to the joint venture, any restrictions on the parties and any competition.

The agreement will also need to cover; the rights and appointment of a board of directors, intellectual property, the rights and duties of the employees, termination of the agreement, shareholders’ rights and the provisions for the transfer of shares.

It is always advisable to get your joint venture agreement either drafted or reviewed by a legal expert so your interests are fully protected.

Andrew Farrugia is an expert contract lawyer at LawBite. He specialises in assisting startups and SMEs with their commercial and dispute resolution requirements. Find out how LawBite can help support you with your joint venture or download their free joint venture agreement template.