Navigating joint ventures and partnerships

Ensuring two is company – not chaos

Teaming up could be the best business decision you ever make – or a costly failure. Set yourself up for success with our joint venture tips to help mitigate the risks.

Possibilities and pitfalls

Running a business is not for the faint-hearted and going it alone can be just that… lonely. Joint ventures and business partnerships offer an exciting opportunity for collaboration, innovation and growth. But they also present unique challenges and potential pitfalls.

Ensuring your protection from the outset is a must with clear agreements, thorough risk management and a good understanding of regulatory compliance. Selecting the right partner or collaborator is key. So too is seeking specialist accounting support and legal expertise to guide you along the way.

So, how do you maximise the opportunities of a joint venture or partnership and navigate the risks? Let’s cover the ins and outs to put you on a path to success.

The 101 of joint ventures and partnerships

First up, what’s the difference between a joint venture and a partnership? Typically, a joint venture is formed for a single goal or project over a defined period, whereas a partnership is formed with the intention of continual business.

A joint venture is formed between two parties while a partnership can consist of up to 20 partners. Unlike a company though, a partnership is not a separate legal entity. This means the partners are jointly responsible for the activities of the partnership – for better or worse. In a joint venture, your debts are your own – but in a partnership, you are liable for the partnership’s debts if other partners are unable to pay.

Deciding on a structure will depend on your objectives, with advantages and disadvantages to both.

Joint venture
  • Businesses of any size can benefit
  • Allows for business expansion and growth without borrowing money or seeking investment
  • Provides greater access to resources and staff
  • Collaboration aids innovation and product development
  • Only a temporary commitment
  • Each party is only responsible for their own debts incurred
  • Relies on finding a trustworthy, short-term partner
  • Marrying different management styles and cultures can be challenging
  • Success depends on working collaboratively
  • Shared, and therefore, lower start-up costs
  • Business affairs of partners remain private
  • Income can be split
  • Ability to easily change business structure if required
  • Collaboration aids innovation and product development
  • Less external regulation
  • Each partner is jointly responsible for other partners’ debts with unlimited liability (meaning their personal assets and finances may be used to service the debt)
  • Each partner is liable for other partners’ actions (including criminal activity)
  • Profits must be shared equally

The need for a well-defined and legally sound agreement for both structures is clear, but the elements covered will differ for each.

A joint venture agreement should cover:

  • details of the joint venture, including your objectives
  • each party’s obligations and warranties
  • financial contributions
  • division of profits and losses
  • audited accounts
  • dispute resolution process
  • agreed exit strategy.

A partnership agreement should cover:      

  • details of how the partnership will work
  • the partners’ obligations
  • ownership of the IP created in the partnership
  • division of assets
  • confidentiality expectations
  • dispute resolution process
  • agreed exit strategy.

Your agreement is your main means of protection should things go awry, so seek legal and financial advice when drafting your agreement before you enter the joint venture or partnership.

Choosing the right partner

The most important predictor of a successful joint venture or partnership? Choosing the right partner. Key factors to consider include:

  1. Aligned objectives and culture. Unified vision and values are key to avoiding conflict and ensuring the joint venture or partnership doesn’t end prematurely on bad terms.
  2. Complementary strengths. Perhaps you run a tight operational ship but you’re lacking in new ideas. A partner with a flair for innovation and creativity who struggles with organisation could be the perfect fit.
  3. Thorough due diligence. In a joint venture or partnership, there’s a lot at stake. Don’t just take your potential partner’s word for it, do your research thoroughly to ensure they’re financially secure, trustworthy and enjoyable to work with.

Questions to ask before you sign

When assessing the suitability of a potential partner and likely success of a collaboration, these questions are a good place to start:       

  • What is your background (including things like court records, credit histories and accounting records)?
  • What are your objectives for this venture or partnership?
  • What are your values?
  • How will we divide up tasks and responsibilities?
  • How will we divide profits and property, including IP?
  • How will we ensure open lines of communication?
  • What constitutes a breach of our agreement?
  • What will we do if things don’t work out?

Managing and mitigating risk

Even with the most thorough due diligence, risk is an unavoidable part of entering a joint venture or partnership. From liability for partners’ debts and actions, confidentiality breaches, partners becoming ill (or worse), premature dissolution leading to profit loss, through to stressful disputes and costly litigation, there’s a lot that can go wrong.

With so much at stake, a thoroughly prepared exit strategy is key to mitigating risk. A well-defined exit plan means parties know their rights and obligations, as well as being prepared for all possible scenarios, saving time, reducing costs, avoiding expensive legal battles, and – ideally – leaving all partners on good terms. 

Regulatory and compliance considerations

When it comes to mitigating risk, it also pays to be aware of your regulatory and compliance obligations.
Joint ventures are regulated by the executed joint venture agreement, the common law, and the Corporations Act 2001 (Cth) if any of the parties are a corporation. Partnerships are governed by State and Territory-based legislation. Find the Partnership Act applicable to your state here.
From a compliance perspective, the most important consideration is taxation. All parties involved in a joint venture can make and claim their own tax deductions. In a partnership however, partners must pay tax on their share of the partnership profit, at their individual tax rate. While the partnership as a whole is exempt from income tax, it is still required to file a Partnership Return each year that shows the partnership’s income, deductions and credits for the financial year.

Prevention is better than cure

When entering a joint venture or partnership, it pays to be proactive and ensure all bases are covered. Seek legal and financial advice from a business partnership accountant to ensure you maximise the opportunities and mitigate the risks for peace of mind. An upfront investment in your protection could prove to save you significant heartache, stress and expense in the long run.

Get joint venture and partnership savvy with expert accounting advice. 

Ask for a callback from Accelerate WA Accounting Group.