For decades, industry leaders have relied on mergers, acquisitions, and coalitions to boost efficiency, minimize liability, and secure their assets. History shows that an organized, well executed business relationship can be hugely beneficial for both parties. But what exactly do these types of collaborations look like? The framework and structure for a commercial relationship can come in many forms, among the most common are partnerships and joint ventures.
A joint venture is business relationship between two or more parties where each involved entity provides expertise, funding, assets, and other resources in pursuit of a specific task. The members of a joint venture (which can be individuals or other companies) each hold a stake in the undertaking; in other words, each has some portion of control over the venture, and will share in the profits or losses accordingly.
This description of a joint venture sounds strikingly similar the IRS’s formal definition of a partnership. According to their government website:
“A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business”
There exists significant overlap between joint ventures and partnerships. Based these definitions, the two types of relationships are seemingly identical. So what distinguishes one from the other?
Partnerships vs. Joint Ventures: The Key Differences
While both partnerships and joint ventures involve the alliance of entities to accomplish some sort of commercial undertaking, there are important differences for business owners to consider. For one, partnerships tend to be more formal and structured. After all, they are in-fact a type of nonincorporated legal entity, meaning they’re state-recognized and require a business-specific employer identification number.
Joint ventures, on the other hand, aren’t necessarily a separate legal entity. In fact, whether a joint venture exists or not is often a point of contention. Oddly, because joint ventures aren’t created by the operation of law, their existence can be ambiguous and often depends on the facts and circumstances of the given situation.
The central difference between partnerships and joint ventures comes down to the main objective of the commercial relationship. Joint ventures are more limited in duration and scope. In other words, entities tend to form joint ventures when trying to accomplish one specific task, project, or objective and once the task is accomplished, the members disassociate back to their individual spaces. For this reason, a joint venture is often considered to be a “partnership” for one single—often short-term—transaction. Importantly, there’s no exchange of ownership in a joint venture; each co-venturer retains full possession of their capital, assets, and properties. There’s no formal merging or acquisition, just a pooling of resources and expertise.
Joint ventures often represent a fiduciary relationship between multiple parties. The reasons why individuals or companies may want to join forces are manifold:
- To share liability (especially for major investments)
- To access new or emerging markets
- To scale operations
- To gain intangible assets, expertise, or skills from fellow co-venturers
In a joint venture, it’s understood that once the task or project is finished, the relationship will dissolve and the parties will return to their individual operations. On the other hand, a partnership is formed to establish and maintain an ongoing business operation. The partnership exists for an indefinite period of time; either until the business closes its doors, or until it is restructured into a different type of business entity, like a corporation or LLC.
Who is Liable in a Joint Venture?
In terms of liability, it’s important to recall that general partnerships (as distinguished from limited liability partnerships or limited partnerships) are a type of unincorporated business structure. Should an individual take legal action against a partnership, they are in fact taking action against the owners of the partnership. The business itself cannot be held liable, as it’s not its recognized as its own legal entity. So how might liability work in the case of a joint venture?
This completely depends on the constituents of the relationship: if two individuals come together to form a joint venture, then both individuals are legally liable for the actions of the venture. If instead two corporations join together, then both corporations are liable. The joint venture doesn’t shield its members from liability as an incorporated business does: simply put, the individual members of a joint venture are liable for their own actions, as well as the actions of their co-venturers. In this sense, the joint venture acts somewhat like a partnership; it’s a framework for a business relationship but is incapable of shielding its members from liability.
For joint ventures, liability—among other key terms—should be clearly defined within a written contractual agreement. This contract, sometimes called a joint venture agreement, should specify the roles, responsibilities, and intentions of each involved party. Having these key points defined in writing will ensure a safe and secure short term relationship among entities. Assistance from an experienced legal professional can help in these situations, especially for individuals unfamiliar with the language of business law.