The Debate Over General Partnerships vs. Joint Ventures
Clients often come to my office very excited about a new business that they are hoping to start or purchase from an existing owner. Many times they need financial help, the expertise and knowledge of someone else with experience in the industry, or a combination of both. As a Corporate Attorney, I’ve drafted numerous contracts and agreements throughout the years in an effort to protect my clients while they achieve their company goals. I can appreciate the different types of contracts and the terms contained therein in a way that some of my clients cannot. Sometimes I have to tell them to take step back and really consider all of their options so that they are happy with the arrangement for the duration of the agreement.
For example, a client recently came to me asking to draft corporate documents for them, but also told me that they were looking for an investor to partner up with them for the acquisition of a restaurant. After discussing the pros and cons of having a partner vs. obtaining alternative financing (i.e. bank loan) we discussed the type of relationship they would like to enter into. I asked them if they would like to enter into a General Partnership or a Joint Venture with the prospective partner. This was not something that they considered and they didn’t have a clue about what I was referring to. I thought that it would be useful to highlight the major differences between the two in this post. I will use the word “usually” throughout this post because all facts and circumstances of a General Partnership or Joint Venture are different, but the examples I provide are typical scenarios in my experience.
General Partnerships usually involve two or more individuals, but there can be a mix of individuals and companies in a partnership. Joint Ventures usually involve two or more companies. Joint Ventures are usually defined as “an association of two or more persons (or entities) formed to carry out a single business enterprise for profit in which they combine their property, money, efforts, skill, and knowledge.” This definition is somewhat different from that of General Partnership because it refers to only a “single business enterprise.” In a General Partnership the relationship is perpetual until the business is dissolved by the parties or by the courts. However, a Joint Venture has a clearly stated time duration and scope. Joint venture relationships are generally considered to be a partnership for a single transaction (i.e. only for this location and not other locations).
Business owners usually enter into General Partnership agreements if they need a cash infusion. Business owners enter into a joint venture agreement if they have a specific purpose, product, good, or service that they want to develop, which may require the expertise or capital contribution of the other party. In a General Partnership all partners contribute capital, time, and expertise to the partnership unless otherwise agreed. Joint Venturers may contribute different services to the joint venture, for example, one party may supply the staffing, hardware, and supplies, and the other party may contribute capital, software, and operational support.
Ownership and Control for both relationships can be in proportion to what is agreed upon by the parties. Therefore, there doesn’t have to be a 50/50 split. In a Joint Venture the parties don’t pay taxes as one entity. Each company pays taxes on profits on their individual tax return.
The members of a General Partnership can claim a capital cost allowance as per the relationship rules. Joint Venturers can use as much or as little of the capital cost allowance. The existence of both types of relationships gives rise to a fiduciary or confidential relationship. In General Partnerships members cannot act according to their individual desires they have to act in the best interest of the partnership. Joint Venturers can retain the identity of their own company. General Partnerships share staff, corporate form and name, space, etc. Joint Venturers have their own separate entities, staff, etc. but come together for a common short-term goal.
In a General Partnership, Partners can act as “agents” to the partnership and can sign contracts, enter into agreements, etc. Joint Venturers generally can’t bind the other company to an agreement without consent of the other company, but it is still possible to do so depending on the terms of the agreement. It’s important to note that Partners are liable for the business debts of their partners, while Joint Venturers are not responsible for the other party’s business debts that are not related to their relationship.
General Partners who engage in criminal activity are solely held criminally responsible, rather than the partnership itself. Joint venturers an be held jointly and severally liable for each other’s wrongful acts.
It is important as counsel to inform your client of the various options available to them and to highlight the differences in those options so that they can make an informed decision on how to proceed. At Jones Health Law we strive to provide our clients with as information and advice possible to ensure that our clients make the decision that’s right for their business. If you would like more information regarding General Partnership vs. Joint Venture relationships, or contracting in general please contact us.