In this article, we will consider the different types of joint venture arrangements, the pros and cons of setting up a joint venture and other important issues that you need to consider if you are going to set up a joint venture.

What is a joint venture (JV)?

A joint venture is often a separate legal entity (JVCO) that is set up for the purposes of two or more parties working on a specific project.

A JVCO is normally set up where the parties want to invest their time, money, resources for the purpose of completing a specific project. JVCO’s do not need to be specifically for one task. They can be set up for a new business activity. 

The parties in the JVCO will be able to share in the profits and returns of the JV but they are also responsible for the costs, expenses and any losses of the JV.

Why set up a JV?

There are many reasons why businesses will set up a JV. The most common reasons are listed below: 

1. The main reason is to work on a new project, idea or product in conjunction with a third party (you may not want to offer the third party shares in your existing company);
2. To split out a new project or business from your existing company or group structure (this could be to minimise risk or attract investors);
3. To pool and share resources (your JV partners may have different or additional resources that will help the JV/business idea be more successful);
4. To obtain investment (it is attractive for investors to invest in a JVCO set up for a specific purpose);
5. To obtain expertise (your business may have the idea and resources but not the exact expertise required. Setting up a JV with a third party with the right expertise can be very beneficial);
6. To share costs and risk (if your business doesn’t have sufficient funds for the JV then an investor or partner can join the JV to help fund the costs and spread the risks);
7. To share knowledge (your own business may not have the knowledge required for the JV); and
8. To enter into new markets (you may be setting up a business or project in a different jurisdiction and as a result you need to set up a company overseas).

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Types of legal structures for a JV and legal documents required

The most common type of structure for a JV is a limited company JVCO, however, there are a range of structures as follows:

1. Limited company (this could be set up in the UK or another jurisdiction depending on the project). This type of JV helps ringfence liabilities and is more attractive to investors. A JV/Shareholders Agreement and Articles of Association will need to be prepared;
2. Partnership (this is an unincorporated JV where a partnership agreement will need to be signed). This involves more risk as there is no separate legal liability and partners are jointly and severally liable for the debts and liabilities of the partnership;
3. Limited Partnership (this is more commonly used for property investments and will require a limited partnership agreement); and
4. Research, collaboration and development JV (this could be incorporated or unincorporated and is normally set up for a specific project to test the market, to design a product, create a new product or intellectual property). You will need to sign a R&D agreement. 

What are the pros and cons of a JV?

Pros of a JV

There are many pros of setting up a JV including sharing costs, risks and resources, obtaining investment, sharing knowledge and obtaining expertise and entering into new markets. If you set up a JVCO you can also ringfence liabilities. 

Cons of a JV

The cons of setting up a JV are there will be costs and expenses involved in setting up a JVCO and the annual compliance requirements. You will need to spend time and money on working out the best structure and preparing the legal agreements that need to be signed. It is really important to get all this agreed at the start to avoid disputes later on. You will no longer be in control of the project or idea as you are working with one or more third parties. Decisions will need to be made by all JV stakeholders.  Businesses may have different ideas and styles which can sometimes conflict later on. 

Obtain advice from experts

It is important when you are setting up a JV to obtain advice from legal, tax and accounting specialists. This is to ensure that you set up the correct structure from a tax and legal perspective. You may also need to obtain advice from a financial advisor. If you are setting up a limited company or project JV, you will also need to liaise with a bank to set up bank accounts and register with HMRC. There will also be ongoing compliance costs depending on the structure that you choose. You may need to take legal and accounting advice from overseas advisors if you are setting up a JV outside of the UK.

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Wrapping up

It is important to carry out due diligence on your potential JV partners to ensure that you have the same ethos and cultures. Your vision and aims should be aligned to avoid future disputes. You need to have clear contractual agreements and commitments so that everyone understands their obligations, roles and what is expected of them in the JV.

It is important to take legal advice to get your contracts prepared correctly and you should also take tax and accounting advice to make sure that the structure is right for your business. 

If you’d like to speak to a legal expert about how a joint venture might impact your business, LawBite offer free 15 minute calls to explore your legal issue and how they can help.

About the author

Annelie Carver is a solicitor qualified in England with over 19 years’ experience in advising a wide range of businesses from start-ups to full list public listed companies. Annelie has in-house experience as legal counsel and, as a result, is able to provide a great understanding of the commercial operation of your business.