One of the most efficient and cost-effective methods of pursuing new business concepts and strategies is where a group of entities carry on a business together with a view to profit.
This article explores how you can set up a business structure that will best facilitate your joint business ventures success.
STEP 1: KEY CONSIDERATIONS
Before commencing any business venture with another party, it is essential that you consider the following questions. By considering these questions, with the assistance of legal and financial advisers, you can set your business and commercial relationship up for success.
- What type of business venture do you intend on undertaking?
- What is the objective of the business venture?
- What is the structure of the commercial relationship?
- How long will the commercial relationship be?
- How will the business venture be funded?
- How will profits and assets accrued from the business venture be shared between parties?
- How flexible does the commercial relationship need to be?
- How will confidentiality be maintained?
- How will disputes be resolved?
- How will the business venture end, and how can parties leave the business relationship?
- Who has ownership over the intellectual property created in the business venture?
- Who has liability over actions made in the business venture, and how will liability be assigned to each party?
- What legal liabilities, tax implications, and costs will you incur?
- What are the future needs of your individual businesses and joint business venture?
STEP 2: BUSINESS STRUCTURE
Once you have answered the STEP 1 questions, you can consider the most appropriate business structure to achieve your objectives. There are two key business structure options for joint business activities, a partnership and a joint venture. Each structure is designed to facilitate different goals.
What does each of these structures look like?
A partnership is where two or more individuals or companies carry on an ongoing business as a partnership. It is usually limited to 20 partners and is not a separate legal entity.
In a partnership, the parties have joint interests in the project and are jointly and severally liable for the project’s expenses.
There are two types of partnership, general and limited.
- In a general partnership, all partners are equally responsible for the operations and management of the association. This means that each partner could be responsible and liable for all of the partnership’s activities if the other partners fail to pay; and
- A limited partnership is one where one or more partners has limited liability for the debts and obligations of the business (provided the limited partner does not participate in the management of the business). In contrast, the rest of the partners have unlimited liability.
A joint venture is where two or more individuals or companies may carry on a business as a joint venture. A joint venture is not limited by size.
This is typically used for temporary agreements and allows all parties to mutually benefit from a specific agreement.
Generally, the parties have defined interests and are usually liable for their own debts, which they incur individually.
There are two types of joint ventures, incorporated and unincorporated.
- In an incorporated joint venture, the parties use a corporate entity to undertake the business venture. The terms are generally set out in a Shareholders’ Agreement; parties must comply with the rules set out in the Corporations Act 2001 (Cth), and directors of the incorporated joint venture company owe directors duties. A joint venture company is unable to offset profits and losses against income and losses outside of the incorporated joint venture; and
- In an unincorporated joint venture, the parties agree to a contract that sets out each party’s rights and obligations. Each party owns a percentage interest in the joint venture’s assets, and their liability is several between parties but joint to third parties. There is only a contractual relationship between parties, and each party is treated independently for tax purposes.
STEP 3: DRAFTING AN AGREEMENT
Once you have determined which business structure best suits your business’s needs, an agreement that is appropriate to your selected business structure and takes into consideration the answers to the STEP 1 questions should be drafted.
Once the agreement is drafted, we recommend seeking independent legal and financial advice to ensure that your interests are protected and promoted.
By having a practical agreement, you can provide your business venture with the best foundation for success.