EM Law | Commercial Lawyers in Central London
Join venture solicitors
Joint ventures have become increasingly popular over the past few years. A major reason for this has been the escalating size of transactions and projects, which often require commitments on a scale beyond the resources of individual companies.
What is a joint venture?
A joint venture is a business arrangement whereby a number of parties agree to work together in pursuit of a specific business or project. Often, these parties are companies and will have different interests and responsibilities in the joint venture. They may, for example, contribute assets, investment or skills and will all be entitled to a share in the revenue that is generated.
There are many reasons why a party may seek to create a joint venture. A party may wish to expand or develop new products or grow returns from existing ones. It may also want to tap into another party’s expertise or resources or may wish to share the costs and risks of developing something new.
How can I establish a joint venture vehicle?
The term joint venture describes a commercial agreement between two or more economically independent entities. There is no distinct legal form for a joint venture in the UK so the first choice to make when establishing a joint venture is the type of vehicle you are going to use. The law governing the relationships between the parties involved will depend upon the structure chosen.
There are essentially four legal structures for a joint venture. These are:
- A limited liability company.
- A limited liability partnership.
- A partnership.
- A purely contractual co-operation agreement.
A limited liability company
For most business joint ventures and for many projects, the limited liability company is likely to prove the most appropriate vehicle. A limited liability company is a separate legal entity and therefore independent of its members. This means the company can enter into contracts and hold assets in its own right, making it a lot easier to borrow money or hold property. The constitutional documents are used to define the company’s objectives, how it is internally regulated and the roles and responsibilities of the board of directors.
The most significant advantage of a limited liability company is the ability of participants to limit their liability in respect of liabilities and losses of the joint venture business. However, unless the joint venture vehicle is creditworthy in its own right, it is unlikely that the shareholders will be able to avoid having to support the joint venture by giving guarantees or other third-party assurances.
A limited liability partnership (LLP)
A limited liability partnership is a hybrid of a company and a partnership, combining the organisational flexibility and limited liability of a company with the tax status of a partnership. LLP’s are often used for ventures between individuals, such as professional partnerships. They are largely inappropriate for joint ventures between corporate groups. This is due to taxation considerations.
A partnership exists between persons carrying on a business in common with a view to making a profit. No written documentation is required to create a partnership and it is not a separate legal entity. The most significant characteristic of an unlimited partnership is that partners have unlimited liability to the whole extent of each other partner’s property. This liability is joint and several, which means that partners can be pursued together or individually for the whole of the partnership’s liability. As a result of this, the partnership structure is infrequently adopted as the basic legal structure for joint ventures by companies.
However, a partnership structure should be considered where it is desirable for the participants to have common direct interests in the underlying assets of the venture and any contracts with third parties. A partnership may also be advantageous for tax reasons.
A purely contractual co-operation agreement
A purely contractual co-operation agreement is the simplest form of association for a joint venture. Under a contractual co-operation agreement the participants agree to associate as independent contractors, rather than as shareholders in a company or partners in a legal partnership. A contractual agreement, also known as a consortium or collaboration agreement, will specify the scope of the venture, the obligations and commitments of individual parties, and the provision covering the financing of the venture.
This type of joint venture vehicle is suitable where the parties wish to avoid the relative formality and permanence of a corporate structure, while wanting to have direct interests in the relevant assets and revenues. A co-operation agreement is often used for property development, tenders and construction contracts and oil development projects.
Choosing the right structure for your joint venture vehicle is extremely important and you should weigh up the advantages and disadvantages of each. For any questions you may have concerning the establishment, our joint venture solicitors Barry Doherty or Neil Williamson can help you.