Joint Venture vs. Partnership: What’s the Difference?

It’s not unusual for savvy professionals to go into business together — who doesn’t want a trustworthy partner by their side? However, it’s important to make your business relationship official from the get-go. 

You have two options to choose from: a joint venture or partnership agreement. Becoming a JV partner or opting for a standard partnership may sound similar in name, but are actually quite different in legal terms. Understanding the difference between partnerships and joint ventures empowers you to make the best decision for yourself and your business.

Let’s go into the difference between a joint venture vs. partnership, as well as the pros and cons of each. 

Joint Venture vs. Partnership Agreement: What’s the Difference?

The first step to starting your business off on the right foot is deciding on a partnership versus joint venture. Before diving into the differences, let’s define each option and examine how they can impact your company’s progress.

What is a Joint Venture Agreement?

Signing a joint venture agreement means you can work with at least one other individual or business to accomplish a strategic goal. In this scenario, all parties will operate separate businesses. A JV partnership means you are all driving toward the same goal while retaining your own independent operations.

Some common examples of when joint partnering makes sense include:

• Building and developing real estate
• Book publishing agreements
• Travel agreements for overseas projects
• Research and development operations
• Mining and energy syndicates

These arrangements are ideal for when a single business alone lacks the expertise or funding required to maximize a project’s potential. Entering into a joint venture agreement combines resources to punch above your weight.

However, a critical aspect of a joint venture partnership is that the individual must pay any debts incurred by the parties involved. Debts and other similar financial obligations are not shared. Profits, however, will be divided at the end of the project, according to the initial agreement signed.

Most people assume that a joint partnership is an arrangement involving major multinational corporations. Any business can choose to form a joint partnership.

Pros

The advantages of joint venture partnerships include:

• Temporary – Joint ventures don’t force you into a marriage for life, unlike a merger. Your agreement will dictate when and how the contract can be ended.
• Greater Resources – Gain access to more staff and technical expertise. If you specialize in one area and your partner specializes in another, a joint venture agreement allows both sides to benefit.
• Develop New Products/Services – Develop new products and services together. It could be the key to expanding your business.
• No Outside Financing – Rather than taking on external financing, you can grow without borrowing money or courting investors.
• Expansion – To put it simply, these agreements allow you to expand your operations.

Cons

Despite the advantages outlined above, there are downsides to joint ventures that need to be evaluated when considering this type of arrangement. Some of the downsides include:

• Finding Trustworthy Partners – You need to trust your partners, and finding a worthy partner can be a challenge.
• Uncertainty – There’s no guarantee of success when signing one of these agreements. Success depends on the ability to collaborate effectively.
• Conflict – Working with somebody else always increases the chances of experiencing conflict. Likewise, there’s always the risk that one or more parties will lack commitment throughout the project.

What is a Partnership Agreement?

The key difference between joint ventures and partnerships is that a joint venture will end. It may have a defined ending date, or when the common goal has been achieved. Partnerships are ongoing relationships between two businesses.

Your partnership is not a separate legal entity in the same way as a company. Each partner is jointly responsible for the activities conducted by the partnership. For example, if a partner cannot cover a debt, other partners will be forced to step in.

While business arrangements should always be put in writing, a written agreement is critical in a partnership. It’s crucial for everyone involved that there’s an official document outlining key aspects of the partnerships, whether it be guidelines for governing the relationship, denoting responsibilities, or providing clear legal recourse for when conflicts arise.

Pros

Partnerships have several potential advantages over a joint venture. Remember, partnerships are a more tight-knit form of business relationship, but they’re not as binding as a merger.

Here are a few reasons why you may opt for a partnership over a joint venture:

• Simplicity – Partnerships are easy to establish, and the startup costs are low.
• Income Splitting – If everyone involved agrees (and puts it in writing), you have an opportunity to split income.
• Fewer Regulations – You have fewer rules to abide by when forming a partnership, which gives you more flexibility than a joint venture.
• Privacy – Despite being partners, there’s no obligation to share private information regarding business affairs.
• Change Structure – Due to its flexibility, you can easily alter the business structure later.

Cons

Most of the disadvantages of partnerships are related to trust issues. Problems can occur long after entering into agreements, whether it be from untrustworthy partners or disagreements down the line. In a worst-case scenario, a partnership gone wrong could threaten the future of your business.

• Liability – You have unlimited liability, meaning your personal assets could be at risk. You’re also jointly liable for the debts of your partners. Likewise, any actions your partners take could impact you because of the liability problem.
• Profit-Sharing – Profits may end up being shared between all partners, no matter how much they contributed.
• Untrustworthy Partners – Since you’re not protected from liability, an illegal or questionable act from one of your partners could get your business into trouble.

Joint Venture vs. Partnership: Which is Right for You?

There’s a time and a place for both a joint venture and a partnership, you simply need to find out which suits your company best. Factor in the current standing of your business, where you want to go, and what you want to get out of the agreement.

Let’s discuss a few points that could impact your joint venture / partnership agreement decision.

Trustworthiness

Forming a relationship with anybody requires a degree of trust. But with so much at stake, this is especially true for business partnerships. A professional partnership will always require a greater level of confidence in the skills and integrity of all parties.

Joint ventures are designed to keep both parties independent from one another. If someone messes up, you’re not liable for their mistakes. On the other hand, partnerships leave you responsible for everything from legal risk to debts. The unlimited liability factor means a partnership can also risk your personal assets and finances.

Unless you absolutely trust the business practices of another party, don’t enter into a partnership.

Project Scope

Consider the scope of your project and wider company goals. Joint ventures are designed to be temporary and include a stated purpose. Most agreements of this nature state that once a goal has been accomplished, the deal comes to an end. Partnerships are better if you’re looking to form an ongoing relationship with several goals. 

Agreement Complexities

Partnerships may be simple to set up in theory, but they require a lot of careful thought and attention. Who owns what assets? What if somebody wants to get out of the business? How will you address the issue of income splitting?

Ending a joint venture is relatively easy, whereas dissolving a partnership is more complex if disputes arise. Whenever you enter into a partnership or joint venture, you should always seek independent legal advice to go over the final agreement. 

Tax Purposes

Partnerships are always considered to be “pass-through” entities. In other words, any income gained or dividends distributed will be regarded as income for tax purposes. Partners will need to pay their fair share of taxes based on how profits have been divided. It also works the same way for losses. Joint ventures may be taxed in an entirely different way. You can elect to have them taxed as a partnership or corporation.

There are advantages and drawbacks to each in terms of how they’re taxed. Partnerships are more flexible because of how profits and losses can be divided. Together with an accountant, partners can divide profits and losses in a tax-efficient way for everybody.

Business Structure

A partnership is an established agreement forming a partnership. Joint ventures may be structured in several different ways. For example, some companies may elect to create a separate, independent legal entity for the duration of their joint venture. It creates a degree of separation that you cannot get with a partnership.

Partner with L3 Funding 

Deciding between a joint venture vs. partnership is essential when entering into any form of business agreement with another party. Make sure you seek independent legal and financial advice before determining whether this is the right move for you.

To improve the prospects of your joint venture or your new partnership, you may decide to seek external financing. L3 Funding specializes in supporting entrepreneurs with reliable merchant funding, having provided more than $2 billion in funding to small businesses since 2007.

If you want to find out more about securing the right business loans for your next project, apply with L3 Funding now.