Joint Ventures – What are the best options?

The
common factor is that each party needs the other in order to generate the
expected benefits which are shared – as well as the attendant costs and
risks.  A joint venture (JV) could be
a way forward for a small business which wants to develop but has insufficient
resources or capabilities to do so. It may also be appealing in the current
economic climate where funding is scarce, and businesses are looking to create
synergies, spread risk and consolidate costs.

 Factors that influence JV structure

 There
are several different kinds of JV structure. Some of the key considerations are:

• Formality:
  some JV structures can be created and managed with little formality – e.g. a
  partnership can be constituted without writing.
• Liability:
  parties can create a separate JV entity so that it – rather than the parties
  collaborating (the ‘joint venturers’) – will assume the liabilities of the JV
  business.
• Management
  structure: the way in which the parties want to manage the JV and make
  decisions will influence which structure is adopted. 
• Taxation:
  where the parties want the tax burden to fall, rate of tax, reliefs available,
  etc.
• Funding: if
  external funding is required, establishing a JV company may provide more options.
• Legal and
  regulatory requirements: some forms of JV will have a heavier burden than
  others.

Pros and cons of typical JV structures
Joint
ventures can be set up by creating a separate business vehicle (e.g. a
company).  Typically each of the
parties would inject capital, and share in the vehicle’s profits and
losses.  Alternatively, a JV can
arise through collaborative arrangements formed by contract. 

So
what are the main types of JV and the advantages or disadvantages they bring?

Company limited by shares

Pros

• A separate legal entity which  can own property and enter into
  contracts in its own name.
• Liability of the joint venturers (shareholders)
  is separate from the liability of the company.  The most that shareholders stand to lose is their
  investment.
• Separation of shareholders’ business
  activities from the JV’s activities.
• Can grant floating charges (which may give
  more financing options).

Cons

• Set-up costs.
• Various legal and regulatory requirements (e.g.
  annual accounts).
• Pays tax on profits; shareholders pay tax on
  dividends.
• Documentation may require more detail (e.g. to
  provide for deadlock if company is owned 50/50).
• Might not be suitable for one-off project or
  where sums involved are low.

Partnership

Pros

• Arises automatically if two or more people
  carry on business in common with a view to profit. 
• Less formal – no written agreement required
  (though advisable).
• No public filings required.
• Tax transparency, i.e. partners are taxed
  individually on profits.

Cons

• Partners have unlimited liability for
  partnership debts – not limited to the amount of their investment. 
• Creditor can go after one or all of the partners
  for the whole of the debt regardless of how much that partner invested.
• A partnership cannot grant floating charges.

Limited liability partnership (LLP)

Pros

• Hybrid between a company and a partnership.  LLP has:
• limited liability (like a company)
• ability to grant floating charges (like a
  company)
• tax transparency (like a partnership)
• flexible management structure (like a
  partnership)

Cons

• Similar public reporting requirements to companies.

There are other options. Contractual alliances, which do not
involve a separate legal entity, are more suitable for customer/supplier
“partnering” or for sharing R&D resources; each party retains
ownership of its assets including its intellectual property. However, it must
be made clear as to how the results will be owned and exploited. 

Brodies LLP has a broad range of experience in advising on
joint ventures. For further information, contact Shuna Stirling on 0141 245
6201 or at shuna.stirling@brodies.com.