What’s The Difference Between A Joint Venture & A Partnership?

If you’re considering the most appropriate structure for your business in New Zealand, you have several options to explore. A common choice is a partnership, as it’s relatively inexpensive to establish and not overly complex to manage. But how does this differ from a joint venture? 

In this article, we’ll delve into the key distinctions between a joint venture and a partnership. If you’re deciding between the two, it’s crucial to understand the advantages and disadvantages of each, as well as the types of agreements you might need. 

What Are The Differences?

A partnership in New Zealand is an arrangement between two or more parties (up to 10 in the case of banking partnerships) to conduct business together. This type of structure is typically more enduring as it represents an ongoing business relationship, whereas a joint venture is often project-specific. Consequently, businesses might opt for a joint venture for short-term initiatives, though it can also be for longer projects. 

Another significant distinction is that in a joint venture, the parties are not jointly and severally liable. If one business incurs debt, the other business in the venture will not be held accountable for it. This is because they remain distinct entities, collaborating temporarily to achieve a specific objective. 

Conversely, a partnership involves joint liability. This means that the liabilities of one partner can extend to the others. If the business encounters difficulties, the partners will be personally liable under the principle of unlimited liability, which we will discuss later. 

Therefore, the primary differences between a joint venture and a partnership are:

• Liabilities of the parties
• Responsibilities of the parties (in terms of costs)
• The manner in which business is conducted (together or separately)
• Duration of the arrangement
• The overarching objective

What Is A Joint Venture?

A joint venture occurs when two or more individuals or companies collaborate towards a common goal while maintaining their separate legal identities outside of the venture. For instance, they might embark on a short-term project to expand their business. An example of a joint venture is the collaboration between Volvo Cars and Uber to develop a self-driving car for Uber’s fleet – this is a joint venture!

In essence, this arrangement involves two distinct parties pooling resources and working together to achieve a shared objective, yet their liabilities and responsibilities remain separate. This means that each party is still accountable for their own costs during the venture, and profits are divided later according to their agreement. 

Joint Venture Agreement

Given that a joint venture entails collaboration with another entity, it’s prudent to have a Joint Venture Agreement in place. This document should outline the key terms of the relationship and manage the risks associated with partnering with another entity. Your agreement should address the following:

• Role of each party
• Division of profit
• How costs will be covered
• Duration of the venture
• Intellectual Property (and confidentiality)
• Dispute resolution
• Liability
• Termination

It’s advisable to become acquainted with How A Joint Venture Agreement Works before consulting a lawyer. 

Pros Of A Joint Venture

A joint venture is a favoured option for numerous reasons. You might consider it because it: 

• Is suitable for businesses of any size 
• Offers opportunities for expansion without the need for external borrowing 
• Provides access to additional resources
• Establishes a legally binding commitment between two parties (two heads are often better than one!)

Cons Of A Joint Venture

However, a joint venture also has its drawbacks:

• Building trust with the other party can be challenging 
• The other party might not meet the required standards or contribute equally
• Potential for hidden agendas
• Conflict may emerge later on

What Is A Partnership?

A partnership is a business structure where at least two individuals run a business collaboratively. Unlike a joint venture, it typically does not involve two separate entities operating independently; it is a collective effort to drive a business forward. While a joint venture may conclude, a partnership represents a long-term commitment. 

In New Zealand, a partnership is generally characterised by unlimited liability, akin to sole traders. Thus, if one partner incurs debt, the other partners will also be liable. Joint ventures do not share this type of collective liability. Instead, each business maintains its own responsibilities and costs while cooperating. 

The fundamental distinction between the two is that a joint venture is centred on a singular objective, whereas a partnership is established with the vision of a prolonged business journey, with the business’s losses or liabilities personally affecting the partners. 

Pros Of A Partnership

When establishing a business or selecting a business structure, a partnership is often a popular choice for several reasons:

• It is cost-effective to establish
• It offers flexibility – you can Change Your Business Structure in the future
• Income can be divided among partners

Cons Of A Partnership

One of the primary disadvantages of a partnership concerns the rules around liability. If the business encounters difficulties, who bears responsibility?

Joint Liability

When one partner faces financial issues (such as owing money to a third party), the other partners will also be held accountable. This is known as joint liability. 

This aspect of a partnership can increase the risk of being liable for the debts of others and may strain personal relationships between partners if problems arise. If you choose a partnership, it’s essential that your Agreement includes provisions for dispute resolution in case liability issues occur later. 

Unlimited Liability

Partnerships in New Zealand also feature unlimited liability. You might be familiar with the concept of a separate legal entity (which applies to companies), meaning the business is distinct from its owners, so the owners are not personally liable for the business’s debts—this is limited liability. 

However, should a partnership face financial troubles, the partners would be personally liable. This is unlimited liability. 

Therefore, your Agreement should detail how losses will be allocated among the partners. 

Partnership Agreement

A Partnership Agreement must outline the essential details of the business relationship, especially regarding liability. For instance, you should consider:

• The roles and responsibilities of each partner
• How profits and losses will be shared or divided among partners
• Decision-making processes
• Dispute resolution mechanisms
• Procedures for when a partner wishes to exit

Since partnerships involve close collaboration and shared liabilities, it’s crucial to ensure that your Agreement addresses the main risks. Having a Partnership Agreement drafted by a lawyer is advisable to prevent any future misunderstandings or complications. 

Need Help?

Deciding on a business structure can be a challenging decision. Each structure has its own set of pros and cons, and every situation is unique. Consulting with a lawyer can help you determine what is best for your specific business needs, and assist you in weighing the ease of management against costs and risks. 

Whether you’re seeking the most suitable business structure or you need an Agreement drafted, Sprintlaw has a team of experienced lawyers who can assist. You can reach out to us at [email protected] or contact us on 0800 002 184 for an obligation-free chat. 

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