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Key considerations for the structure of a new joint venture
Joint ventures – choosing the right structure and whether to incorporate
As a business owner preparing for a joint venture, you and your potential partner will need to decide how best to structure the business arrangement so that it provides the best platform for your mutual objectives.
Several factors will influence your choice of legal structure for the deal, including the scope of the project, its likely duration, the level of risk, taxation and funding, as well as your respective negotiating positions. The decision whether or not to incorporate should be made very carefully.
The key choice will be whether or not to set up a new limited company as the vehicle for your joint venture. If you decide against a new company, the two main non-incorporated options are either a legal partnership or a more straightforward contractual arrangement.
The final option would perhaps be a limited liability partnership (LLP), which is akin to a hybrid between a partnership and a company, but this is rarer and most suited to scenarios where multiple individuals are actively involved as opposed to companies.
Here we discuss how to structure your new joint venture, including the pros and cons of whether or not to launch a new company.
The pros and cons of incorporation
The biggest advantage of setting up a new company is that the liability in the joint venture will be restricted to the capital and assets of that new company. This means that your respective businesses, as joint venture partners, will be broadly shielded from the majority of the liability arising from the joint venture. This is important, particularly if the joint venture is going to be trading in an industry with a higher risk profile or if there are any other aspects which increase the risk of trading liabilities, such as onerous supplier terms or external financing requirements.
On the other hand the limited company route is more burdensome from an administrative perspective, particularly if the joint venture is not going to be a long-term arrangement or is only to carry out a specific project. Also, a limited company will be open to greater public visibility and scrutiny, with all the company details and accounts being published by Companies House.
While a legal partnership offers fewer administrative burdens and less public visibility, it does not provide the shield against liability extending to the principal businesses that you would get with a company structure.
A simple contractual arrangement also does not provide this protection from liability, but it can be a very effective and efficient way of structuring a short-term or project-based venture. Also, a contractual arrangement is the fastest way to get a new joint venture off the ground, so this is likely to appeal if time is of the essence.
The other main disadvantage of an unincorporated joint venture is that it will not have its own legal vehicle with its own administrative and management structures, which can create issues when dealing with external stakeholders, such as funders or regulators.
Finally, while an LLP does have the benefit of limited liability, it is not suited to a joint venture between companies owing to the lack of transferable shareholding and because individuals must act as agents of the LLP.
Key factors to influence your choice of structure
Our solicitors will help you to choose the right structure for your joint venture and then bring that structure to life so that you can succeed with your project. The key factors to consider include:
- Project duration - You will need to think carefully about why you are setting up the joint venture, how long you expect the project to last and how you propose to bring it to a close. Longer term projects are more likely to justify incorporation.
- Industry sector - If your industry or sector norms recognise a certain trading structure as being preferable, then business pragmatism is likely to guide your selection.
- Risk and liability - The greater the inherent risk and liability profile in the venture, the more likely you are to benefit from a corporate veil on such liability by creating a company to house the joint venture. This is not always the case, and in certain cases other factors may override this consideration, but as a general rule high-risk endeavours are more suited to an incorporated structure.
- Bargaining power - If you and your prospective partner have equal bargaining power, the choice of vehicle for your venture may be a genuinely mutual decision. However, where this is not the case, the reality is that the partner with the most power is likely to exercise more control over the selection of structure.
- Tax - Each joint venture vehicle option has its own tax implications. There may be advantages to you in choosing a certain structure based upon taxation. You should take expert advice in this regard at the outset.
- Financing - If your venture requires external funding, whether by way of debt financing or investment, your funders may dictate a certain structure as a condition of the arrangement. From a funding and investment perspective, the limited company route is perhaps the most well-known and has the benefit of greater flexibility.
Our corporate law team can advise on how these factors play out in your specific case and which option makes most sense.
How we can help
If you are looking for legal assistance in connection with your joint venture, our lawyers will guide you at each step of the way from planning, negotiating, creating the structure and then drafting and agreeing the required documents.
If you elect to go down the company path, we can incorporate the new company for you, advise on all the share aspects and attend to all required filings at Companies House. Likewise, if you are looking towards a partnership or a contractual arrangement, we can draft all the documentation required.
For an informal discussion, please contact Ian Barnard, Director and Head of Company Commercial on 01653 600070.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.