Many folks in business bandy about the words “partnership” and “joint venture”, or even a “JVP” (short for joint venture partnership – a made up term like “Leafs playoff tickets” or “government transparency”), without understanding that partnerships and joint ventures are different legal animals. Though the two have much in common, there are a few important differences that, if not understood from the outset, could affect your work together in strange and not-at-all-wonderful ways. If it walks, talks and acts like a partnership it will likely be treated as one, even if the intention was to create a joint venture. Ergo, it’s important to be clear and precise when creating a co-owned business, in order to avoid unexpected complications with tax, ownership of property, or liability.
What’s the diff?
Partnerships and joint ventures are both agreements to do business together between two or more individuals or corporations, with the goal of making a profit. Both are formed and governed by contract between the parties.
Joint ventures usually are usually used for one-off projects. They’re limited in time and scope – you’re not working together on everything, and they’ll often have an expiry date, which allows parties to renew or eject. They’re particularly useful when you’ll all be putting in different skills and assets, in different quantities. Joint ventures don’t create a separate business entity, and generally are not registered with the government. You work together to the extent that’s agreed to in the contract, and that’s it.
Partnerships, which I talked about in this other article, create an ongoing business relationship through a partnership agreement. Partnerships must be registered as a business entity with the government, and are governed by the rules in the Ontario Partnership Act.
Key terms in the contract
Terms common to both joint ventures and partnerships include:
- Length of the agreement and conditions for renewal
- What the business will and will not do
- What money, assets or skills each party is contributing
- Share of profits and losses, salaries, and expenses
- Calculation of profits
- Duties and responsibilities of each venturer
- Management structure
- Indemnity between the venturers
- Dispute resolution
Terms of a joint venture agreement – or JVA – include:
- Limits on time or scope of work
- Termination, including how to divide up assets
- Ownership of co-created assets and intellectual property
- Assigning liability for actions of the other venturers
- Accounting between the venturers, record keeping,
- Bank accounts, and insurance
- Division of expenses and revenues
Ownership of property
Ownership of property contributed to a joint venture remains the property of each joint venturer. The party who owns the asset may use it for other purposes without the consent of the joint venture unless it’s otherwise agreed.
Assets contributed to a partnership are considered the property of the partnership and not of the individual partners.
Your accountant will care a great deal about this stuff, and the tax consequences of the business structure you choose could be substantial. Make sure to ask before you choose one or the other…
The distribution of profits in both is governed by the agreement. Joint venturers assess their taxes based on their own expenses and share of the revenues from the joint venture. Partners in a partnership are taxed based on the net profits of the partnership. The net profits are distributed to the partners according to their share of the partnership, and taxed at the partners’ normal income tax rate.
The choice between partnership or JV makes a big difference if one party is spending more than the others. In a partnership, a party with higher expenditures would not be able to claim that amount individually.
Capital Cost Allowance
Capital cost allowance is a tax deduction that allows a business to account for the depreciation of capital property. Joint venturers may each claim the capital cost allowance individually to maximize their own tax benefits for the depreciation of the assets they put in to the joint venture. In a partnership, the capital cost allowance claimed must be the same for each partner because only the net profit of the partnership is distributed.
Joint venturers report their share of income and losses based on each venturer’s tax year. A partnership will have its own fiscal year end.
Corporate partners in a partnership are required to claim income (but not losses) for the period between the end of the partnership’s tax year and the corporation’s tax year.
Joint venturers are liable for their own debts and obligations, and can limit their liability based on the joint venture agreement. That way a creditor can’t go after one joint venturer for the debts of the other. The venturers can agree to share responsibility for liabilities taken on in the course of the project, or can split them up however they see fit.
Partners in a partnership, on the other hand, are “jointly and severally liable” for the debts, obligations and misconduct of the partnership and the other partners. “Joint and several liability” is a legal term meaning a creditor can go after the other partners to settle one partner’s debt. The liability can be limited by creating a “Limited Partnership” where a “general partner” takes the excess of any liability that the other partners can’t cover. Each other partner is only on the hook for their own debts or misconduct up to a fixed amount. I’ll get into Limited Partnerships in a different article later.
Both joint ventures and partnerships can agree to assume only their own liability, but there is more risk involved in a partnership if the at-fault partner cannot cover the loss.
Where two or more parties want to join forces together for a one-off project rather than becoming co-owners of a business, a joint venture is typically the way to go. Whichever business structure is chosen, the choice should be clearly set out in the agreement between all parties involved. Though joint ventures and partnerships may have many characteristics in common, the legal differences between the two warrant taking the time to talk to a lawyer and figure out which structure is right for the business at hand.
I’m indebted to my awesome law student intern, Claudia Dzierbicki, for her work in putting together the guts of this article.