JAN11

Legal differences between partnerships and joint venture agreements

In an ever changing world where every class of person including the “9-5ers” dabble in business in order to have multiple streams of income, coupled with the constant change in valuation of currencies in the capital market, it is pertinent to decipher the mediums in which financial stability can be gotten. Whether or not these individuals decide to establish a business organization for profit or the promulgation of a certain goal, these business organizations differ from the types of business organisations to be formed, the legal frameworks regulating it, the differences, and their advantages and disadvantages. It however goes without saying that capital is the first utmost priority when considering a business to establish. And with the perpetual devaluation of the Naira in recent years and the 22% rate of inflation in the country, it is most advisable to go into business in partnerships or joint ventures. In view of this, this article would be discussing the legal differences between partnerships and joint ventures, and their agreements, as before entering into a joint venture or partnership arrangement, it is essential you understand the difference between a joint venture and partnership.

A joint venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. Each of the participants in a Joint Venture is responsible for profits, losses, and costs associated with it. However, the venture is its own entity, separate from the participants’ other business interests. Although a Joint Venture is a partnership in the colloquial sense of the word, it can be formed using any legal structure: Corporations, partnerships, limited liability companies (LLCs), and other business entities can all be employed. Despite the fact that the purpose of a Joint Venture is typically for production or research, one can also be formed for a continuing purpose. Joint Ventures can combine large and small companies to take on one or several projects and deals. A Joint Venture is not a partnership. That term is reserved for a single business entity that is formed by two or more people. JVs join two or more different entities into a new one, which may or may not be a partnership.

A partnership is often described as a voluntary association of two or more people who jointly own and carry on a business for profit. For example, partners in a law firm who work together to provide legal services for profit. Partnerships in Nigeria are regulated by the Companies and Allied Matters Act 2020 more particularly in Section 19 of the Companies and Allied Matters Act 2020, and by extension, the Corporate Affairs Commission. The different types of partnerships are contained in PART C- Limited Liability Partnerships with a special mention of Foreign Limited Liability Partnership as supported by Section 20(4) of the Companies and Allied Matters Act 2020 for aliens, and PART D- Limited Partnerships.

These definitions overlap in certain ways. Both a joint venture and a partnership consist of co-owners of a business enterprise sharing the profits and losses. However, typically a joint venture is set up for one transaction or a series of transactions. Therefore, joint ventures are generally distinguished from partnerships by being more limited in both scope and duration. A partnership, on the other hand, ordinarily engages in an ongoing business for an indefinite period of time. Further, in a joint venture, it may not be just profit that binds the parties together. Joint ventures can be formed for specific purposes such as when parties engage in research and development, which would otherwise be cost prohibitive to do individually. Nevertheless, these distinctions are not ironclad and a court may determine a partnership was formed even for a single business transaction.

Furthermore, the differences between these business organizations are to be discussed, ranging from tax implications, fiduciary duties, liability of parties and regulations. An issue to consider in deciding between a joint venture and partnership is liability. Generally, partners in a partnership are jointly and severally liable for the partnership's obligations. This means that every partner is liable for his or her own actions, the actions of the other partners, and the actions of employees of the business. In general, the members of a joint venture that is set up as a separate corporation or limited liability company (LLC) will only be liable to the extent of their investment in the corporation's stock or their interest in the LLC. If the joint venture is established by contract (as opposed to a separate legal entity), then the parties are personally exposed to liabilities incurred pursuant to the venture, similar to a partnership. Parties in a joint venture can include a clause in their agreement as to whether parties will share liabilities or whether each party will be held separately responsible. As opposed to a partnership, the actions of parties involved in a joint venture do not bind other parties without the other parties’ consent to being bound. In a partnership, each partner: is personally liable for the business’ debts; is jointly and severally liable for the debts of each business partner(s); can bind other partners by their actions; owes fiduciary duties to all other partners.

The regulations that apply to a joint venture are the actual joint venture agreement, the common and contract law, and the Companies and Allied Matters Act 2020. If the parties to the venture are corporations, then the legislations regulating the industry will also regulate the joint venture, such as BOFIA for banks. While partnerships are governed by State and Territory-based Partnership Acts, such as the Companies and Allied Matters Act 2020. It should however be stated that the importance of drafting and duly executing a partnership agreement cannot be over-emphasized, as this aids the partners in the partnership agreement to override and evade the implied presumptions of the law as to partnership agreements as contained in the 15 th schedule of the Companies and Allied Matters Act 2020.
It should also be noted that a partnership can be established orally, and through the act of parties as construed by the court in the decided case of Uredi v Dada. Whereas joint ventures always arise by the due execution of a joint venture agreement. Therefore, by extension, a partner in a general partnership owes a fiduciary duty to the partnership and the other partners. This includes duties of loyalty, care, and good faith to the other partners and the partnership. The fiduciary duties of parties in a joint venture agreements are similar to those owed by a partner in a partnership, although joint ventures are not treated in all respects as identical with a partnership. For instance, the fiduciary duties of a member of a joint venture are often deemed finite and tailored to the business, joint venture agreement and activities of the venture, while partnership fiduciary duties are more broadly construed.

One of the main reasons business owners should be concerned about the election between a partnership and a joint venture is taxes. Partnerships are considered "pass through" tax entities, meaning all of the profits and losses of the partnership pass through the business to the partners. The partners then each pay taxes on their share of the profits (or deduct their share of the losses) on their individual income tax returns. Depending on the circumstances, joint ventures may be taxed as a corporation or partnership. Entities that are taxed as corporations are subject to tax at both the corporate and shareholder levels, commonly referred to as double taxation. There are positives and negatives to each form of taxation. One benefit of partnerships is that they offer greater flexibility with regard to the allocation of gains and losses. For example, you might be able to structure your partnership so that one partner receives 50% of the gains generated by the business and 99% of the losses, something that might benefit the individuals in your group. However, you or others in your group might not want to report income on your personal returns and therefore corporate tax treatment might be better.

In conclusion, as in all choices of business organizations, parties to these businesses are advised to consider all factors present before deciding whether or not to establish a partnership or joint venture. As they could be similar but very different business organizations.