What is a Business Joint Venture in England and Wales?

Have you been approached by another business to start a joint venture? Joint ventures, commonly called JVs, are becoming more popular, particularly for commercial projects with large upfront capital requirements, because you can allocate the risk between two or more businesses. This article will set out an overview of what joint ventures are and why companies enter into them, how they are commonly structured, and the key legal considerations you should bear in mind when considering entering into a joint venture. 

Defining a Joint Venture 

There is no specific legal definition for a joint venture (‘JV’) in England and Wales. Practically, it refers to any arrangement between two or more separate business entities entered into for some commercial reason. 

They can last for a specified period, or indefinitely, depending on the interests of both parties. 

As you might guess from such a broad definition, JVs can take numerous forms — ranging from the simple to the relatively complex. 

The Purpose of a JV

Businesses enter into JVs for several reasons. For instance, JVs can help a business to:

• save resources: rather than spend a substantial sum of capital on a project or undertaking, your business can share this expense with another; 
• mitigate risk: depending on the terms of the agreement, your business can better allocate the risk of a venture according to the resources and needs of the other parties; 
• access other resources: the other party to the JV may have certain proprietary resources like technology or intellectual property that your business can use under the terms of the JV; and
• expand into new markets: JVs can be an efficient way for your business to move into another geographical region, produce or distribute new products, or move into different parts of the supply chain. 

In many cases, a JV may be an alternative to a merger or acquisition (M&A), where Business A buys Business B in exchange for paying the owners of Business B a valuable sum of money. 

The Structure of a JV

Like you can choose to structure a business in different ways, so too can you structure a joint venture. Four main legal structures are used for joint ventures operating in England and Wales. They are:

• purely contractual arrangements; 
• general partnerships (or limited partnership)s; 
• limited liability partnerships (LLPs); and 
• limited liability companies (also called joint venture companies). 

Contractual Arrangements

This is the most basic form of JV as it is solely a contractual agreement. There is no partnership relationship between the parties, and the JV does not exist as its own separate legal person. Instead, you can only enforce the terms of the agreement against the contractual agreement, like with any other contract.

Consequently, this structure is suitable for smaller projects or those with a short duration, such as:

• certain kinds of property development and construction; 
• natural resources exploration projects; or
• where parties may make unequal contributions to the project or contribute to the project at different times. 

General and Limited Partnerships 

A partnership will automatically arise when two or more persons carry on a business in common to share in the profits and losses. This is the case both where the persons are natural people, like you and me, or large corporate entities like multinational companies. 

Therefore, when entering into any agreement with another business, you must ensure that you take proper steps to either:

• avoid entering into a partnership, such as by merely agreeing to enter into a contractual agreement that excludes this possibility; or
• expressly define the terms of the partnership. 

A well-drafted partnership agreement will ensure that both parties know their obligations and rights concerning each other. Therefore, you should always seek legal advice when considering entering into a JV with another business on a partnership basis. 

One variation on a general partnership is the limited partnership, where one or more of the partners has limited liability for another partner’s debts. These are common for certain investment fund structures like private equity funds.  

LLPs

An LLP is a kind of partnership with its own legal personality, which is the main distinction between this and a general (or limited) partnership. It will be governed by a partnership agreement. 

LLPs are common for JVs where the parties intend to operate together for an extended period. The JV can own property, assume debts, and otherwise limit the partners’ liability. 

JV Companies 

Like JVs structured through an LLP, a JV company is also a separate legal person. 

One of the key advantages is that a limited company has share capital, leading to greater flexibility in setting out the voting and profit-sharing sharing rights of the parties to a JV. It can also make it easier for one party to sell its ownership to another party later. 

Considerations When Entering into a JV

Entering into a JV can entail considerable legal, financial, and strategic implications for your business. 

Some of the main items you may wish to consider include:

• apportioning management of the JV itself with other parties; 
• how any differences in the cultures of the different businesses may impact the JV; 
• protecting particular intellectual property and proprietary technology that other parties may gain access to; 
• to what extent your commercial objectives align and where they might diverge; 
• what will happen in the event of a dispute; and
• how you will bring the JV to an end.

Key Takeaways 

A joint venture, commonly known as a JV, refers to any commercial undertaking by two or more parties, usually where there is some degree of sharing in the profits and losses. They can last for any duration. There are four common business structures used to operate the JV:

• a contractual agreement
• a general or limited partnership
• a limited liability partnership; and
• a JV company.

Regardless of the structure your business adopts, you should set out from the start the full extent of the terms of the JV to protect your business. 

If you need help negotiating the terms of a JV on behalf of your business, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.

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