A joint venture is a business arrangement in which a number of parties agree to work together in pursuit of a business or in relation to a specific project. Each party will have different interests in the joint venture and different responsibilities. The parties will each make a contribution to the joint venture whether by way of assets, investment or skills. These contributions may be the same of different. Each party will be entitled to a share in the revenue generated by the joint venture. This share will largely be calculated by reference to that party's contribution.
There are many different legal structures, both incorporated and unincorporated, which can be used as vehicles to run a joint venture. This guide sets out the key characteristics and the advantages and disadvantages of some of those structures.
As an alternative, parties could use a contractual joint venture or partnership. These are becoming more common but are outside the scope of this guide which focuses on corporate joint venture vehicles only.
Limited companies can be categorised as private or public; the latter being publicly listed on a stock exchange. In this guide we have only focussed on private limited companies.
A private limited company is an incorporated organisation which is registered with the Registrar of Companies. It is regulated by law, in particular the various Companies Acts. One of the most important characteristics of a limited company is that its members have limited liability in respect of the company. There are two ways of achieving this status: a company limited by shares and a company limited by guarantee. These work as follows:
- companies limited by shares – in this type of company, subject to any personal guarantees given by a shareholder his liability is limited to the amount he is obliged to pay the company for those shares. This can be a nominal amount – for example, £1;
- companies limited by guarantee – again subject to any personal guarantees given by the member, his liability is limited to the amount he has agreed to contribute to the company's assets on becoming a member. Again it is usual for this to be a nominal amount – for example, £1.
A limited company is a separate legal entity and therefore independent of its members. This means the company can enter into contracts and hold assets in its own right, making it a lot easier to borrow money or hold property.
The constitutional documents are used to define the company's objectives, how it is internally regulated and the role and responsibility of the board of directors.
Advantages of using a limited company as your structure:
- members' liabilities are limited to an agreed amount;
- the company can enter into contracts, borrow money and hold property in its own name as a separate legal entity to its members;
- companies limited by shares are well-recognised vehicles for joint ventures;
- regulation and reporting requirements create transparency;
- it is possible to create a governance structure within the vehicle which fits the needs of the joint venture members - for example different voting rights for different members and automatic triggers for members to exit the company and new members to join;
- in relation to companies limited by guarantee, as this structure does not use shares, it can be easier for members to enter or exit the company. Companies limited by guarantee may also be non-profit distributing and may gain charitable status. As such, they are commonly used in the public sector.
- companies are subject to statutory regulation which can be onerous for directors;
- directors may be subject to personal liability for breach of duties and responsibilities in certain circumstances;
- there is a pre-defined two tier structure involving board and shareholders or members;
- the vehicle may reach deadlock if the parties are unable to agree which can require complex exit rights.
The private limited company is probably the most common vehicle used in joint ventures. One of the main factors for not using this structure is often tax.
A partnership exists between persons carrying on a business in common with a view to making profit. No written documentation is required to create a partnership, although it is recommended that a written partnership deed be produced in all circumstances for certainty and clarity. In the absence of a formal partnership agreement, the provisions of the Partnership Act will apply which may not reflect the position that the parties are trying to reach commercially.
There are three types of partnership:
- unlimited partnership;
- limited partnership;
- limited liability partnership.
Unlimited partnerships: an unlimited partnership is not a separate legal entity. The most significant characteristic of an unlimited partnership is that partners have unlimited liability to the whole extent of each partner's property. This liability is joint and several, which means that partners can be pursued together or individually for the whole of the partnership's liability regardless of any restrictions in the partnership agreement.
Each partner is entitled and bound to take part in the conduct of the business unless otherwise agreed, and each partner is bound to contribute to the partnership's debts in proportion to his share in the profits. Each partner has the authority to bind the partnership. As a result the unlimited partnership can have a flexible constitution but as it is not a separate legal entity and cannot contract in its own right, and because of the potential unlimited liability of the partners, it is not a model that is often used for joint ventures.
Limited partnerships: these are the same as unlimited partnerships in many respects except that some of the partners can benefit from limited liability. The partnership must consist of one or more 'general' partners with full liability and one or more 'limited' partners who are not liable beyond the amount they have contributed to the partnership. Limited partners must not participate in the management of the partnership. General partners bear unlimited liability.
Limited partnerships do not have separate legal identities, therefore contracts have to be entered into and assets held by the general partner.
Limited partnerships are tax transparent, which means that the partners are taxed but not the partnership itself. This and the fact that limited partners cannot participate in the management of the partnership means that the structure is designed for 'passive' participants – for example pension funds or hedge funds.
There is less familiarity in the market as to how to sell or transfer an interest in a limited partnership, and therefore they are not always the preferred choice for a joint venture model.
Limited liability partnerships (LLPs): this is a more recent form of business entity but is becoming increasingly more common. It is a separate corporate entity independent of its members, and provides limited liability for those members. In this sense it is a hybrid of a company and a partnership, as it combines the organisational flexibility and limited liability of a company with the tax status of a partnership.
LLPs are governed by the Limited Liability Partnerships Act, which applies the provisions of company law and insolvency law with modifications. The LLP itself can be set up with an internal structure similar to a limited company.
Advantages of using an LLP as your structure are:
- the members are able to put in place a flexible governance structure to reflect their joint venture arrangements. An LLP is not restricted by the Companies Act;
- an LLP does not pay tax on its profits - although its members will pay tax on their receipts;
- the liability of members is limited;
- an LLP exists in its own right so will continue to exist irrespective of any changes in its membership.
- less familiarity in the market with LLPs being used as joint venture structures;
- there is a degree of administrative burden including filings to be made at Companies House – however, there is less of a burden than with a limited company.
Although less well known than a private limited company, LLPs incorporate the limitations on liability and flexibility of the private limited company so could be used for many joint venture models. As a result of tax transparency it is likely that they will be more popular with public sector participants or investors – for example, pension funds.
Community interest companies
A community interest company (CIC) is a relatively new type of company designed for social enterprises that want to use their profit and assets for the public good. CICs are registered as companies in the usual way and can either be companies limited by shares or by guarantee.
The main characteristic of a CIC is that it has a statutory 'lock' on its assets and profits which restricts distributions of profits or capital, except in limited circumstances. In order to be registered, it must pass a 'community interest test' and deliver an annual report demonstrating how its activities have benefitted the community.
There are specific reporting requirements and provisions that must be incorporated into the CIC's constitution, and extra fees are payable to the CIC Regulator.
Advantages of using a CIC as your structure are:
- it has a clear status for the benefit of the community - this can be maintained by the asset lock which will mean that any surplus funds must be reinvested for the benefit of the organisation;
- the regulation and disclosure requirements provide transparency.
- the asset lock may operate rigidly;
- regulation and reporting requirements may be burdensome.
As a result of the asset lock and increased regulation the CIC lends itself to joint ventures undertaken for not for profit and social benefit, largely in the public sector. If the joint venture is for this purpose then these characteristics may give the structure increased credibility.