A joint venture is where two or more companies with different skills join together to reach a common goal.
That goal might be to research and develop something, to construct something, to host something (like a festival or an exhibition), to distribute or to scale-up something, for example.
The collaboration might result in the formation of a company, to pursue long-term objectives in a manner that has a degree of independence and separate identity from the collaborating parties (called parents).
Or, it might require a simple agreement for co-operation on a shorter-term project, after which the parties plan to resume their independence and go their separate ways.
The joint venture could be between rival businesses (tending to invite more legal requirements and possible scrutiny), between businesses adjoined to each other in the vertical supply chain, (e.g. a producer and a distributor/retailer), between a business and a university research unit, for example, or even between a business and an individual.
Joint ventures can take many forms and there are generally no limitations on who can or cannot form one. However, the means by which they're formed, and the manner in which they're operated, can attract different legal rules, tax liabilities and commercial opportunities, and those initiatives that cross borders can often be more complex to administer.
As a starting point, ahead of starting to discuss or agree any detail about how you might collaborate with another business, our experts strongly recommend that you put in place a confidentiality agreement with your target collaborator.
This will give you greater confidence to explore ideas and possible contributions to a joint venture, as well as to quantify the value of those contributions, set agreement or other structural terms that are commensurate with this value and ensure, above all, that you’re protecting your proprietary data, IP and ideas, as best you can.
Our standard mutual confidentiality agreement (also called an NDA – or non-disclosure agreement) is an ideal starting point for this.
Joint venture advantages & disadvantages
Before you decide to start a joint venture, it's important that you weigh up whether it's the right thing to do for your business. Because, while there are plenty of good reasons to start a joint venture, there are some negative factors you'll need to consider too.
Advantages of a joint venture
Access to new customers. By teaming up with another business, you open up your potential customer base – particularly if you're collaborating with someone who has strong complementary products or services to your own. For example, a copywriter and a graphic designer, or a hairdresser and a beautician, would have very similar target audiences and can, therefore, share their current customer base and together reach a larger share of the market. And a joint venture can also give you increased competitiveness/competitive advantage over others who may not be able to offer the same complementary propositions to customers.
Stronger ability to achieve goals. The skillsets of each party can enable projects to be achieved more easily than if each party were to go it alone. For example, a personal trainer may decide to launch a product range of healthy snacks and drinks; however, while they may have studied nutrition, they'd benefit from the expertise, experience and industry contacts of a professional nutritionist, who could design the recipes and help to get them produced.
Shared resources can help. You might be able to better afford new stock/tech etc. if you pool funds, which you might not have been able to afford on your own. And combining your teams and working from the same premises could be financially beneficial too.
Access to valuable IP. Your JV partner may have solutions they’ve created that are unique in the market and to which they own the IP, which you wouldn’t be able to access without this collaboration with them.
Bigger potential for innovation. Collaboration often generates new ideas and innovations that you may not have thought to have launched on your own.
Confidence in your plans. If there’s more than one of you, you have a sounding board that totally understands the business – and for a lot of solo business owners, that could be a real boost as it can be lonely running your own show and there are plenty of moments of self-doubt.
Access to new distribution channels. By partnering up with agents and distributors, you could reach a much bigger customer base than you could otherwise.
Association with a respected brand. New businesses may find that teaming up with a more established one can enable them to gain the confidence of potential customers.
Disadvantages of joint ventures
Profit sharing. With a joint venture, you'll be giving away a chunk of the profit from your efforts. And the dividing up of those profits can be difficult. Parties within a joint venture need to make sure there's no underlying tension or mismatch between their strategies and aims.
Debt liability. Each party of a joint venture is liable for any debts incurred by the venture. However, liability can be limited if the parties structure their venture as a limited company (ltd co) or limited liability partnership (LLP), which we explain more about later in this guide.
Potential disputes between parties. As with any business arrangement, all parties are likely to be on the same page at the start – but as projects continue and more decisions are needed to be made (for example, regarding money, staff, workload, etc.), the chances of disagreements increase. And while many of these disagreements can be resolved quickly and without any lasting impact of the relationships between the parties, some may turn into project-disrupting disputes, which may require the help of a mediator before the joint venture can work together again.
Joint ventures can take a bit of work to unwind. If you later decide to go your separate ways, it can take some time to do so. It’s critical to ensure that, however you choose to document the arrangement at the start, your IP ownership and financial contributions/liabilities are very clearly set out, (you should use a good heads of terms as you’re scoping the arrangements and then subsequently either a JV agreement or clear corporate constitutional agreement (if you’re setting up as an ltd co or LLP). You’ll need to cover what happens with the ownership and revenue from any jointly created IP too.
How are joint ventures structured?
This is largely dependent on what best works for the businesses who are joining up – but typically, there are 3 ways to structure a joint venture:
As a limited company or a limited liability partnership (LLP)
To give them the benefit of limited liability (i.e. no personal responsibility for debts incurred by the venture), to be eligible for company insurance, and to have the ability to easily end the venture when required, the parties may decide to formally set up a separate limited company or limited liability partnership that is managed by them both and to which each of them may contribute vital elements, like IP, equipment, facilities, staff and custom.
This is a very involved model, requiring the most amount of effort and detailed agreement to set it up. A very clear consensus between the parties about what might result in the company being wound down, when that might happen and how such an event will be addressed, is vital for these types of collaboration.
Stepping away from this kind of joint venture is typically not a quick or cheap exercise, especially where the company employs staff, holds assets, is committed to contracts and/or has external investment or other financing arrangements, in its own right.
Joint ventures that take this structure are often formed where the parent businesses envisage lengthy, costly and potentially risky enterprise, such that it makes sense to share risks, expertise and resources, to achieve the desired outcome.
Often, you’ll find these kinds of models in engineering, scientific, mining, technological and pharmaceutical industries, for example. They can even find themselves subject to M&A and regulatory laws, especially since they may often involve competing businesses or those that are very closely aligned in a vertical supply chain (e.g. where a producer and a distributor work together). These types of venture are most challenging where the businesses involved, whether rivals or supply-chain neighbours, are market-leading businesses, since the activities of these more substantial players can alter market dynamics and potentially close down opportunities or inflate costs and efforts for others.
They can be a tax-efficient means of collaborating, and will be entitled to all the usual corporate tax reliefs alongside incurring their own individual tax liabilities (though the parents may be able to off-set some of their own tax obligations due to their expenditure on these kinds of initiative). They will carry the costs and obligations of employing staff, will need to comply with regulatory and reporting duties and will need to procure insurance, just like any other business.
In spite of the above, they can have huge advantages too, in terms of what they make possible. But this will not be a model that is suitable for many small businesses.
Limited companies must be set up via the UK's Registrar of Companies: Companies House and you can follow our step-by-step guidance on how to do this well, here.
If you're interested in setting up a limited liability partnership, then you'll find guidance on how to do this and what to expect here. You can use Farillio's template LLP agreement to help you set in place the right foundations for your arrangements.
In both case, taking good legal and tax advice is strongly recommended.
As a co-operation agreement
For a cheaper and all-round easier (but slightly riskier) alternative, a joint venture can be structured as a collaboration, also called a cooperation, agreement.
This is where both parties work together as independent contractors in line with the rules they set out within a joint-venture contract. Unlike a limited company or LLP setup, where all liability automatically lies with the company itself, this contract will detail who will be liable in the event of client disputes or incurred debts, for example.
No parties are automatically more liable than others in a co-operation agreement, so it’s important that the joint-venture contract is written in a way that’s fair to everyone involved (which is where the riskiness of this structure and the need for robust legal drafting comes in).
These simpler versions of joint ventures are generally more about shorter collaborations, requiring a lesser degree of involvement by the parent businesses and not necessitating the creation of permanent business structures. They might be formed in order to create and host events, to write a book, conduct a finite R&D project or to launch a range of designer products and services, for example.
A lot of the time, these collaborations will not involve rival businesses, but there’s no rule that says they can’t.
Besides dealing with the question of liability, the detail of a co-operation agreement will also make clear what each contracting party will contribute to the venture, which could include IP, human and/or financial resources, equipment, infrastructure and technology. It may also include lists of who will do what to ensure the success of the venture, how success will be measured, who will manage sales, marketing and monies and what happens in the event of the parties falling out with each other.
Ownership and defence of IP rights, confidentiality and trade secrets, restrictions on either parties’ independent activities or freedom to operate for a specified period after the co-operation agreement has ended and what acts, events or omissions will be considered a breach of the agreement, will be important areas of focus for the agreement. These kinds of agreement will usually include detailed licensing terms permitting each collaborator to use the relevant IP of the other to ensure the achievement of the joint venture’s goals.
If you're interested in setting up this kind of collaborative agreement, you can use Farillio's template below as a starting base for this:
As a simple partnership
Another option is for the parties to set up their joint venture as a simple partnership. This works in a similar way to a limited liability partnership, but (like a co-operation agreement), all liability lies with the partners. With this model, all partners are also automatically equally liable from the outset.
There are limitations with this kind of venture. For example, a simple partnership can’t raise finance and can’t own assets (unlike LLPs). And while LLPs are often set up with the intention of lasting for a significant length of time, simple partnerships are usually designed to be in place for the duration of one specific project.
The contractual paperwork surrounding this kind of partnership is just as important as for the alternatives above. And as this model carries a high degree of commercial and legal risk, the detail relating to each partner’s expectations and their contributions (at the start and during the enterprise) will need to be very clearly spelled out.
If you're interested in setting up a simple partnership, you can use Farillio's template below as a starting point for this:
So, the structure you choose will depend on what’s best for your situation.
For example, if you’re looking to share the risk and financial burden involved in a proposed venture, and you're in it for the long haul, a limited company or LLP may be best.
But if you’re not ready for the expense, admin and responsibilities of running a limited company or LLP, and you need some flexibility in your contract agreement regarding levels of risk and liability, a co-operation agreement may work instead.
Or, if you’re only joining with another party to carry out a quick project that doesn’t need much, if any, funding, and you’re both happy to equally share risk and liabilities, then a simple partnership could make more sense.
Whatever method you choose, you’ll still need robust contractual documentation.
Want to access this guide?
Already have a Farillio account? SIGN IN
Get unlimited access to 100s of legal resources by signing up to Farillio today.
- Manage your legal documents online
- Well written legal templates by our partners
- Guides to help you understand law
- Legal help available every step of the way