Joint Ventures: Which structure should you choose?
When approaching a joint venture (JV) you need to consider which legal structure will best fit your requirements. Below we have outlined the three most commonly used legal structures in England and Wales, highlighting defining features and comparing the key advantages and disadvantages of each.
Option 1 - Limited Liability Company (JVC)
A JVC is a separate legal entity formed by the joint venture parties (JVPs) to deliver the JV. The defining features are:
- Ownership. JVPs (either individuals or companies) will each hold shares in the JVC. The proportion of the shareholdings can vary depending upon the commercial agreement between the JVPs - normally it will depend on their investment in the JVC and the proportion of the profits that it will take from the JVC.
- Limited liability. A JVP's liability is limited to the amount they have contributed to JVC's capital (i.e. the value of the shares they own). Provided the capital is paid up in full, no JVP can be called upon to contribute further to JVC in the event of insolvency.
- Separate legal personality. The JVC is a separate legal entity independent of the JVPs. A JVC can own its own assets and contract with third parties in its own right, including being able to raise finance and employ its own workforce.
- Governance and Management. Directors undertake the day-to-day management of the JVC. Its operation will be regulated by its articles of association which set out the basic administrative structure of the JVC and the relationship between its directors and the JVPs.
Option 2 - Limited Liability Partnership (LLP)
An LLP is a hybrid form of separate legal entity aimed at combining the operational flexibilities of a partnership with limited liability for JVPs. The defining features are:
- Limited liability. The JVPs will incorporate the LLP. The exposure of each JVP in the event of insolvency will be limited to the amount of capital they have contributed to the LLP.
- Separate legal personality. The LLP is a separate legal entity independent of the JVPs. An LLP can own its own assets and contract with third parties in its own right, including being able to raise finance and employ its own workforce.
- Governance and Management. JVPs can be involved in operational matters without losing limited liability status. They will be agents of the LLP – their actions will be attributed to the LLP. Special 'Designated Members' have additional duties akin to directors of companies. The JVPs will enter into an LLP Agreement governing their inter-relationship, including how decisions are to be made on behalf of the LLP.
Option 3 - Unincorporated Associations (UA)
A UA is created by contract. The JVPs retain their separate legal status with their inter-relationship being regulated solely by the contract. The defining features are:
- Liability. The contract regulating the UA should be carefully drafted and continually monitored to ensure it is not regarded as a partnership. If a partnership is created, each JVP will become jointly and severally liable for the debts and obligations of the other in relation to the project.
- Legal personality. The UA is not a separate legal entity - therefore contracts will have to be entered into individually by JVPs on a project by project basis. The JVPs will have to raise funds in their own right if required and will also have to employ personnel relating to the project separately.
- Legal agreements. Contracts will need to be entered into by JVPs for each project. If the JVPs undertake numerous projects together, their relationship may be governed by a framework agreement.
- Governance and Management. A UA will not be able to be self-sufficient in terms of responsibility for project management as contracts will still have to be entered into on its behalf by the JVPs on a project by project basis.
Drawing a comparison:
|Time||Can be incorporated in a matter of days.||Can be time consuming - dependent on preparation and negotiation of partnership agreement.||Can be time consuming - dependent on preparation and negotiation of JV agreements for each project.|
|Tax||JVC will be liable for corporation tax on any profits it makes.||LLP is transparent for tax purposes. Each JVP pays tax on profits from the LLP in line with its existing tax status.||UA is transparent for tax purposes. Each JVP pays tax on profits from the project in line with existing tax status.|
|Contracts||Separate legal entity. Can contract in its own name.||Separate legal entity. Can contract in its own name.||Not a separate legal entity. Cannot contract in its own name. Contracts will have to be entered into by JVPs on a project-by-project basis.|
|Ring fencing risk and protection risk||Liability of JVP limited to amount they have contributed to the capital of the JVC.||Liability of JVP limited to the extent of their contribution to the LLP.||If partnership, each JVP incurs joint and several liability for all the debts and obligations of the project.|
|Annual accounts and auditors report to be filed with Companies House. Articles of association filed at Companies House.||Annual accounts and auditors report to be filed with Companies House. LLP agreement is confidential.||All arrangements are confidential.|
It is great to have a variety of options when setting up your JV but you need to make sure you proceed with the best fit for your business opportunity. Each have their advantages and disadvantages so consider these in line with your needs to come out on top.
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If you have any questions or would like support with your approach to joint venutures, please get in touch.