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When approaching a joint venture (JV) the parties will need to consider which legal structure will best fit their requirements. Below we have outlined the three most commonly used legal structures in England and Wales, comparing the key features of each.
|The day-to-day business is dealt with by the directors (which are deemed to be separate to the shareholders) with decisions being taken on a majority basis unless otherwise agreed. Certain key matters (e.g. adopting new articles and the allotment of shares) will usually require consent of the shareholders. The directors can appoint committees or working groups to carry out certain functions.
|A hybrid (partnership / company) structure where day-to-day business is dealt with by the members. The LLP agreement often sets out governance provisions that delegate certain day-to-day decision making to an executive board (to largely mimic how a Company operates).
|As a separate legal entity is not created by a contractual joint venture, the conduct of the parties insofar as the joint venture is concerned is dealt with entirely by the contractual agreement. The parties will often appoint representatives to deal with each other on a day-to-day basis or on certain matters.
|The affairs of a limited company must be managed within the confines of the Companies Act 2006 which places stricter restrictions on limited companies than the equivalent LLP legislation.
|Generally, an LLP is considered to have greater organisation flexibility than a Company.
|As it has no separate entity through which it operates (separate to the parties) it is considered to have less flexibility in respect of being able to facilitate a change in parties or to accommodate future projects that may arise.
|A Company can be incorporated in a matter of days. However, negotiating shareholders' agreement and articles of association can be time consuming (depending on the complexity of the venture and the level of negotiations required).
|Similar to a Company, an LLP can be set up quickly. However, negotiating the limited liability partnership agreement can be time consuming (depending on the complexity of the venture and the level of negotiations required).
|A contractual joint venture can be time consuming to prepare depending on the complexity of the project and the level of negotiations required. Additionally, it is likely that this would have to be repeated for each new project entered into.
|The liability of the shareholders is limited to the amount of capital they have contribution to the Company. The directors would be subject to the usual fiduciary rules and duties.
|The liability of the members is limited to the amount of capital they have contributed to the LLP. The members of an LLP do not owe general fiduciary duties to the LLP or each other. However, a member that is an individual who takes on specific roles and responsibilities may have fiduciary duties in respect of such roles and responsibilities.
|Under a contractual joint venture each party would be liable in respect of contracts which it has entered into. Care needs to be taken to ensure the relationship does not constitute a "general partnership". If a general partnership was created, each party would become jointly and severally liable for the debts and obligations of the other in relation to the project.
|Required to file accounts and a confirmation statement annually with Companies House. A Company must also create and maintain a register of people with significant control at Companies House.
|Required to file accounts and a confirmation statement annually with Companies House. An LLP must also create and maintain a register of people with significant control at Companies House.
|There are no additional filing requirements in addition to those to which the joint venture partners are subject themselves.
|A Company's main constitutional document (its articles of association) will be publicly available at Companies House. A shareholders' agreement can be entered into, which is a private document made between the Company and the shareholders, to further govern the relationship between the parties.
|Unlike a Company whose articles of association are publicly available at Companies House, an LLP agreement is private. Companies House will however show the members of an LLP.
|There is no requirement for a contractual joint venture to be publicly available. Therefore, all arrangements can stay confidential.
|Contracting / separate legal personality
|A Company is a corporate entity with its own distinct legal personality. This means it can enter into contractual arrangements, including being able to raise finance and employ its own workforce.
|An LLP is a corporate entity with its own distinct legal personality. This means it can enter into contractual arrangements, including being able to raise finance and employ its own workforce.
|There is no separate legal personality and therefore any contractual arrangements, including financing, would need to be in the name of one or all of the joint venture parties on a project-by-project basis. Each of the joint venture parties would be capable of being sued personally in respect of obligations which it has assumed and is carrying out as a result of the contractual joint venture.
|Tax (NB: specific tax advice should be sought in each case)
|A Company is treated as a separate entity for tax purposes and it will pay corporation tax on its profits. Individual shareholders of a limited company will pay tax on any dividends they receive and on any gains arising when they transfer their shares in the Company. Corporate shareholders may be able to avoid this outcome as a result of using reliefs and exemptions available. As the Company will be newly created, assets may need to be transferred to it which may create a tax charge. For example, the transfer of land to the Company is likely to trigger the payment of SDLT.
|An LLP is treated as tax transparent and so is not taxable itself, and instead the members are taxable as individuals both on profits earned by the LLP and gains on the sale of LLP assets. As the Company will be newly created, assets may need to be transferred to it which may create a tax charge. For example, the transfer of land to the Company is likely to trigger the payment of SDLT.
|As there is no separate legal entity created, on a realisation of a project as with an LLP the parties to the contractual joint venture will pay tax personally. In creating a contractual joint venture it would be unusual for any assets to be transferred.
It is great to have a variety of options when setting up your JV but the parties will need to make sure that they proceed with the best fit for the business opportunity. Each have their advantages and disadvantages and there may be other structures to be considered (for example, limited partnerships and trust structures both onshore and offshore).
If you have any questions or would like support with your approach to joint ventures, please get in touch.