With lack of confidence and problems with the availability of cash and/or borrowings, alternative business and deal structures are becoming more prevalent. The recession market favours the flexible.
We are seeing more joint ventures being used, either as a vehicle to take advantage of an opportunity or to share the burden of unavoidable costs.
The main benefits of a joint venture are that:
- the cost of the project is spread;
- the risk of the project is spread; and
- with multiple parties involved, a greater breadth of expertise and resources can be brought to the project.
It's not all upside. Potential downsides of a joint venture include:
- the need to surrender or share control;
- receiving only a share of the profits; and
- working within a structure potentially different to that normally operated by your business.
With proper planning and preparation, these potential downsides can be substantially mitigated, by setting out clearly at the outset how it will be run, how decisions will be made and how profits will be shared.
A variety of structures can be used for joint ventures, each having its pros and cons. Common structures include:
- a limited company;
- a limited liability partnership (LLP); or
- a purely contractual joint venture (where no separate joint venture entity is created).
Which structure will be most appropriate will depend on the nature of the project and the intentions of the parties, as well as other considerations such as the tax treatment of the joint venture. Each structure can have its own benefits. For example:
- incorporation of a limited company or LLP brings the benefits of limited liability for the parties to the joint venture;
- LLP (and other forms of partnership) can be advantageous from a tax perspective;
- a contractual joint venture can mean that third parties are trading directly with recognised names rather than a newly incorporated body with no track record, and avoids the complications of having a third party to be controlled between the principals.
If you are considering a joint venture, you should take thorough legal, tax and accounting advice from the outset. Although they are not usually difficult to set up or run, a lot of time can be lost negotiating details which were not discussed early enough.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.