If you’re in the first steps of entering into a business partnership, you may be wondering about the legal pitfalls to look out for. What partnership structure should you choose, and what are important clauses in partnership agreements? In this article, we’ll cover the fundamentals of business partnerships.
What Is A Business Partnership?
By definition, a partnership is an agreement between two or more parties to share resources and collaborate on projects. The resources can be of any nature, including, but not limited to technical expertise, financial and human capital, and intellectual property. The collaboration can vary as well, with partners involved in the management of the projects at different levels. Thus, partnership agreements differ widely in the scope of matters covered.
Nonetheless, most partnership agreements share a number of structural similarities. Partners should have in writing the following:
- Their individual financial contributions
- The roles that they will each play in the partnership, and the responsibilities and expectations attached to those roles
- How profits will be distributed
- A description of the projects that the partnership will be investing in and/or managing
- How the partnership will be governed (with rules establishing the decision-making hierarchy of the partnership and a list of key personnel in the hierarchy)
- The division of liabilities in the event of a dispute
What Is A Joint Venture?
A joint venture is a more formalized version of a standard business partnership. The former is established on a project-by-project basis and can be registered as a legal entity, while the latter focuses only on the working relationship between partners. In simpler terms, a joint venture has its own legal personality, while a standard business partnership is a looser arrangement that can cover a number of projects, so long as it’s the same partners working together.
Accordingly, joint venture agreements tend to be far longer than a partnership agreement. They include details that are specific to the project, as well as more complex rules on the governance of the joint venture. For example:
- Joint venture agreements may include clauses on exactly how audits of the project will be made, how the management team of the project will be organized, or how other very particular technical aspects of the project will be operated.
- Since a joint venture may be structured in any combination of a corporation, limited liability company, or partnership, joint venture agreements can be as long-winded as operating agreements or limited partnership agreements with respect to governance.
Which Structure Should You Choose?
When determining whether you should opt for a standard business partnership or a joint venture, you may want to ask yourself several questions:
- How flexible do you want to keep the working relationship with your partner(s)? Do you want to maintain a loose relationship that can be applied to a range of projects, or do you want to have a fixed relationship that would work well for just one project?
- Do you want the partnership to have its own legal registration, bank account, and tax identification number? In a standard business partnership, partners pool financial resources but do their accounting separately. Do you want the project to have a legal personality of its own, or do you want to be able to categorize the project under you personally or a company that you already own?
- Do you want to be able to exit the partnership at any time, or do you want to be more locked in with your partner through forming a legal entity?
Keep in mind that joint ventures don’t have to be registered. They can organized informally, but still usually cover more than standard business partnerships. To summarize the above, they offer more certainty and clarity on specific projects, which can be desirable (or not) depending on how you want to work together with your partner(s).
To Sum Up
Business partnerships are akin to marriages in that it helps to discuss the details as early as you can. Transparency is useful in avoiding conflicts further down the road. Who is committing how much, and are the amounts fair? What are the long-term strategic goals of you and your partner(s)? If this is meant to be lighter, it may be better to keep the clauses of your agreement looser. If you are fully committed, then you may want to lock each other in with a more formal structure. Will you be collaborating on one project, or on a multitude of projects? Once you have these down, drafting your partnership or joint venture agreement will be easy.
