Are you entering into a business cooperation agreement with others? If so, have you thought about what type of cooperative agreement you should have (joint venture or partnership)? Below are some guidelines and templates on the right form of cooperation agreement you will need.
They are both commercial arrangements between two or more parties to cooperate in a business venture to share resources, risks and rewards.
Joint Ventures come in all shapes and sizes, which can be set up via a separate corporate entity or just by a simple contract.
Partnerships are a type of Joint Ventures set up by contract. It is not a separate entity and such formal arrangement is recognised by law (except for limited liability partnership, see below).
Whilst partnerships may be regarded as a subset of joint ventures, the main differences are:
A Joint Venture is a cooperation agreement between multiple parties to pool their resources (capital, intellectual property, other assets and capabilities) and share ownership, governance, returns and risks of such business venture.
Joint Ventures can be categorised into a few forms, with the most common ones are:
Let us dig into their differences right away!
A Corporate / Equity Joint Venture is the most common form for a Joint Venture to carry on an ongoing basis. An equity joint venture is an agreement between the parties to enter into a business together by contributing equity into a corporation. The equity joint venture is a separate legal entity and is usually incorporated as a limited liability company to shields its shareholders from liability.
The most common form is a company limited by shares. It is usually a private company, or its equivalent in the relevant jurisdiction unless a subsequent public offering of shares is contemplated.
An unlimited company may have tax advantages in some jurisdictions. Each member of an unlimited Company has unlimited liability and, in certain circumstances, the company is exempt from requirements to file publicly any annual amounts.
With a corporate personality, the Corporate Joint Venture can do anything a natural person could do, including the ability to enter into contracts and hold property in its own, rather than looking through to the shareholders. A Corporate / Equity Joint Venture generally offers the following Advantages:
However, parties looking at a one-off project may shy away from this business structure due to the following Disadvantages:
As such, parties who are cooperating on a single project short term may prefer to enter into a Contractual Joint Venture agreement instead.
In an international Joint Venture, there may be occasions when it is preferable to establish a different Joint Venture vehicle in different countries - rather than a single Joint Venture Company to act as holding company for a number of subsidiaries located in different jurisdictions. This is often determined by tax factors.
Contractual Joint Ventures are established as unincorporated ventures based simply on a contract between the parties detailing their cooperation, without the creation of an independent legal entity.
A Contractual Joint Venture is usually more appropriate for short-term, single-purpose ventures or those established for cost-sharing purposes (e.g. collaboration on joint R&D or a consortium to undertake a particular works project).
Remember to draft the contractual provisions in detail as the business relationship depends primarily on them!
Before entering into a Joint Venture agreement, plan ahead by asking yourself these questions:
For more information on drafting a Joint Venture Agreement, please refer to the link below.
For an example of a contractual joint venture agreement, please refer to:
A Partnership is a formal arrangement between multiple parties to share its management and profits. Every Partner must render information to any partner. Every Partner must account to the firm for any benefit derived. Basically, a Partnership is a fiduciary relationship between Partners who owe a duty of good faith towards each other.
There are typically 3 types of partnership:
The main difference between the 3 types of partnerships relates to the liability of the partners, which we shall explain below.
A general partnership is a business cooperation agreement whereby a number of general partners agree to share in all assets, profits, and financial and legal liabilities of the partnership. Its primary feature is that the general partners are equally responsible for the business and would all have unlimited liabilities for the debts of the General Partnership.
General partnerships are fiscally transparent for tax purposes. In other words, profits and losses are accrued directly to the partners in their respective shares. General Partnership has multiple Advantages:
However, General Partnership also has the following Disadvantages:
For a sample general agreement template, please click the links below:
It is not uncommon for a partner to decline to enter into Partnership Agreement even in a win-win situation due to the potential unlimited liability. How can we mitigate that? One alternative is to opt for a Limited Partnership. Please note that a Limited Partnership is different from an LLP (see below).
A Limited Partnership may exist of Limited Partners (with limited liability) with at least one General Partner (with unlimited liability). A Limited Partner will lose the benefit of limited liability if it becomes involved in the management of the Partnership. Other than these, it has similar features as a General Partnership.
A Limited Partnership is commonly used as a private equity vehicle with the investment manager as the general partner and investors as limited partners. It is transparent from a tax perspective whilst limiting the liability of the investors.
For an example of a Limited Partnership Agreement, please click the link below:
A Limited Liability Partnership (LLP) is a type of partnership with separate legal personality and limited liability. It is a hybrid of partnership and company.
A Limited Liability Partnership is a new form of legal entity created through statutes in a number of common law jurisdictions, e.g. the UK. All dealings between Partners are governed by a Membership Agreement. It was developed to combine the benefits of limited liability with the flexibility of a partnership structure.
Advantages of a Limited Liability Partnership (LLP):
Disadvantages of a Limited Liability Partnership (LLP):
With so many advantages, no wonder it is increasingly popular among entrepreneurs! Click here to view a 2-party Limited Liability Partnership (LLP) Agreement Template and create your own now!
In a General Partnership, all partners are responsible for the liabilities of the partnership, which are unlimited.
In a Limited Partnership, the liability of limited partners is limited and that of the general partner is unlimited.
In a Limited Liability Partnership (LLP), even though it is under a partnership structure, it is a separate legal entity with limited liability.
For more details on the difference between different types of partnerships, please see the link below:
Once you have decided to opt for a Partnership, ask you and your partner(s) will need to consider the following actors, in order to prepare yourself and a comprehensive Partnership Agreement:
The legal structure of your cooperation must be agreed and established early. It significantly affects the choice/use of lawyers and the drafting of the documents. It is vital to identify the requirement of establishing the cooperation structure you choose.
One should establish a realistic timetable for negotiation amongst the parties and obtaining the third-party consents or undertaking. Once the cooperation structure has been agreed, the following are 9 additional items one will need to consider when drafting the cooperation agreement:
Joint Ventures frequently require regulatory approval. It is vital to review at an early stage the likely regulatory impact on any venture. Regulatory approvals can include:
Many industries are regulated (often through a licensing procedure) in relation to the admission or conduct of participants engaged in those industries, such as banking, insurance, financial services, utilities; broadcasting, telecommunications, etc.
A company (particularly one whose securities are quoted on a public stock exchange) will need to consider whether the establishment of the particular venture requires prior approval from its shareholders and/or involves mandatory notification requirements.
Will the venture involve a transaction which requires the prior consent of banks or trustees under the terms of any loan agreements, debenture stocks or trust deeds?
As a commercial matter, it will often be important for the parties to gain comfort that major existing customers or suppliers will continue to deal with the Joint Venture or the Partnership. In addition, the creation of a new business entity may mean that the consent of counterparties to relevant contracts is required, involving a need to distinguish between:
Key timing and/or political issues can arise from any requirement for consultation with employees or trade union representatives under any employment legislation or under any local agreements. Consultation requirements can be particularly time-consuming in many continental European jurisdictions. These requirements need to be identified and planned at an early stage.
If the venture is to be founded on the contribution(s) of non-cash assets, many jurisdictions require formal procedures for the valuation of those assets. If so, these procedures need to be identified early and built into the timing.
Where the Joint Venture/Partnership involves the merger of significant businesses/assets to be contributed by each of the parties, the transaction raises a number of issues equivalent to those in any private acquisition/disposal transaction.
Particular issues which frequently arise in a Joint Venture/Partnership transaction include:
A Joint Venture/Partnership must be founded in the jurisdiction of one country and the national laws (and practice) is important to the establishment of that Joint Venture/Partnership.
Issues which commonly arise include:
If you want to explore a new market opportunity in a foreign country, make sure you seek legal advice from local lawyers of that jurisdiction.
An unincorporated Joint Venture/Consortium Agreement with a Joint Venture leader and participants to provide service to a client in a particular jurisdiction. The association is for non-permanent services required for a specific project. This agreement is drafted for 4 parties and can be in Neutral Form, with full or no indemnity between participants.
A Shareholders Agreement suitable for the set up of a relatively simple joint venture - a company with equal shareholding. This agreement is drafted for 4 parties and can be in Neutral, Strict or Loose Form.
A General Partnership established under local laws. It provides a basic Partnership framework only. This agreement is drafted for 4 parties and can be in Neutral, Strict or Loose Form.
A Limited Partnership established under local laws. It provides a basic Partnership framework only. This agreement is drafted for 4 parties and can be in Neutral, Strict or Loose Form.
A Limited Liability Partnership (LLP) established under local laws. It provides a basic Partnership framework only. This agreement is drafted for 4 parties and can be in Neutral, Strict or Loose Form.
Please note that this is just a general summary of Joint Venture, Partnerships and LLP under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may want to speak to your legal advisor.
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