Joint venture agreement (UK): what it covers, legal forms a JV can take and the benefits

If you are planning to partner with another business, a joint venture agreement is the document that keeps that collaboration safe. It sets out who does what, how decisions get made and what happens when the partners disagree. Joint ventures can be fantastic, but in my experience they only work well when the legal structure is put in place properly from the start. This article covers three things: what a joint venture agreement is, the legal forms a joint venture can take, and the main benefits of a joint venture.

What is a joint venture agreement?

A joint venture agreement is your legal safety net. It is the document that governs everything between the joint venture partners and the joint venture entity itself. Whatever the partners have agreed about how the venture will run, this is where it should be written down.

A typical joint venture agreement deals with:

• Rights and obligations. What each joint venture partner is entitled to receive from the venture, and what each partner has to contribute and do.
• Decision-making. The process that has to be followed before the joint venture can act, so that one partner cannot simply commit the venture to something the other has not approved.
• Dispute resolution. The mechanism the partners will use if they fall out, agreed while everyone is still on good terms.

The agreement also governs the relationship between each partner and the joint venture entity itself, not just the relationship between the partners. So if the venture is run through a company, the agreement should cover how the partners deal with that company as well as with each other.

Think of it as the constitutional document for the joint venture. From my experience, comprehensive agreements prevent disputes before they happen. Most arguments between business partners come from points that were never discussed or were left vague. So the clearer and more detailed the document is, typically the better.

JV agreement vs articles of association

Here is a practical tip. If you are structuring your joint venture by setting up a new limited company, that company will have its own articles of association. Check those articles against your draft joint venture agreement before anything is signed. You want to make sure the two documents do not conflict with each other.

If there are conflicts, you may need to amend the company's articles of association so that they line up with what the partners have actually agreed. It is much easier to fix this before the joint venture starts trading than to argue later about which document wins on a particular point.

Legal forms of a joint venture

You have a few options, but in practice three structures come up most often: a limited company, a limited liability partnership, or a purely contractual arrangement. Each one changes how much liability the partners carry and how much admin the venture involves, so the choice is worth making deliberately rather than by default.

Joint venture through a limited company

The most common structure for a joint venture is the limited company (the LTD). If you go down this route, the joint venture partners become shareholders of the limited company, and typically they also act as its directors. The company is the vehicle that trades, signs contracts and takes on the risk.

The key benefit of using a limited company is flexibility. You can give each partner a different number of shares to reflect what they are putting in, and you can create different classes of shares where the partners need different rights. The other big advantage is limited liability. Because the vehicle is a limited company, each partner's liability is capped at how much money that partner has contributed to the company.

Joint venture as an LLP

Another form is the limited liability partnership, where all the partners are limited liability partners. Typically an LLP is used when the arrangement is less complex and people simply want to join forces and carry on a business together.

A common example is accountants or solicitors coming together into a single practice. They want to work as one firm, but each still wants to keep some separation from the others, and an LLP suits that kind of arrangement well.

Contractual joint venture (no new entity)

The last main option is a purely contractual relationship. No new company or LLP is created. The parties enter into the contract as themselves, whether that is as individuals or through their own separate limited companies, and the only document or vehicle between them is that contract.

The main advantage of a contractual joint venture is cost. You just need to put a contract in place. There is no new entity to set up, and the running costs and the burdens of operating the joint venture are typically lower because there is less admin to comply with.

The main drawback is that the liability is typically greater. With no separate vehicle sitting between the partners and the venture, the liability sits with the partners themselves. So the whole of each partner's limited company, or the individuals personally if they signed the joint venture agreement in their own names, is at risk. If instead the partners use a limited company as the vehicle and simply hold shares in it, their exposure is lower, because it is the company rather than the partners that enters into the venture's contracts.

So the trade-off is straightforward. A contractual joint venture is cheaper and simpler to run, but you carry more risk. A company or LLP costs more to set up and administer, but it puts a limit on what each partner can lose.

Benefits of a joint venture

There are a few key advantages to entering into a joint venture.

• You minimise your risk. If risk is split between multiple partners, you are not carrying the whole of it yourself. Of course, as a consequence, the rewards are also split between the partners.
• You can take on bigger projects. By joining and pooling resources with other partners, you may be able to take on work that needs more capital than you have on your own. Bigger projects can bring a bigger return, and the return on investment may be greater even as a percentage of what you put in.
• You can access new markets. Some markets, particularly niche ones, are hard to enter if you are not already part of them. A joint venture with someone who is already established there lets you tap into their resources, their goodwill and their reputation, and get into a market you could not easily reach alone.
• You complement each other's skills. You may partner with someone whose skills are different from yours, and in turn you bring skills they do not have. When you join forces, the combined business is more well-rounded than either of you would be on your own.

Tip: choosing a joint venture partner

This is my top tip when it comes to choosing a partner for a joint venture. Do not simply choose whoever is most similar to you or shares the same views as you. It feels comfortable, but if you do that you may find you are both bringing the same skills to the partnership, and the joint venture adds less than it should.

Keep an open mind about who you should partner with. The point of a joint venture is to combine what each party brings, and that only works if the two of you bring different things. What matters is finding someone who has something you do not have, whether that is money, knowledge, skills or access to a market.

Next steps

Decide first which legal form suits your joint venture, because that choice drives the liability each partner carries and the paperwork involved. Then get a clear, detailed joint venture agreement drafted, and if you are using a new company, check its articles of association against the agreement. A corporate solicitor can help you structure the arrangement and spot the conflicts before they turn into disputes.