Joint venture vs partnership (UK): liability, profit sharing and legal structure compared

Getting the difference between a joint venture and a partnership wrong can make you responsible for your business partner's financial liabilities. The short version: a joint venture is usually a separate limited company with capped liability, while a general partnership can form without anyone registering anything and leaves each partner personally liable for the other's debts. This page sets out the two vehicles, the three main differences between them, and what to include in the contract.

What is a joint venture?

When it comes to joint ventures, typically a separate limited company is incorporated. The shareholders of that company are the two business partners who are coming together to collaborate on a specific purpose. Because it is set up for a specific purpose, a joint venture typically has an expiration date. It is not supposed to be a long-term relationship; it exists to achieve something and then wind down. A typical example is two businesses with complementary skills forming a company to develop and sell one product, with the understanding that once the project has run its course the company is sold or closed. I cover the contract behind this structure in joint venture agreement explained.

Types of partnership: GP, LP and LLP

Partnerships are a little more complex because there are three main types: the general partnership, the limited partnership and the limited liability partnership. The differences between them matter, and I explain them in what is a partnership. To keep this comparison manageable, I will compare joint ventures with general partnerships.

What is a general partnership?

A general partnership is typically formed when two or more people come together with a view to making a profit and conduct business accordingly. There are no registration requirements. You do not have to incorporate anything or apply for a general partnership to be created. It can come into existence automatically, so long as that definition is met.

That is the trap. Many people are in a general partnership without realising it, simply because they have started doing business with someone else and sharing the proceeds. There is no form to fill in, no fee to pay and no registration at Companies House, so nothing prompts you to stop and think about what you have created. Compare that with a joint venture company, which only exists because someone deliberately incorporated it.

General partnership liability risks

The important point about general partnerships is liability. You have unlimited personal liability. On top of that, you are also liable for your partner's financial liabilities, if your partner incurred those liabilities as part of the general partnership. If your partner signs a contract or runs up a debt in the course of the partnership business, you are on the hook for it too, whether or not you knew about it at the time and whether or not you would have agreed to it.

As an expert tip, if you are forming a general partnership, or you believe you may already be in one, which would not be uncommon, make sure you get a partnership agreement drafted. That agreement is your tool for managing the extent to which you are liable for your partner's financial liabilities. It is also the document that records what each of you has agreed about money, decisions and what happens if one of you wants to leave, all of which the default position leaves unanswered or answers in a way you may not like.

JV vs partnership: liability

The first of the three main differences is liability, and it is the one that matters most if things go wrong.

• Joint venture. Liability is capped at the amount of money contributed by the members, the shareholders, in return for their shares. For example, if you bought 50 shares with a nominal value of £1 each, your liability is £50.
• General partnership. Your liability is unlimited. There is no cap, and it extends to your partner's partnership liabilities as well.

For most business owners this is the single biggest reason to think carefully before going into a general partnership. In a joint venture, the worst case is losing what you put in. In a general partnership, the worst case is personal exposure to debts you did not incur.

JV vs partnership: profit sharing

The second difference is how profits are shared, which is the one that matters most if things go well.

• Joint venture. Profits are shared according to the proportion or percentage of shares that you hold in the joint venture company. If you hold 60% of the shares, you are entitled to 60% of the profits distributed.
• General partnership. Unless there is a partnership agreement in place that says otherwise, profits are split 50/50 between you and your partner. That default applies regardless of who brought in the work or put in the effort.

In a joint venture the split is built into the shareholdings from day one, so there is rarely an argument about it. In a general partnership the equal split is only a default, and if the partners have contributed unequally it is the agreement, not the law, that has to fix it.

JV vs partnership: legal structure

The third difference is legal structure, which underlies the other two.

• Joint venture. The JV company is a separate legal entity. It can own assets, sign contracts and incur liabilities in its own name, separate from its shareholders.
• General partnership. There is no separate legal entity. It is simply the two individuals who have come together to form a business, and the business's rights and obligations are theirs personally.

This also affects practical matters such as who signs contracts, who holds assets and what happens if one partner wants out. In a joint venture company the shares can be transferred and the company carries on. In a general partnership, the business is the partners.

What to include in a JV or partnership agreement

My top tip for avoiding legal issues with either vehicle is simple: get a professionally drafted, bespoke contract in place between you and your partner. The goal of that contract is to clarify your relationship. Three things in particular should be dealt with.

• Structure. Identify what kind of structure or vehicle you are adopting. If you are doing a joint venture, you need a joint venture agreement. If you are doing a partnership, you need a partnership agreement. The document should match the vehicle, because the two agreements deal with very different things: one governs shareholders in a company, the other governs individuals trading together.
• Liability. Set out how liability is to be split. Is there a specific percentage or proportion each party is liable for? In a joint venture, liability can instead depend on what each party is doing. For example, if you are responsible for research and development of new products in the JV, the agreement might state that you are liable for any liabilities relating to research and development.
• Responsibilities. Specify each party's responsibilities. This is especially important for joint ventures, because they are typically founded on a combination of skills between two or more partners. The agreement should say how those skills are to be used and what the key deliverables and milestones are. If one party is bringing the technology and the other the customer base, for example, say so, and say what each is expected to deliver and by when.

In my experience, the disputes that reach me usually come from arrangements where none of this was written down, and each party had a different understanding of who was liable for what.

Next steps

If you are about to go into business with someone, decide deliberately whether you want a joint venture company or a partnership, rather than drifting into a general partnership by default. Think about how long the relationship is meant to last, how much personal exposure you can accept, and how you want profits divided. Then have a corporate solicitor draft a bespoke joint venture agreement or partnership agreement that sets out the structure, the liability split and each party's responsibilities before any money changes hands.