If you’re looking to develop and expand your business, you might be considering entering into a joint venture (JV).
JVs can be an effective way to maximise opportunity, minimise risk, and explore new markets.
However, without the right legal structures in place, JVs can quickly become a source of disputes, regulatory issues, and financial losses.
Therefore, it is essential to understand the advantages and disadvantages of entering into a JV before you make any decisions.
What are the advantages of joint ventures?
JVs provide a range of advantages to businesses.
- Shared resources and financial risk: By pooling resources and sharing risk, you can protect your interests and boost your chances of business success.
- Flexibility: A JV can manifest itself in several ways, including as a contractual agreement, a limited liability company, or a partnership. A limited company structure provides a clear well trodden governance structure and protects parties from personal liability, while a Limited Liability Partnership (LLP) can allow for tax efficiencies and maintains some liability protections.
- Tax optimisation: JVs can provide tax efficiencies, particularly in relation to Capital Gains Tax (CGT) and, in cases involving commercial property, Stamp Duty Land Tax (SDLT).
With a JV, you can combine each partner’s unique strengths and share expert knowledge to give your business the best chance of success.
What are the disadvantages of joint ventures?
Although JVs offer many advantages, they are by no means an easy route to business success.
JVs may fail due to clashing priorities, strategies, and corporate cultures.
Some of the issues involved in JVs arise around:
- Control and decision-making difficulties: Without clear governance structures, disputes can arise over everything from profit distribution to day-to-day property management.
- Exit strategies: If one party wishes to leave the JV, how will this be handled? Without a clear legal mechanism in place, disputes can lead to costly litigation.
- Regulatory compliance: If the JV results in market dominance that could be seen as anti-competitive, you risk breaching the Competition Act 1998.
- Tax liabilities: If commercial property is transferred between JV partners, SDLT and CGT may apply.
Without legal agreements and compliance with UK law, JVs can quickly become problematic.
Questions to ask before entering into a joint venture
Open communication and careful planning from the get-go will give your JV the best chance of success.
Before you decide whether or not to enter into a JV, you need to ask yourself – and your proposed partner – some questions.
Gaining clarity on your goals and intentions will help you make decisions in your best interests and ensure your JV has the best chance of success.
- Is your proposed JV partner suitable? You will need to conduct thorough due diligence to ensure that potential partners possess complementary skills, resources, and a similar corporate culture. Additionally, you should consider seeking a partner whose strengths fill gaps in your organisation.
- What’s your vision for the JV, and does your partner share it? All parties involved should make sure they have a shared vision for the partnership by defining clear, mutual objectives.
- How do you intend to work together? Not all JV partners work together in the same way. Some will share resources, while others keep them separate. Maybe you want to have a weekly catch-up with your partner over coffee, or perhaps you would prefer formal meetings once a month. Figuring out these arrangements early on will help to iron out any sticking points.
- How will you foster an environment of open communication? Open and honest communication is essential if JVs are to succeed. You should consider how you will create an environment where JV partners feel comfortable discussing concerns, sharing feedback, and resolving conflicts without receiving backlash.
A well-drafted Shareholders’ Agreement or Joint Venture Agreement will help outline voting rights, exit strategies, and profit allocation, as well as clearly define roles, responsibilities, and dispute resolution strategies.
This way, you can prevent common misunderstandings and significantly reduce the risk of disputes that could jeopardise the success of the JV.
To mitigate potential legal issues, our experts are able to draft and review your JV arrangements early on in the process.
At Palmers Solicitors, we have the knowledge and experience to protect your interests in the partnership and identify any unforeseen liabilities and legal issues.
How Palmers Solicitors can help with your joint venture
Entering a JV can be an exciting step forward for your business, but it must be handled with care to ensure that your goals aren’t derailed by disputes and legal issues.
At Palmers, our Corporate and Commercial law team have a wealth of experience in all business legal matters.
We can advise on structuring the JV and drafting the Shareholders’ or Joint Venture Agreement.
For tailored advice on entering into a joint venture, get in touch with our Corporate and Commercial Department today.