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Are you considering getting into business with another party? There are different ways that you will be able to structure this. One option is to set up a company with each partner having an even share in the business. Alternatively, your partner could set themselves up as a contractor to your business. However, a common structure when two parties want to enter into business together is a joint venture. This article will explain what a joint venture is the different types of joint ventures in New Zealand. 

What Is a Joint Venture?

A joint venture is a business structure where two or more parties agree to pool their resources together for a common business objective. The objective could be a business idea or a specific project. The parties to a joint venture share control, profit and costs over the entity. Likewise, a joint venture agreement will govern the relationship between the parties. 

Reasons to Start a Joint Venture

There are several reasons why you might enter into a joint venture. The main reason is that you might not have the expertise in the industry that you want to do business in. A joint venture allows you to partner with another company that might have the knowledge to grow your project or idea. Joint ventures can also allow businesses to share the risk for major investments or gain economies of scale through a more efficient process.

Different Types of Joint Ventures

Limited Partnership Joint Venture

A limited partnership joint venture acts as a separate legal entity where there is one limited partner and one general partner.

A limited partner has limited liability as long as they do not take a management role in the limited partnership joint venture. This means that they will not be personally liable for any business debts.

Most parties to a joint venture will be limited partners and will contribute capital to the joint venture.

The general partner has unlimited liability in the joint venture thus this partner will generally be a limited liability company. Under a limited partnership joint venture, the details of the limited partner’s investment may be private but the details of the general public will be public. 

Incorporated Joint Venture

In an incorporated joint venture, the parties of the joint venture are the shareholders. They will appoint directors to the entity. The parties to the venture will receive any dividends after paying all tax obligations.

An incorporated joint venture is generally better than a limited partnership joint venture as the joint venture has limited liability. They also allow different ways of raising capital whether this is through shares or debt. Likewise, it is relatively easy to sell incorporated joint ventures without disrupting the business. However, any capital gains that have been made during the life of the joint venture cannot be distributed to the relevant shareholder’s tax-free.

Unincorporated Joint Venture

An unincorporated joint venture is a type of partnership that means that the venture is not a separate legal entity. Any profits that the venture makes are distributed to the partners. These are taxed at the relevant income tax rate.

An unincorporated joint venture might have unlimited liability which could open the individual partners up. This means that their personal assets could be sold if the joint venture goes into liquidation. However, there may be some situations where an incorporated joint venture is not a partnership. Likewise, the result of this is that each party will keep their businesses separate. To mitigate against unlimited liability the partners should make the joint venture partners limited liability companies. 

Key Takeaways

You must choose the right business structure for the entity that you are trying to operate. If you wish to go into business with one or more parties you should consider using a joint venture structure. This structure is ideal when you have multiple parties coming together to complete a common goal or task. In New Zealand, there are several ways that you can structure a joint venture. These structures are:

  • a limited partnership joint venture;
  • an incorporated joint venture;
  • an unincorporated joint venture.

For legal assistance with choosing your business structure and the different types of joint ventures, contact LegalVision’s business lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Can I change my joint venture structure after establishing it?

Yes, as long as all the parties to the joint venture agree to change it.

How do I know if my unincorporated joint venture is a partnership?

This will depend on the facts at the relevant time and how well drafted the joint venture agreement is. It is important that you use legal advice to make sure you adopt the correct structure.

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