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Running your business with a partner can have many advantages, such as gaining access to your partner’s technologies, patented processes or distribution network. If you are considering entering a foreign market, forming a strategic alliance or joint venture (JV) can help you share the risks and opportunities in the market. However, the first step is to decide on the most appropriate structure to achieve your commercial objectives. You will need to consider some issues such as liability, ownership of assets and taxation. This article explains the different types of joint ventures that you can set up in New Zealand and how to draft a joint venture agreement.

What Is a Joint Venture?

A joint venture (JV) is a strategic alliance between two or more parties working to accomplish a specific task or project. For example, you may contribute goods, services or capital to a common commercial enterprise, which makes it appealing to small business owners. 

Even though it sounds similar to a partnership structure, in a JV, participants generally team together to complete a specific project. Each partner retains their independence while contributing towards mutually shared goals. Some of the legal differences between these two structures include:

  • a JV is regulated only by the joint venture agreement;
  • each party can specify in their agreement whether they will share liabilities or not; 
  • the actions of each party are not binding to other participants without their consent; and 
  • each participant can make and claim their tax deductions.

How Can You Structure Your Joint Venture?

Like partnerships, you can choose to incorporate a limited liability company with the Companies Office to undertake your JV in New Zealand. This is known as an incorporated joint venture and:

  • each party holds shares in the company proportionate to their interest in the JV; 
  • they enter into a joint venture agreement following the incorporation of the company; and 
  • the agreement sets out how the venture will operate.

Being a separate entity, the JV company owns the assets of the venture, enters into contracts, incurs obligations and liabilities, and makes profits or losses. Under this structure, you can limit the liability for the venture’s debts and obligations to the company, which protects you and your assets as a shareholder or director. When you run a JV company, you operate specifically for the venture, so when the venture ends, you should wind-up the company. 

In an unincorporated joint venture, each party makes a different contribution through their existing structures to create a business venture or achieve a common objective, and typically have an agreement detailing their rights and obligations.

Before choosing a JV structure, you should consider the associated tax consequences. This area can be complicated, so you should discuss your obligations under each structure with your tax lawyer.    

What Are the Standard Terms of a Joint Venture Agreement?

Whether you incorporate your joint venture or not, you will need to create a joint venture agreement to set out the terms of your relationship with the other parties. Certain clauses are standard to most agreements of this kind, such as:

  • the purpose of the venture;
  • the interest of each participant (expressed as a percentage of the total JV interest);
  • the contributions of funds to the venture from each participant; 
  • who comprises the JV committee;
  • a mechanism to break a deadlock (e.g. the party with the majority participating interest may have the right to a casting vote);
  • what circumstances amount to a default event (e.g. a breach of the terms of the agreement or failing to provide funding on a cash call);
  • the term (a fixed period of time or a specific termination event, e.g. mutual agreement or a default event);
  • how you will distribute the property of the JV (typically in proportion to each participant’s interest unless stated otherwise in the agreement).

Key Takeaways 

If you need to complete a specific business project, such as establishing a marketing and distribution presence, it may be beneficial to form a JV with a business partner. You can choose to incorporate a new company with the Companies Office to undertake your JV in New Zealand. Under this structure, you can limit the liability for the venture’s debts and obligations to the company, which protects you and your assets as a shareholder or director. Whether you choose to incorporate your JV or not, it is essential to set out each participant’s rights and obligations in a JV agreement. This will help you set a solid foundation for a clear business relationship between each of the partners, as well as ensuring that everyone understands the purpose, direction and eventual termination of the JV.

If you need help deciding on the most appropriate structure to achieve your business goals or drafting your joint venture agreement, LegalVision’s business structuring lawyers can help. Call 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Is a joint venture a legal entity?

An incorporated joint venture is a separate legal entity as the operations of the JV are run through a limited liability company. This means that the JV company owns the assets of the venture, enters into contracts and incurs obligations and liabilities. You can also choose to set up an unincorporated joint venture. This structure is not a separate legal entity to its participants.

What are the benefits of a joint venture?

Some of the benefits of forming a joint venture include gaining access to your partner’s technologies, patents and distribution networks. You can share the risks and opportunities of entering a new market with your partner. A JV can also give you access to a greater pool of resources, including specialised staff and finance.

What type of entity is a joint venture?

A joint venture is a strategic alliance formed between two or more parties working to accomplish a specific task or project or start a new business activity.

What is the difference between a partnership and a joint venture?

In a partnership, the parties involved are co-owners of a business venture with the goal of making a profit. In a joint venture, it is not just profit that binds the parties together. You can form a JV for specific purposes, such as research and development. Although a joint venture is very similar to a partnership, it is generally more limited in scope and duration.

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