So you're starting a business with someone you know or with another company, but you don't know whether your legal entity is a joint venture or a partnership. Or is there any difference between the two?
The words joint venture and partnership are often used in tandem, which can get some people confused.
Before you sign on the dotted line and gear up to get your company running, you should know all of the legal terminologies.
Joint Venture vs Partnership: The Bare Bones
At its core, there is one major difference between a joint venture and a partnership. This major difference involves the entity that is entering into the joint venture or partnership.
Simply put, a joint venture is when two or more companies join together to create a business. Often, this is to reach an end goal. For example, if two makeup companies came together to create a brand-new lipstick but have not merged as one company, that would be a joint venture.
With a joint venture, the companies that come together agree to share profits and losses. They legally should have equal input when it comes to the creation of the project.
A partnership is two individuals joining together to go into business. This is often not for a set length of time. For example, if someone were to start a makeup line with their best friend and they plan to share the profits and create new products together, this would be a partnership.
The members in a partnership have a duty to share both profits and losses accumulated during their business together.
In a partnership, you and your partner legally have one identity, which is that of the business as a whole.
For example, you create a skincare product with your best friend as a partnership organization. If the product gave people rashes, you would both be held liable for this setback.
In a partnership, both of you would also be held responsible for the negligent activities of an employee. If, for example, your company installs roofs in people's homes and your partner hires someone you did not interview. If the person installs a roof with knowingly shoddy materials, you cannot be absolved simply because you did not personally hire the person. Instead, both of you are responsible for your employee's actions, as is the employee.
With a joint venture, businesses still retain their separate identities during the process of whatever it is they are creating together.
For example, if your joint venture was two makeup companies coming together to create a lipstick, as stated in the first example, and the lipstick caused people's lips to become stained purple, each party would be held responsible only insofar as the amount of stock they held.
If two makeup companies come together and each holds 50 percent of the LLC, they are each 50 percent culpable for this issue. If one company has 10 percent in the LLC, and another 90 percent, the company with 10 percent invested is only 10 percent responsible.
Taxes for a Partnership
In the United States, the taxes for a joint venture versus a partnership are different, and you should be aware of this as you enter into one or the other.
In a partnership, any net gains or losses "pass through" the business and directly to the partners themselves. They then pay their taxes on their individual tax returns based on the profits and losses of the company.
In 2018, a new "Pass Through" deduction was introduced in Tax Cuts and Jobs Act.
This tax deduction will continue through 2026 unless Congress votes to change or amend it.
In Canada, individuals in a partnership can claim Capital Cost Allowance or CCA. This allows you to deduct the costs of a depreciable asset from your taxes over time. For example, you and your partner can claim back the depreciation of the car you've purchased or the building where you conduct business.
If you conduct business in your home, you can claim some of the depreciation of the asset on your taxes as well. Those in partnerships can only claim the depreciation per CCA rules.
Taxes for a Joint Venture
Joint ventures usually pay taxes as a corporation or partnership.
In Canada, joint ventures can claim as much or as little Capital Cost Allowance as they wish.
Contracts are important, whether you're entering into a partnership or a joint venture. They lay out exactly what you're entering into and give every person an idea of what they are responsible for, what taxes they will have to pay, their liability, and how they will absorb profits and losses.
The contract will also detail who will contribute what and lays out the responsibilities of all parties, in addition to any contributions of money or skill that each partner or joint venture entity gives.
The contract is relatively similar, for both a joint venture and a partnership, however, the contract will specify which is which.
Trust and Other Duties
When you enter into an agreement as a partnership, both partners agree that they have a duty to be loyal and practice everything in good faith.
Registering an LLC
To ensure that those in the joint venture do not hold all of the same liability, it is necessary to register the venture as an LLC or limited liability company.
Registering an LLC is incredibly simple and takes just a few hours. You can register yourself, or use an online service that will register your LLC for as little as $150. After this, your joint venture will legally become a limited liability company and you can only be held responsible for the percentage you or your company holds.
You should not, however, assume that someone else has created an LLC if you want to ensure your party is not held completely liable for any issues that arise. As mentioned previously, a contract itself will not absolve you or your company of liabilities.
Should I Enter into a Joint Venture or a Partnership?
Most of the time when considering a joint venture versus a partnership, parties take things into consideration such as taxes, liability, and the commitment to the business. You should ensure that you understand what you are entering into before you do so.
You want to ensure that when you sign on the dotted line, you are doing what is best for yourself personally, as well as for any companies you have.
Taxes are also an important thing to consider, and you should understand how you or your corporation will be taxed when it comes to the profits and losses of the undertaking.
For more information on all things legal or involving taxes, you should always get competent legal and financial advice. The advice you get and the money you spend up front can save you millions later on.