Starting a business is a stressful and rewarding endeavor that should never be taken lightly. There are a lot of little things that need to be done before the business is up and operating: finding capital, finding office space, warehouse space, hiring employees, and filing the necessary paperwork with the state to actually form the business. This isn’t something you have to do alone. In fact, you may have a partner or partners you’d like to go into business with.
There are a lot of articles that confuse joint ventures and partnerships and I’d like to take some time to clear up the distinctions between the two.
Partnerships are considered long-term business relationships with the intention of operating together on all matters endlessly. There are many different kinds of partnerships: General, Limited, Limited Liability, etc. But they all have the same principle: two people partnering together to create a company.
Say you own a printing press and your friend is a pen-and-ink artist. The two of you would like to start an art printing business with the intention of working together for a long time. The two of you will share all the responsibilities of running the business and contribute your individual expertises when necessary. This is a partnership, the scope of the work you’re each performing is indefinite and equal.
This is a catch-all term for two companies or organizations teaming up for a specific goal or purpose where there is a definite end to the scope of their work. Where a partnership is two or more individuals working together forever, when two businesses decide to team up on building and distributing some new service or product it’s a joint venture. They aren’t strictly partners, they’re just in a contractual relationship.
A great example of this would be if Exxon and Texaco find the next huge oil reserve in the Arctic. It’s a potentially high-risk/high-reward endeavor and Exxon could do it by themselves; however, they want to marriage their risk a little bit so they go to one of their competitors, Texaco, and say “Hey we’ve got a deal that we want to put together would you Joint venture with us? We’ll provide labor and equipment, you provide finances and legal resources.” Since the scope of the project will have a definite ending and when it’s resolved they’re sharing their costs and profits it’s a joint venture.
The joint partnership can manifest itself in an entirely new entity. This is commonly used to receive lower taxes. Exxon and Texaco form Texxon for the purposes of this newly found oil. This new entity is a partnership, but it’s done through a joint venture. Sound complicated? It is! And doing this also complicates the burden of responsibility should anything go wrong.
In a partnership all partners are joint and severally liable (in the context of a general partnership, not a limited partnership). Remember the art printing business? Turns out it’s not very profitable and the artist decides to cook the books so they don’t have to pay as much in taxes during a slow-business quarter. If the IRS or the Texas Comptroller catch on then both parties in the business are liable for the fraud. Even if one or the other individual wasn’t aware of the illegal activities of the other.
The same is true for a joint partnership, but contracts can be drawn up so that portions of the liability fall on one or other of the partners. Exxon is a much bigger company than Texaco and wants 75% of the profit and Texaco takes 25%. That’s fine, they’re only doing 25% of the work and they agree. But tragedy strikes and there is an accident at the rig. Some workers lose their lives and Exxon and Texaco now have to pay out large sums of money to the surviving families. Exxon would now be responsible for 75% of those pay outs and Texaco would only have to cover 25%.
In reality, the question should never be whether you should create a partnership or should you go into a joint venture. Often there is some combination of the two. As always, we are here to help clients navigate through the sometimes complicated legal aspects of forming and building their businesses. Contact us today and let us know how we can help you.
Romano & Sumner – Sugar Land, TX Attorneys