Partnerships vs. Joint Ventures

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Partnerships vs. Joint Ventures

A partnership is a business made up of two or more co-owners that contribute resources, share in financial gains and losses, and are individually responsible for the actions done within the business. Individuals interested in forming partnerships must consider the pros and cons of a partnership before they enter into any contractual agreement. Partnerships come in two types, general and limited.The most appealing aspect of joining a general partnership is its simplicity in structure. A general partnership does not require any specific rules to form. The co-owners all have direct control within the business and can make binding decisions with a simple majority vote. If not stipulated in a written agreement, any profits made among co-owners are shared equally by default. The greatest advantage of being apart of a general partnership is that each co-owner is taxed separately on their share of the business’s profits.A limited partnership consists of both general and limited partners. General partners own, run and assume liability for the business, whereas limited partners serve only as investors; they have no control over the company and do not assume the same liabilities as general partners. Depending on the individuals and circumstances involved, partnerships can offer many benefits:

ProsShared start-up cost
Shared responsibilities and effort
Shared business risks and expenses
Team contribution of skills can potentially lead to greater achievement
Mutual support and motivation
A partnership may generate more long-term buy-inCons

There are very distinct cons associated with a partnership that merit careful consideration such as:

Owners can be held individually liable for business losses, meaning that creditors can file law suits to seize limited partners’ personal assets.

Unlike in a corporation, a partnership structure is based on mutual consent. If the mutual consent to continue a partnership is abandoned by one or more co-owners, the remaining individuals of the partnership are responsible for handling all of the business’s activities and all of the business’s debts incurred by their former partners.

Another disadvantage of general partnerships is that co-owners do not have total control over the business.

Since all decisions are shared, differences of opinion can lead to an unstable business environment where one partner will eventually buy out the other.

A partnership is typically much easier to get into than to get out of; a partnership agreement will almost always express specific details of how profits and losses are to be shared.

One co-owner may not put as much effort in the business as the other, or have a personality and skills that do not compliment the mutual goals of the partnership.

Joint Venture

A joint venture involves two or more individuals or companies entering into a legal agreement for the purpose of undertaking a particular business project or agenda. Unlike a partnership, a joint venture is not meant to last long term. Rather, it gives individuals and businesses the chance to collaborate their talents to create more business opportunities and more financial success. For example, an American company might have to establish a joint venture with a company in a foreign country to be able to set up overseas operations.

Pros

A joint venture allows a company to overcome its weaknesses or access new market segments by pairing with the other party.

Major companies decide that lack specific technical capability or expertise can learn the skills and technical capacity they need from the other party by the end of the joint venture.

A joint venture could enable companies to enter access greater resources, including new technology and specialized staff.

A joint venture helps stretch out the occurrences of risks a company would typically assume alone.

The predefined period of a joint venture also is a plus for companies that prefer not to form a long-term partnership.

Joint ventures are naturally flexible. It could exist in a limited, specified period or just cease to operate once common objectives and business goals are met.

Cons

It could take too much effort and time to establish the right and healthy relationship between joint venture partners.

Overcoming cultural cooperation and communications barriers are key drawbacks.

Offers less buy-in time than a partnership

Problems with company leaders agreeing on the best strategy plans for the venture.

With a joint venture, a particular party may abandon the joint venture but still be strongly engaged in its own business operations.

An imbalance in the level of investments, expertise, and assets infused into the business project could negatively impact a joint venture.

A joint venture would force companies to share risks.

According to market analyses, up to 60 percent of all joint ventures worldwide fail.

The joint venture objectives and goals may not be well communicated to all participants because of varying management styles and cultures of joint venture partners.

Partnership or Joint Venture?

Entering into a partnership can ease the burden of starting up your business. However, giving a co-owner(s) a share of your business has its challenges. Differences in personalities, values, work ethic, ideas, and objectives of how to run the business can prove problematic long term.

Before entering into a partnership, you must take a close examination of yourself to determine if joining a partnership is right for you. If you like the idea of being able to claim certain deductions ( i.e., contributions, buying new equipment, technology, software) as the co-owner of a business, then a partnership would be a good fit for you. On the other hand, if you prefer working for yourself, and don’t want to share your assets or consult with others when making business decisions, a general partnership would not be the type of business you should enter in. As an alternative, you may decide to enter into a limited partnership as an investor only.

When you have weighed all the risks and still decide to form a partnership, provide clarity of how your partnership will operate. Drafting a detailed legal agreement and making sure to involve a lawyer and an accountant in this process will allow all involved to know what is expected of them. The agreement should include who’ll be responsible for making purchases; percentages of capital contributions; who owns what; how decisions will be made, how profits will be divided, how disputes will be settled; how to buy out a co-owner and who will be entitled to what if the partnership fails.

If you prefer only a temporary partnership with individuals or a company to help you break into inaccessible markets, or to gain more skills or expertise with a certain facet of the business world, a joint venture may be the better business option as opposed to forming a partnership. It is always essential, however, to review your current business strategies and objectives prior to committing into any joint venture.

A joint venture not only offers you the ability to share the profits with the other party in a mutual way, but you can also exit the joint venture if it is not profitable. On the other hand, it could take too much time and effort establishing an ideal joint venture partnership. Moreover, you must ensure that joining a company belonging to a different culture that possesses different values from yourself will be flexible enough to fully cooperate with your business’s endeavors.

A joint venture is a business relationship that requires a commitment. Additionally, it is good business etiquette to offer some form of capital or expertise/technical contribution. To avoid having cultural or communication barriers impede your business’s success, make sure that all parties involved are all on the same page, so to speak, before entering the joint venture. It is important to note that joint ventures are sometimes used as clever strategies to gain exposure to a new business segment. In many cases, companies will go as far as using a joint venture as a facade to steal technical experts and professionals from other companies.

 

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