It's exciting to think about starting a new business. One of the first things to consider is the form your business should take. Should it be a sole proprietorship, a corporation, a partnership or a joint venture?

The way your business is taxed, your legal liability, and government requirements are all factors to think about when deciding upon a business structure. Two business types to consider are a partnership and a joint venture.

Difference between Partnership and Joint Venture

A partnership involves two or more persons who agree to co-own a business for profit. The simplest type of partnership is a general partnership. Each partner has an equal say in making decisions and an equal share in the profits and losses.

A joint venture is similar to a general partnership. The difference is that it's formed for a specific, limited purpose or a limited time. For example, two companies might form a joint venture to develop a special computer chip that's too expensive for either company to develop alone.

State Legal Requirements

Specific rights and duties of the partners or joint venturers are spelled out in an agreement between the parties. State requirements for a partnership or joint venture typically include the following:

  • An express or implied contract showing the parties' intent to form a business 
  • An agreement for joint control and ownership
  • A contribution of money, property or services by the parties
  • The sharing of profits and, when required by local law, losses

In most states, partnerships and joint ventures aren't required to file certificates or other organizational documents with local, county or state authorities. Like any business though, they need a business license, trade name registration, and proper permits. Check with your local government to learn the requirements for operating a business in your community and state.

Advantages

Joint ventures are generally treated the same as general partnerships. So the two forms of business have the same advantages. These include:

  • Flexible arrangements. Members of the partnership can structure the partnership according to their agreement. Distributions of profits, losses and capital gains don't have to be directly proportional to the percentage interests held by the partners
  • Ownership transfer. Under buy-sell provisions of a partnership agreement, a partnership interest can be transferred to another person or to the partner's heirs or estate when a partner dies or becomes disabled. These buy-sell provisions may give existing partners a right of first refusal. That means the partners get the first chance to buy the ownership interest
  • Financing. General partnerships are attractive to lenders because the lender can look to the net worth of all the partners when loaning money

Disadvantages

Joint ventures and general partnerships have similar disadvantages. These include:

  • Individual liability. Each partner is liable for at least his or her share of the partnership debt. In some cases, each partner may be liable for the entire amount of all partnership debts and obligations
  • Death dissolves partnership. Under the laws of most states, partnerships end upon the death or withdrawal of any partner unless the partners agree to continue it. If there is only one partner left, the partnership dissolves unless another partner joins the partnership within a certain time 
  • Joint control. General partners don't have the right to act alone in making partnership decisions. But partnership agreements often give designated partners the power to make certain decisions
  • Limited funding. General partnerships are limited in their ability to get financing other than debt financing, borrowing money that is paid back over a period of time with interest

Tax Treatment

A significant advantage of a general partnership is that the business itself isn't taxed. Income, losses and gains pass through to the general partners according to the partnership agreement.

If there is no partnership agreement, income, losses and gains are allocated in proportion to the partnership interests of each partner. The partners then report their income, losses and gains on their individual income tax returns.

Is a Partnership Right for You?

Forming a partnership is often the easiest way to get a business up and running. Consult a business law attorney who practices in business formations for help in deciding whether or not a joint venture or partnership is right for you.

Questions for Your Attorney

• What is the difference between a joint venture and a general partnership?
• Can joint venturers structure their business by agreement?
• Are joint venturers personally liable for the debts of their joint venture?