Partnerships and Joint Ventures

A partnership is an arrangement involving two or more persons who have agreed to undertake a business venture as co-owners, with the intent to make a profit. The simplest type of partnership is known as a "general" partnership.

A joint venture is similar to a general partnership, except that it is formed either for a specific, limited purpose or for a limited period of time. For example, technology companies often form joint ventures to fund research and development of a particular item useful for their respective businesses (such as a specialized computer chip) when development might be too expensive for either company to fund alone.

State requirements for a joint venture typically include the following:

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

Laws in the state where the partnership or joint venture is formed typically govern the rights and duties of the partners or joint venturers, if these aren't spelled out in an agreement between the parties. In most states, partnerships aren't required to file any certificates or other organizational documents with local, county or state authorities, but usually must file a "trade name certificate."

Advantages

Because joint ventures are treated the same way as general partnerships, the two forms of business have the same advantages, including:

• The arrangement of duties and benefits are flexible. Members of the partnership can structure the partnership according to their agreement. In a partnership, distributions of profits, losses and capital gains don't have to be directly proportional to the percentage interests held by the partners.
• 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 he dies or becomes disabled. These buy-sell provisions usually give the partnership and the existing partners a "right of first refusal" when a partner wants to transfer his interest in the partnership, even if the transfer is to a member of the partner's immediate family.
• General partnerships are more attractive to lenders because the lender can look to the accumulated net worth of all the partners when loaning money.

Disadvantages

Joint ventures and general partnerships have similar disadvantages, such as:

• Each partner in a partnership is liable for at least his pro rata share of the partnership debt. Under some circumstances, each partner may be liable for the entire amount of all partnership debts and other obligations.
• Under the partnership statutes of most states, partnerships usually terminate upon the death or withdrawal of any partner unless the partners agree to continue the partnership.
• If there is only one partner left, the partnership will be dissolved unless an additional partner (or partners) is admitted to the partnership within a certain time period.
• General partners don't have the right to act alone in making partnership decisions. But partnership agreements often give designated partners the authority to make specific kinds of agreements.
• General partnerships are limited in their ability to get financing other than "debt financing," which is borrowing money that is paid back over a period of time with interest.

Tax Treatment

On the matter of taxes, some courts have assumed that an enterprise that is a joint venture under state law is a partnership for tax purposes. Other courts have applied a federal standard and examined the arrangements to determine whether the venture is a partnership on the basis of the parties' intent, sharing of profits and losses, mutual control and other facts and circumstances.

One of the advantages of a general partnership is that, like a sole proprietorship, the business is not taxed. Income, losses and gains are passed through to the general partners according to the partnership agreement. If there is no partnership agreement, income, losses and gains will be allocated in proportion to the partnership interests of each partner. The partners then report their allocations of income, losses and gains on their individual income tax returns and pay tax accordingly.

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?

Sherrie Bennett is the former director and staff attorney at the University of Washington Student Legal Services in Seattle.

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