Partnership vs Joint Venture

Partnership vs Joint Venture

In this insight we explore the differences between partnerships and joint ventures, two types of business structure that are often mistaken for one another.

To confuse matters from the outset, it is important to note that a joint venture is not excluded from being a partnership, in that joint ventures may be carried about by a variety of business structures (including partnerships). In such cases, the joint venture would be regulated as a partnership by the relevant legislation.

The key differences between a joint venture and partnership are summarised in the below table.

Partnership

What is a Partnership?

A partnership is a commercial relationship between two or more people (up to 20) that comes into existence upon operating a business together.

A partnership may be established and governed by way of:

1. (explicitly) executing a written partnership agreement between the relevant parties; or
2. (implicitly) the inferences from the circumstances surrounding the relevant parties.

Unlike a company, a partnership is not a separate legal entity meaning that the parties comprising a partnership (Partners) and the partnership itself are regarded as one and the same. Consequently:

1. Partners are completely liable for the debts and obligations of the partnership; and
2. the partnership itself does not pay tax, but rather the business income is distributed between the Partners who then pay tax on their share of the income received.

Legislative Framework

In Australia, partnerships are regulated by relevant legislation in all the various jurisdictions.

For the purposes of this insight, we focus on partnerships in NSW which are regulated by the Partnership Act 1892 (NSW) (the Partnership Act).

Section 1(1) of the Partnership Act defines a partnership as “…the relation which exists between persons carrying on a business in common with a view of profit…”.

If you are interested in how partnerships are regulated in other states and territories, please don’t hesitate to contact us.

Existence

The Partnership Act, by way of the following provisions, sets out a list of various circumstances that indicate the existence (or non-existence) of a partnership:

(Joint Property Ownership – s2(1)(1)) section 2(1)(1) states that “Joint tenancy, tenancy in common, joint property, or part ownership” does not on its own create a partnership, whether the tenants/owners shared profits or not;

(Profit-Sharing – s2(1)(2)) section 2(1)(2) states that the “sharing of gross returns does not of itself create a partnership’” suggesting that profit-sharing alone is not enough to determine the existence of a partnership;

(Receipt of Payment – s2(1)(3)) section 2(1)(3) states that “the receipt by a person of a share of the profits of a business is prima facie evidence that the person is a partner in the business” and therefore, although rebuttable, such receipt, or a payment contingent on the profits of a business suggests that person is a partner in the business;

(Employee Profit Sharing – s2(1)(3)(b)) section 2(1)(3)(b) establishes that sharing profits of a business with an employee who is engaged in the business via a contract does not make them a partner;

(Relatives of Deceased Partners – s2(1)(3)(c)) section 2(1)(3)(c) states that the widow, widower, or child of a deceased partner who receives a portion of the business’s profits is not a partner; and

(Creditors – s2(1)(3)(d)) section 2(1)(3)(d) states that a creditor lending money and in turn receiving a share of the business’s profits does not make them a partner.

In determining the existence of a partnership, a Court will consider these legislative factors in light of the circumstances surrounding the parties including, without limitation:

1. the parties’ intentions and the nature of the relationships between the parties (i.e. whether (or not) the parties intended to act as partners);
2. whether (or not) the parties acted as partners through acting in the interests of all parties as a whole; and
3. whether (or not) there was evidence of mutual trust and confidence having been extended between the parties (that might suggest the parties acted as partners through acting in the interests of all parties as a whole).

Liability

In a partnership, Partners “jointly” liable for all of the debts and obligations of the partnership that are incurred (whilst that person is a Partner).

In accordance with the Partnership Act by way of the following provisions, partners are jointly responsible for all the actions of the other partners:

(Binding Effect – s5(1)) section 5(1) states that “Every partner in a partnership…is an agent of the firm and of the other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm…binds the firm and the other partners…” and therefore any act carried out by a partner within the scope of the firm’s usual business is binding on the firm and all the other partners;

(Debts – s9) section 9 establishes that every partner in a firm is liable jointly, alongside all the other partners, for the debts and obligations of the firm that are incurred whilst that person is a partner, and even if a partner dies, their estate will still be liable for unsatisfied debts; and

(Wrongful Acts – s10) according to section 10, if a partner in a firm commits a wrongful act or omission that causes loss or injury, and they are acting within the ordinary course of the partnership’s business, then the firm is liable to the same extent that the partner is, and such liability in accordance with section 12 is joint and several.

In Polkinghorne v Holland (1934) 51 CLR 143, a partner in a law firm gave poor investment advice to a client of the firm. He advised her to invest in a company which he was associated with and then took her money and disappeared. The client successfully sued the other partners of the firm because the fraudulent partner’s advice was considered to be within the ordinary course of business.

Joint Venture

What is a Joint Venture?

A joint venture is where two or more parties (Participants) cooperate in order to undertake a specific project or achieve a certain goal.

A joint venture lasts for a limited time and ends at the end of a specific project (as opposed to a partnership which is ongoing).

In a joint venture each Participant separately contributes their own particular skillset and/or expertise.

A joint venture may be carried about by a variety of business structures, including partnership, company, trust, agency and joint ownership.

A joint venture may be established and governed by way of:

1. (explicitly) executing a written joint venture agreement between the relevant Participants; or
2. (implicitly) the inferences from the circumstances surrounding the relevant Participants.

In determining the existence of a joint venture, a Court will consider the substance of the relationship between the Participants. If the relationship is purely contractual, the Court is likely to classify the structure as a joint venture, whereas if there is evidence of mutual concern between Participants, the Court is likely to categorise the relationship as a partnership.

Existence

In Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321, the question before the Court was whether the relationship between two companies was a partnership or a joint venture, and even though there was an agreement stating that it was a joint venture, the Court held that the two companies were partners. This was because:

1. they were in “a commercial enterprise with a view to profit”, whereby the profits were to be shared pursuant to section 2 of the Partnership Act; and
2. the business was being conducted with ‘mutual concern’ whereby the parties were concerned with each other’s financial stability in such a way common amongst partners.

Similarly, in United Dominions Corp Ltd v Brian Pty Ltd (1985) 157 CLR 1 (United Dominions), the Court held that, despite the wording of the existing joint venture agreement, the profit-sharing that occurred between the companies indicated the existence of a ‘fiduciary relationship’ (between the companies) and a partnership pursuant to section 29 of the Partnership Act (provides that partners must account to other partners for the profits they gain in the course of a partnership).

Further, in United Dominions, for the purposes of distinguishing joint ventures from partnerships, Dawson J stated at [15-16] that:

“Perhaps, in this country, the important distinction between a partnership and a joint venture is, for practical purposes, the distinction between an association of persons who engage in a common undertaking for profit and an association of those who do so in order to generate a product to be shared among the participants… the feature which is most likely to distinguish them [joint ventures] from partnerships is the sharing of product rather than profit.”

Liability

Joint venture Participants can specify in the terms of their joint venture agreement whether (or not) they are to “jointly” share the liabilities of the joint venture or if each Participant is separately (i.e. “severally”) responsible for the liabilities of the joint venture.

GST Context

Notwithstanding that the definition of joint venture remains unclear (with neither profit-sharing nor product/output-sharing a determinative feature), in the context of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act), the joint venture definition can be narrowed and distinguished from a partnership.

For the purposes of the GST Act, a joint venture is considered an arrangement between 2 or more parties, characterised by the following features:

1. sharing of product or output (rather than sale proceeds or profits);
2. a contractual agreement between the participants;
3. joint control;
4. a specific economic project; and
5. cost sharing.

For a joint venture to exist for GST purposes, the first feature, sharing of product or output, must be present. The other features however, are indicative of the existence of a joint venture. While it is expected that the other features will also be present, there may be circumstances where not all are present (e.g. a joint venture established by statute where there is no separate joint venture agreement).

It is also important to note that partnerships, companies, trusts and any other unincorporated association or body of persons are treated as separate entities under the GST Act. Accordingly, for GST purposes, the term joint venture does not include incorporated joint ventures, partnerships or trusts.