General Partnerships, Limited Partnerships, Contractual Joint Ventures, Non-Contractual Joint Ventures. There are numerous ways to structure your next business venture and various factors to consider when determining which structure is ideal for you and the goals you hope to achieve.
What is a Partnership?
A partnership is formed when partners—that is, two or more individuals or entities— carry on business in common, with a view to profit. Canadian courts have defined "business" to include every trade, occupation or profession.
Traditionally, at law, a partnership was not generally considered to be a separate legal entity; however, provincial statutes have been enacted to define when a partnership may, or should, be considered a legal entity. Currently, in most Canadian jurisdictions, a partnership is a separate legal entity that may sue and be sued in its own name, similar to a corporation.
Partnerships are taxed differently than corporations. Partnerships are considered to be tax transparent for Canadian income tax purposes. What this means is that whileincome is calculated at the partnership level, it is only taxed in the hands of the partners.
Partnerships are typically established partnership agreements, which sets out the rights and obligations that partners have towards each other and the partnership. In Canada, there are two main types of partnerships: General Partnerships and Limited Partnerships. Procido LLP lawyers are well experienced with drafting partnership agreements and can draft an agreement based on your needs.
General Partnerships
Two or more partners are required to establish a general partnership. Typically, in a general partnership, all partners have unlimited joint and several liability, which means that each partner is liable for all the debts and obligations of the general partnership unless the partnership agreement says otherwise.
General partnerships can have equity partners and non-equity partners. A non-equity partner is a partner who is entitled to a fixed share of partnership profits and, depending on the terms of the partnership agreement, may not be responsible for the partnership's losses.
Limited Partnerships
Limited partnerships are made up of a general partner and one more limited partners. A general partner manages the business of the partnership and has unlimited liability. Limited partners typically have no right to manage the business of the partnership, and, in turn, have limited liability. Limited partners, in effect, act as silent partners that have invested in a company. To participate in a limited partnership, the partners must enter into a partnership agreement.
The main advantage of a limited partnership is that the limited partners can protect their personal financial obligations from their investment in the partnership. A general partner in the partnership is typically willing to take on more risks in order to raise funds for the partnership. The structuring of limited partnerships can be complex, and we encourage you to reach out to our team at Procido if you are setting up a limited partnership.
What is a Joint Venture?
A joint venture is not a legal entity capable of contracting on its own. Joint ventures can be established in several ways as a corporate joint venture, partnership joint venture, or contractual joint venture. Historically, joint ventures have been viewed as partnerships, with contractual joint ventures being a newer, less understood concept; the exception to this general statement being in Alberta, where contractual joint ventures have long been used in the oil and gas industry.
Contractual Governance of Joint Ventures
Joint venture relationships are governed by contracts between the joint venture participants. However, there are several ways to contract a joint venture relationship, including in the form of establishing a new corporation to carry out the joint venture (for a corporate joint venture), joining together as partners (for a partnership joint venture), or agreeing contractually on how the parties will operate the joint venture (for a contractual joint venture). Under each scenario there may be specific legislation that governs the joint venture, such as a business corporations' statute for a corporate joint venture or a partnership statute for a partnership joint venture.
Joint ventures are frequently used as an alternative to mergers and acquisitions (M&A) because they allow the parties to achieve their objectives without giving up their autonomy.
Planning for Joint Venture Exits
Many joint ventures do not have a long lifespan. Often, parties enter joint ventures with an exit strategy in mind. Even if the parties do not intend to exit or terminate a joint venture in the foreseeable future, the parties of a joint venture should consider setting out exit or termination procedures in detail at the outset to avoid disputes later on.
Allocation of Interests and Commercial Realities
A party in a joint venture will typically be provided control of the joint venture that is commensurate with their stake in the joint venture and commercial realities. For example, a party who owns 25% of a joint venture is typically not entitled to the same rights, and cannot make the same demands, as an equal or majority owner of the joint venture. Procido lawyers can help you understand how to advocate for your interests in a joint venture, while also being mindful of the commercial reality of the joint venture.
Tax Considerations in Joint Ventures
The tax profile of a joint venture, and the impact on each party to the joint venture, will depend on the type of legal vessel that the parties use for the joint venture. However, generally, parties to a joint venture are typically operating separate businesses and seek to establish a joint venture structure that will allow them to report their income and expenses separately for tax purposes.
Conclusion
The success and longevity of a joint venture depend on well-defined contractual agreements that address exit strategies and the allocation of interests. Ensuring these elements are clearly outlined can prevent future disputes and protect the interests of all parties involved. Proper legal guidance is essential when crafting agreements for a joint venture, particularly in navigating the complexities of ownership rights and tax obligations. With careful planning and the right legal support, joint ventures can be a strategic tool for achieving mutual business objectives. We encourage you to reach out to our team at Procido for advice and assistance in setting up a joint venture.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.