When 2 or more already
established organisations decide to enter a new project together, there is a
limited number of legal frameworks that will fit around the plan.
Whichever is chosen will
have its own legal and tax consequences. Some may have undesirable
consequences, as a result of the framework which has been chosen, and which
will apply whether or not they are either wanted or foreseen.
If it is not clear what
particular framework has been chosen, or if it has not been structured
properly, the law will fit the actual arrangement into whichever framework most
closely fits the facts, and will assume (whether or not such is the case) that
all the consequences of that were intended.
The possible frameworks
are:
Whichever of these
approaches you choose, I can help with setting it up in the way which most
closely matches your needs - so feel free to
mail me for more information.
The new venture is wholly
owned by one party, who takes all the risks of loss and keeps all the profits,
capital and revenue. The other party is paid for its involvement either by a
fixed fee (ie consultancy) or by a percentage of gross returns (ie commission).
This may be ikely to suit
what is required, but is simplest to set up and has few complications. You must
realise that the new venture will be wholly owned by one party, which will
receive all the profits and any capital value that the new venture may acquire,
and which will have the sole decision-making responsibility. The other can be
paid either by a fixed fee, or by a percentage of the gross turnover. There are
dangers in making this a percentage of the net profits instead of the gross,
because then it looks too much like a partnership - and could all too easily be
held to be one.
This will be suitable for
the kind of situation where only one party has the resources to support the new
venture, or is able or willing to carry the risks.
The new venture is
structured as a partnership between two or more existing enterprises. It will be
governed by the law relating to partnerships.
Section 1 of the
Partnership Act defines a partnership as being 'the relationship which subsists
between persons carrying on a business in common with a view of profit'.
Business is widely defined as being 'every trade, occupation or profession'.
Under English law a partnership is not a separate legal entity, and the
question of whether a partnership exists in law can only be answered by
considering all the circumstances in the light of the statutory definition - ie
regardless of whether the parties say it is, or is not, a partnership.
If two or more persons or
companies trade on the basis that they share profits - ie net receipts, as
opposed to gross turnover - then whether they like it or not, and whether they
expect it or not, it is likely that they will be treated as if they were
partners, with all the legal consequences of that.
Some of those legal
consequences are capable of being changed by express agreement between the
parties - such as:
Some of the legal
consequences however cannot be changed:
The potential consequences
of these aspects which cannot be changed are where the dangers lie. Your own
existing business is wholly at risk, without limit as to amount, from
commitments and liabilities to third parties, which may be incurred by the other
partner, even without your knowledge and even if incurred in breach of your
partner's obligations to you.
And if, for example, the
joint venture were to succeed but the other party's own business failed and
went into liquidation, this would put an end to the joint venture even though
it was succeeding, and you could find the revenue and other creditors coming to
you for payment of liabilities relating to the joint venture - without limit as
to amount and regardless of the value of your stake in the joint venture.
These risks generally make
partnership an unwise choice for a joint venture. It is potentially far more
serious than giving a third party sole signing rights over your bank account.
And even if you're prepared to do this - would they? And would they be
impressed at your business acumen if you were to propose it?
Partnership is rarely
chosen in this situation by those who take the trouble to consider the
consequences, even in a situation where the risks appear to be very minor. If
it is chosen, it is essential for a proper partnership agreement to be prepared
which clearly defines the position and responsibilities of each party.
Despite the risks,
partnership can have some advantages. A partnership is quick and easy to set
up, and internal arrangements are flexible enough to be able to be structured
as the parties require. Generally however the disadvantages will outweigh the
advantages.
See also
partnership FAQ.
A new limited partnership
is set up to be the trading vehicle for the joint venture. Limited Partnerships
were created by the Limited Partnerships Act 1907. They are not very popular.
There must be at least one partner whose liability for partnership debts is
unlimited, and one or more partners whose liability is limited. They must be
registered at Companies House, although accounts do not have to be filed. They
are cumbersome, and relatively expensive to set up and administer. Mentioned
for completeness, not recommended, and not considered further here.
Each of the existing
enterprises sets up a new company as its wholly owned subsidiary. The new companies
so set up then enter a partnership with each other.
Basically this provides a
way of safeguarding against the risks of partnership to the partners' existing
businesses, combined with the flexibility of partnership. The new subsidiary
companies can be ordinary 'off-the-shelf' trading companies.
The new subsidiaries act as
a 'firewall' and limit the liability of the existing companies to contribute
towards the partnership's liabilities to the amount of any unpaid capital they
have agreed to subscribe to in the subsidiaries - which may be purely nominal.
Arrangements between the
new companies will need to be structured in a partnership agreement, which can
be tailored to the needs of the situation and the venture.
Shares within the subsidiary
companies can be transferred without reference to the other party (unless
restricted by the terms of the partnership agreement).
This is the most complex
arrangement of those considered - and the most flexible.
Since the coming into force of the Limited Liability
Partnerships Act 2000, this option is probably of limited value – most of the
benefits to be gained can be obtained with considerably less administrative
overhead and cost by using a LLP.
A new company is set up,
jointly owned by the existing enterprises, for the express purpose of being the
trading vehicle for the new venture.
The Articles of Association
of the new company need to be drafted to suit the needs of the situation - an
'off-the-shelf' company will not do the job - although once the articles have
been drafted they can be sent to the company agent usually used and he can be
asked to then form the company incorporating those Articles.
The Articles constitute the
internal rules or constitution of the company.
An agreement will also need
to be prepared between the existing businesses in their capacities as
shareholders in the new company to regulate other matters relating to the joint
venture itself.
There are basically three
types of situation which can be covered by this option:
This kind of option will
generally be the most suitable for the usual joint venture.
A
new Limited Liability Partnership, set up under the LLP Act 2000.
The
LLP is a half-way house of sorts between a partnership and a limited company,
having some of the characteristics of each.
To see a comparison of some of these click
here.
A
LLP may be considered as a substitute for either 2 (partnership), and for all
practical purposes supercedes 4 above.
This
is not an arrangement having any particular legal significance; I am however dealing with it as a separate
heading because this is a particular type of commercial arrangement which seems
to be becoming popular in practice. The essence of the relationship is
mutual cooperation, for the benefit of both, and to the detriment of neither -
Win-Win – and ‘mutuality between equals’.
Typically,
a relationship (often ongoing) between two businesses of similar size and in a
similar area, but each having some elements of skills or resources lacked by
the other. In broad terms, for each prospective
‘partner’, there are material areas where one has skills or resources that the
other lacks, and where that lack is an obstacle to securing contracts with
clients; and (again in broad terms) the
‘partners’ are reasonably equal. There
are some areas where they do not tread on each others’ toes.
Often
they will manage the pre-sales process to a third party client together, and
then one will enter (a) a contract with the client for the provision of an
overall service, and (b) with the other to hire-in part of that service.
The arrangement needs to be
genuinely fair both ways - and seen as such by all. Whatever position is to be adopted on any
particular point, there will be occasions when each party is on one side of the
fence, and also other occasions when that party is on the other side of
it. One’s self-interest is served more
by the opportunities from the longer term relationship than by short term
advantage, to the detriment of the other.
The higher the ongoing relationship is valued by each party, the easier
it becomes in practice, and the less one needs to rely on the strict legalities
of the relationship. The fewer the areas
where the parties risk treading on each others' toes, the easier it is; and the greater those areas, the more
sensitive things become. Likewise the
greater the general level of equality (size, resources etc) between the
‘partners’, the easier it is – each has an equivalent value to bring to the
party; and the converse applies also.
Key
points that can help to make these arrangements work:
A Mutual
cooperation to
·
secure
a third party contract
·
perform
that contract
·
make
the sales process easy by fitting in with what the client wants and with the way
in which the client wants to do it - one primary point of client contact, one
invoicing entity etc - seamless to the client's eye
B Proper
respect for the other party's
·
business
connections - for an opportunity put on the table by one partner; and for future opportunities with a client
for whom a task has been jointly performed
·
confidential
info
·
staff
C Sharing
of
·
rewards
(ability of each to profit commensurate with effort)
·
'external'
risks (outside the control of either - such as non-paying client)
D Acceptance
of responsibility for own performance, acts & defaults
·
neither
party should suffer additional exposure because of the other's mistakes
E Clarity
·
Consistency
in presentation to client ‘as one’
·
Legal
position – not partners in the strict legal sense
·
The
party who owns the lead should generally front with and contract with the
client, and have the final ‘say’ on ‘how’ and ‘who does what’ questions in
pre-sales matters (at this point the other party can always decline to go
forward with the opportunity)
F Openness
·
Open
book policies on rates as between the partners
·
Openness
to client – client knows dealing with one party but that the other is involved,
and on what basis
G Certainty
·
To
ensure client-driven terms are reflected, client contract needs to be
negotiated first with both partners involved – then conditional contract for
the task itself (reflecting those terms as appropriate) needs to be in place
between the partners before the fronting partner contracts with the client
Overall,
these arrangements can allow smaller business entitles to compete effectively
with larger businesses which might be able to provide the entire service as a
one-stop-shop – by being cost-effective and flexible.
Again,
this is not an arrangement having any particular legal significance, but I am
dealing with it as a separate heading because this is another type of
commercial arrangement which seems to be becoming popular in practice. One of the parties here will be in the public
sector, and the other in the private.
Whilst the word ‘partnership’ is used, the arrangement is not one of
partnership in the legal sense of the term.
Typically,
this is an arrangement where each party brings something fundamentally
different to the ‘party’, and the combination of what they each have to offer
gives the opportunity for both (and also the public) to gain. Instead of (eg) the public authority simply
engaging the private entity to provide a service for a fee, the parties enter a
more complex arrangement, under which they may provide separate aspects of an
overall service, and share in the rewards of it. Often there is a high degree of uncertainty
as to the profitability of the venture – even though public responsibilities
may make profitability only one of several requirements.
A
recent example I dealt with:
A local authority, having
responsibility for collection and recycling of waste, which wanted to enter a
PPP with a waste management company (a private company, although in fact wholly
owned by a neighbouring local authority).
The company had the land for a waste
processing facility, the requisite licence to use that land for the purpose, the
infrastructure to run a facility, and a source of waste – but did not have the
resources to buy the equipment, or a large enough source of waste to make it
financially viable.
The local authority had grant funding
for the equipment to set up the facility, and another source of waste – but did
not want to become involved in the operation of the facility.
Thus each brought essential elements of
the end package to the party, and we were able to structure an arrangement
whereby it would be set up and operated, with both sharing the returns from
it. The last I heard, it was working out
very well.
Before you can start to set
up the legal framework, there are various issues that need to be addressed.
These can be summarised as follows (you can download this section as a checklist
by
clicking here):
1 What are the objectives
of the joint venture?
2 Who puts what in?
3 Will any external funding
be needed?
4 Who gets what out?
5 Who controls what?
6 What happens if either
party 'wants out'?
7 To what extent will the
parties be free to carry on other businesses
8 Is it intended that
spouses/partners should also be shareholders, to allow for tax advantages from
a broader split of dividends?
9 Are there any offshore
angles:
If the
answer to any of these is ‘yes’, then careful planning and setting appropriate
structures in place now can save a lot of money in taxes in the future –
so if you think any of these may apply, then ask!
There will probably be more
questions following from the answers to the above, but these questions set out
the basics.
I'd really appreciate your
feedback on this FAQ - so
mail me and tell me what you think
of it, if it's been useful to you, or let me know of any specific problem you
have where I may be able to help.
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