A quick guide to joint ventures

Private sector businesses entering into partnership with local authorities may choose to do so under a joint venture arrangement - where both parties enter into a legal agreement to share the expenses, management and revenue of the specified project. A corporate joint venture is typically an appropriate choice for long term projects or to define a continuing business relationship, where the commercial risks and the rewards likely to be generated are shared by all parties involved. As more and more joint ventures are entered into between local authorities and private sector organisations, we look at the main features and considerations to be borne in mind when setting up a joint venture.

What is a joint venture?

Joint Venture (JV) is a term used to describe several different forms of co-operation, including:

• contractual partnering arrangements
• not for profit arrangements
• corporate and partnership structures

In this guide, we look at the principal corporate and partnership structures used in commercial JVs between local authorities and private sector organisations, the circumstances in which they (rather than contractual partnering arrangements) may be appropriate and some of the key pros and cons of each. There is no single format or vehicle which is best in every case - the answer to that will depend on the purpose of the particular JV and the needs and objectives of the local authority and its private sector partner.

Contractual partnering arrangements

These are used for a wide range of public private partnerships (PPPs) where risk is being transferred wholly or mainly to the private sector partner. They are simply contracts in legal terms and are not considered further in this note.

Corporate and partnership structures

There are three separate corporate structures commonly used in commercial JVs between local authorities and private sector partners:

• company limited by shares
• limited liability partnership
• limited partnership

These can also be used in combination (e.g. the general partner of a limited partnership will typically be a company limited by shares). These sorts of structures are generally most appropriate where the objective of the venture involves a sharing of longer term risk and reward by the parties.

The key characteristics of the different structures are:

Company limited by shares
This is a separate legal entity owned by its shareholders and run on behalf of the shareholders by its directors. The shareholders' liability is limited to the share capital they contribute. It is taxed on its own income and gains and, generally speaking, the shareholders are taxed only when profits are distributed.

Limited liability partnership
This is also a separate legal entity. It is owned and run by its members who (in the absence of some form of misfeasance) have no liability for its debts. An LLP is tax transparent (i.e. as a general rule its shareholders are taxed directly on their share of its profits).

Limited partnership
This is a partnership without separate legal identity. It must have at least one general partner (whose liability is unlimited) but the remaining partners have limited liability. The general partner (who must be the partner running the partnership) can be a company limited by shares. A limited partnership's partners are taxed on their shares of the partnership's profit.

The principal advantages of all three of these structures is that they represent suitable flexible structures for risk sharing and profit sharing while providing the benefit of limited liability. The tax transparency offered by the LLP and limited partnerships can often be attractive.

Whichever JV structure is used, it will be supported by a JV agreement that will typically itemise the parameters (in terms of purpose and timeframe) of the JV and a number of other issues such as funding, day to day and strategic operation and (in some cases) exit.

When is a JV appropriate?

A corporate JV of some sort will typically be the most appropriate choice where the venture concerned involves a long term alignment of the commercial risks being accepted by the parties and of the rewards likely to be generated by the venture.

The decision about which JV structure is most appropriate for any particular form of co-operation between the local authority and a private sector partner will be an outcome of the initial planning and appraisal of the venture rather than an initial input.

Points to consider in deciding on the optimum structure for any particular JV include:

• the parties' objectives in terms of risk transfer and participation in long term risk and reward
• the powers of the local authority - this is a complex and constantly evolving area which needs careful consideration case by case; in particular limited partnerships and limited liability partnerships can be used by local authorities in a narrower range of circumstances than companies limited by shares
• the tax and accounting treatment of the different structures
• the funding of the JV

This guide provides a very brief summary of some of the main issues affecting JVs between local authorities and private sector bodies.

For more information, contact Ian Holyoak at ian.holyoak@michelmores.com