Joint Ventures 101: What is Joint Venture Investing… and why isn’t it a Partnership?

Joint Venture investing is a fabulous way to conquer and find quick success in real estate, but so many investors find Joint Ventures (JV) confusing. What is this strategy anyways?

At Rethrive we’ve been investing in Joint Ventures since 2015 and it’s become our primary investing strategy. Most of our investment properties are owned with Joint Venture investors.

Now, I’m not a lawyer or an accountant but I do love research. Let me share what I’ve learned about joint ventures with you. I’ll even explain why a JV isn’t a “partnership” and give you some fun facts so you’ll feel just a little smarter at your next real estate networking event.

So, what is a Joint Venture?

The dictionary defines the term as follows:

joint ven·ture (noun): a commercial enterprise undertaken jointly by two or more parties which otherwise retain their distinct identities.

Lexico – Oxford University Press

In real estate, JVs are used by savvy investors to combine skills and/or resources to buy investment properties that they would not have normally been able (or willing) to purchase on their own. Instead of “divide and conquer” think of joint ventures as a way to combine and conquer.

But isn’t that a Partnership?

The short answer is: No. While “Joint Venture” and “Partnership” are also often incorrectly interchanged or combined together, there are different tax and legal implications for each.  

Joint Ventures are distinctly different from partnerships and anyone who is investing in a JV is definitely not a “joint venture partner.” Let me explain why…

A little Joint Venture history

Joint Ventures are still fairly new to North America.  In the US, JVs have only been recognized by courts and scholars as a separate form of business association since the mid-20th century. In Canada, JVs have only been recognized since the 1970s. 

In contrast, both partnerships and corporations have been generally recognized in both countries for over 200 years.1

While JVs are “new” – they aren’t uncommon. The biggest and brightest companies regularly use this strategy to further their business interests. JV collaborations commonly occur within the automotive, tech, healthcare/pharmaceutical, and food industries.

Famous Joint Ventures include:

  • Google and NASA working together to develop Google Earth.
  • BMW and Toyota co-operating on research into hydrogen fuel cells, vehicle electrification and ultra-lightweight materials
  • Tata Global Beverages (the maker of Tetley) and Starbucks to expand their combined reach into global markets.

Perhaps one of the most famous Joint Ventures is Sony Ericsson which was incredibly successful for over 10 years before Sony offered to buy out Ericsson.

And recently GlaxoSmithKline and Pfizer Inc. announced a JV to work together on their health businesses, a venture valued over $12.7 billion (US).

Understand the Key Differences between Co-Venturers and Partners

So if a JV and a partnership aren’t the same, how are they different? Here’s a high-level overview of some key differences I’ve learned, but as always it is important for you to consult with certified legal and tax professionals to determine what applies to the country and province/state where you are investing.

1. Scope: A partnership is an association of two or more people to carry on as co-owners of a business.  A JV is normally limited to a single undertaking or transaction.

2. Timeline: Joint ventures often operate for a specific period of time or with a specified purpose. Most partnerships are created without a defined end date and are not limited to a specific purpose or transaction.

3. Autonomy: Within a partnership, each partner cannot act autonomously because they do not have an individual identity. In a joint venture, each party retains autonomy.  Each party in a joint venture can independently participate personally or within a business structure (e.g. one sole proprietor and one a corporation).

4. Who can sign: Partners have the ability to “bind” the partnership. This means each partner can sign contracts and enter agreements on behalf of the partnership itself something that is not possible with a joint venture. A joint venture cannot contract in its own right.

5. Liability: Normally parties in a general partnership are jointly and severally liable for the partner’s obligations. This means each partner is liable for his or her own actions, the actions of other partners and the actions of any employees in the business.  

In Canada, there is no default rule for joint venture liability. Joint venture agreements normally agree co-venturers are only liable for their respective proportions of the joint venture’s investments and agreed expenses. However, the Canadian government and courts outline that even though a written agreement may provide evidence of the intention of the parties, the existence of such an agreement is not, by itself, sufficient proof that a JV exists and that the relationship is not actually a partnership.  

Important note: If the Joint Venture is not clearly defined in the written agreement or if the parties have acted more like partners than co-venturers, the courts or government may decide the relationship is actually a partnership (and tax or legislate it as such!)

6. Taxation: In a Joint Venture, the income and expenses are allocated to each co-venturer according to their percentage participation. Each party then calculates net income according to their personal tax situation.  It is possible for JV parties to claim different taxation for the same Joint Venture transaction.

This is different than a partnership where income expenses, capital cost allowance, etc. are deducted from net income before the net flows through to each partner.

So, which is best for you and your investments? Should you choose a partnership or a Joint Venture? Really it’s up to you because every individual and each investment is different. 

As with any investment decision, consulting with qualified professionals is key to making an informed and smart decision. Understanding tax and legal implications can be complicated so having an investor savvy attorney and tax professional on your team is crucial to understanding how to structure your investments.

Do you invest in joint ventures or partnerships? What’s your experience with these strategies? We’d love to hear about your story.

Sources:

(1) Joint Ventures – The Limited Fiduciary Relationship Structure by Bernhard J. Zinkhofer, 2009.

Distinguishing Between a Joint Venture and a Partnership for the Purposes of the Section 273 Joint Venture Election. Canada Revenue Agency. https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/p-171r/distinguishing-between-a-joint-venture-a-partnership-purposes-section-273-joint-venture-election.html

What Is the Difference Between a Joint Venture & a Partnership Agreement?by Kevin Johnston. https://smallbusiness.chron.com/difference-between-joint-venture-partnership-agreement-26330.html

Disclaimer: This post is for general information only and does not constitute legal or financial advice. Rethrive Properties always recommends working with qualified professionals who are experienced with real estate and joint ventures when deciding if this investing strategy is right for you.

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