July 2009
Joint venturing – an overview of some of the different business models you can use for joint ventures
There are plenty of things you need to ask yourself when entering into a joint venture. I cover these in some depth in the next issue of The Business when looking at the joint venture company. The best approach is to start from basic principles. Ask and resolve basic questions about each party’s aspirations, objectives and concerns whether short, medium or long term. Anticipate what might happen in future and how each party might want to deal with it. Then put together the terms for a working relationship which addresses these issues.
The expressions ‘partnering’ and ‘joint venturing’ can cover a wide range of different types of venture, with any number of different individuals or companies joining together as stakeholders in particular ventures. The following are different possible ‘joint venture’ models, with very brief explanations of some of the differences which might help you to choose which to use. In fact all of the business models mentioned earlier could be said to have an element of ‘joint venture’ to them – in the sense that the expression simply indicates that two or more people or businesses are entering into a venture.
Joint venture companies
A joint venture company is an appropriate business model for people looking to go into a standalone business with each other. The business has its own legal identity. Shareholders have the benefit of limited liability [see below]. A company is the easiest structure to raise finance for. A company will develop an underlying value which means the shares in it will also have a value. One of the most difficult issues to address is how different stakeholders should share in the growth in value of a private company.
Partnerships and LLPs
A partnership or a limited liability partnership (LLP) is generally an appropriate business model for people looking to work together with each other in a business. They will look to share profits with each other in each year, but may be less concerned at building up an underlying ‘saleable’ value for the business as a whole. Partners in many partnerships, such as law or accountancy firms, will look to take home a good profit share each year, whereas many company directors may look to expect a smaller salary but with the potential of a large ‘windfall’ when they sell their company. As ‘people’ businesses, most partnerships will look to develop a system where partners can retire and new partners can join.
Technically, only partnerships should be called firms. But don’t let me stop you calling a company a firm if you want.
Contractual arrangements
Many joint ventures involve one-off arrangements with two or more businesses looking to share resources or work together on specific initiatives. The limitations are as far as your imagination – if you think of something you can put together a contract to cover it - but here are some examples of different types:
• Businesses agreeing to make different contributions (eg money, people, IPR, property and equipment) to specific shared business initiatives, and agreeing how they can each exploit the fruits of their endeavours. Examples are:
o research and development agreements
o collaboration or cooperation agreements
o simple agreements sharing the cost of marketing initiatives
• Referral fee/ ‘affiliate’ arrangements, where businesses reward others for introducing new business to them. In a marketplace where roughly half of all SME turnover comes from networking and word of mouth marketing, it is in some ways surprising that more businesses do not have simple open arrangements where they let their business contacts know that they will reward them with a referral fee for any new business which they put their way. They are your outsourced sales and marketing team! More on this in my next newsletter, possibly.
• Simple arrangements to share resources, eg seconding employees; sharing office or warehouse space.
‘Members’ organisations
Other business organisations, such as companies limited by guarantee, mutual societies, trade associations and members’ clubs will be appropriate for groups of people with similar interests looking to do business with each other. Or looking to do business with each other’s help. They can help member businesses with resources, profile raising and other things. They don’t have the complications which arise from having a joint venture company. They are designed either not to make a profit; or for any profit to be rolled over for the benefit of their members as a whole. (Very occasionally such an organisation might develop an underlying value of its own, and occasionally carpetbaggers come along and look to ‘demutualise’ them (ie turn them into a limited company which is sold to new shareholders) which might produce a ‘windfall’ for its members (in return for them losing all control...).)
At a very simple level, these organisations do not need to be a separate legal entity. You can call them what you want (a club, an association, a network, a group...let’s call them ‘unincorporated associations’ because you expect long words from lawyers!). But when things get more sophisticated, it can become sensible to set up a separate legal entity. The most common method is as a company limited by guarantee. (Occasionally one comes across organisations, such as Friendly and Provident Societies or old-fashioned Building Societies, which are created and regulated by special legislation.) See below for an explanation of the main differences between companies limited by shares and companies limited by guarantee.
Pros and cons of using unincorporated associations as against companies limited by guarantee
Having its own legal identity makes a company limited by guarantee a more appropriate model to use when the organisation itself needs to start doing things, rather than simply acting as a medium through which its members can interact with each other.
• A company can own its own assets. Unincorporated associations can’t – their assets need to be held by members, and complicated issues of trust law (and trustees’ duties and liabilities) can arise.
• A company can enter into contracts, and as a limited liability company its members are not liable for its obligations. Whereas everything an unincorporated association does needs to be done by some or all of its own members.
• A company’s members can contract with it, rather than just with each other.
• A company can own money on its own account, including members’ subscriptions.
• A company can borrow and lend money, and can offer security over its own assets for its borrowings.
• Members of unincorporated associations have a greater risk of being held to be acting in partnership with each other, with the potential liability and tax consequences.
• A company has its own accounts and tax treatment.
On the other hand, an unincorporated association has the advantage that you can make it as informal as you like. It does not even need any written rules or set-up costs – although the absence of a defined legal structure to base it around makes it quite hard to put detailed rules together should you want to do so.
Some issues to consider for a company limited by guarantee
• Who will be the initial members?
• Who is allowed to be a member? Who can decide who will be a member?
• Do you want different categories of members with different voting rights?
• Who decides who should be on the board of management of the company? How should directors be appointed and removed? Should they retire by rotation?
• How should the company be funded? Should there be different categories of subscription?
• What benefits should it offer to its members, including different categories of subscribing members?
• Should there be any restrictions on what its board can and cannot do?
Confused about some of the expressions being used?
• Public or private?
o Companies are generally either public limited companies (eg XYZ PLC) or private limited companies (eg OnHand Counsel Limited).
o Public companies are so named basically because shares in public companies are allowed to be offered to the public at large, and traded on regulated share markets (such as The London Stock Exchange or AIM (the Alternative Investment Market)).
o Private companies are so named because they are not public companies and ‘private’ is the opposite of ‘public’!
o Whilst there is a lot of overlap, the laws governing public companies are generally more detailed and restrictive than those for private companies.
o All companies limited by guarantee are private companies.
• Members/shareholders?
o The Companies Act and other legislation call the ‘owners’ of a company ‘members’.
o The members of companies limited by shares (whether public or private) own shares and are usually known as shareholders. Shares have a value which is linked to the value of the underlying business.
o Companies limited by guarantee do not have shares. Their members are simply called ‘members’! Their constitution (Memorandum/Articles of Association) sets out who can be a member and the procedure for becoming or ceasing to be a member.
• What does ‘limited’ mean?
o All companies (not totally correct, but most likely all companies you are ever likely to come across) are limited companies.
o The term ‘limited’ can confuse people, because they are both called ‘limited companies’. Limited companies are called ‘limited’ because the liability of their owners is limited.
o Members of a company are technically accountable to make good its liabilities, but only up to specified ‘limits’.
o Technically, the liability of a shareholder in a ‘company limited by shares’ is ‘limited’ by reference to the face value of any shares they own (eg a shareholder owning one £1 share is liable for £1 maximum, and he usually meets this liability when he first acquires his share. If he hasn’t, the company or any liquidator can subsequently make a ‘call’ for it).
o The liability of a member of a ‘company limited by guarantee’ is limited by reference to what the company’s constitution says he has to pay into the company on a winding up. Usually peanuts, eg £1.
• Directors/officers
o Under the Companies Acts, all limited companies are run by directors who have board meetings.
o Many companies limited by guarantee, particularly charitable companies, like to call their boards and directors something else, such as ‘management committee’ and ‘officers’, ‘trustees’ or ‘members’.
o Unlike companies limited by shares, where the right to appoint and remove directors is generally linked to shareholding power, the constitution of a company limited by guarantee will set out its chosen rules as to how they should be appointed or removed (often involving regular elections and retirements by ‘rotation’).