Understanding Unincorporated Joint Venture Agreements

What is a joint venture?

A joint venture is any arrangement, with or without a contract, between two or more parties who cooperate to run a business or achieve a commercial objective.

The joint venture is a flexible concept that can be adapted to the needs of any business depending on the resources and wishes of each participant.

A joint venture can be started using an existing company or legal structure (even as an individual or partnership) or a new company incorporated for this purpose. 

The focus of this article is the unincorporated joint venture.

How do I enter into an unincorporated joint venture?

The best way to enter into an unincorporated joint venture is by signing a contract. It will set out the parties’ rights and obligations.

Joint ventures can also be implied from the circumstances when no contract is signed. If you speak to friends about buying land for development, you may be entering into a joint venture because you have a common commercial objective.  

The risk with implied joint ventures is that many details are left out. This can cause misunderstandings, lead to disputes and frustrate the purpose of the venture.  

8 things to speak about before entering into a joint venture agreement

1. Scope of the venture – you must establish the nature of the business or project, activities it involves, geographical scope, etc.

2. Participants and their shares – who are the participants and what are their shares in the profits and losses of the joint venture? Depending on shares, participants must decide the protections afforded to minority shareholders or what provisions are needed to resolve deadlocks.

3. Financing – how will you finance the joint venture? For unincorporated joint ventures, you cannot issue equity or shares of different classes.

4. Management – Roles, skills and contributions, responsibilities of each party and milestones for achieving those goals have to be set out in detail for effective management. If one party is the operator or effectively runs the venture, appropriate safeguards must be set up to protect other parties. The document must make clear who has the authority to appoint and direct employees. Major decisions may require a special majority or unanimity.

5. Transfers – shares are not freely transferrable in a joint venture. However, provisions may be made to allow a party to withdraw subject to a right of first refusal or an obligation for the other parties to buy them out. Alternatively, the joint venture as a whole may be terminated.

6. Protections – whether in a 50/50 joint venture or one where one or more parties are in a minority position, all parties want their interests protected. Protections and decision-making must be expressly stated. Contrary to a corporate joint venture where protections are statutory under the Companies Act, 2016, unincorporated joint ventures protections are contractual. Deadlock provisions will provide for dispute resolution or termination of the venture.

7. Taxation – Each participant must report their own share of the joint venture income which may result in higher individual tax rates. They may not qualify for certain tax benefits or incentives, deductions or lower corporate tax rates.

8. Termination – if the purpose of the joint venture is completed, the joint venture is terminated. But even indeterminate joint ventures have clauses for what happens when disputes arise. Usually, a party has either a right to buy another participant’s share, sell theirs or terminate the venture. The contract must provide for what happens with each party’s contribution.

Benefits of unincorporated joint venture agreements

• Flexibility – A contract can be drafted fast and is not subject to regulatory approvals. Terms are highly adaptable and there are no mandatory standards similar to the Companies Act, 2016.

• Cost Effective– there are no administrative set-up costs for forming, accounting or reporting such a joint venture. You can terminate it without any separate filings.

• Risk sharing – allows parties to share risks without exposing their entire business operations. It can be used for pilot projects in new ventures.

What kind of project would I use an unincorporated joint venture for?

Short-Term projects limited in time and scope without future involvement such as constructing a building, organizing an event, conducting a research study.

Bidding as part of a Consortium to combine capabilities and meet qualification or financial requirements collectively for projects with special categories of expertise. 

Market Testing or Pilot Programs for new products or services especially in areas which are not the main driver of profit for the company.

Cross-Border collaborations for markets which are hard to penetrate due to regulatory requirements, cultural differences or established market practices especially where the supply chain is dependent on labour or services from abroad.

Land investment for specific projects limited in scope which may only yield returns in the long term. May be used in conjunction with a power of attorney.  

How is a joint venture different from a partnership?

Like the joint venture, you can also have an unincorporated partnership. The main differences between unincorporated joint ventures and partnerships are:

• Joint ventures are set up for a specific objective with a defined timeline or scope. Once the project is completed, the venture dissolves. Partnerships are continuous business relationships to manage ongoing enterprises.

• Liability for a joint venture is usually limited to the scope of the venture and is governed by agreement. Parties are responsible for their obligations. In partnerships, partners usually share joint and several liability for debts and obligations which arise out of the partnership.

• Joint ventures profits are taxed at the participating entities or individuals level. Partnership profits are taxed at the partnership level and then passed on to the partners taxed individually.

• There is a statutory framework for partnerships (whether general or limited liability). There is no legal framework for unincorporated joint ventures. The Companies Act, 2016 applies only to incorporated joint ventures.

• Other differences may be relevant and depend upon the exact terms of the joint venture or partnership agreements.

Summary

An unincorporated joint venture is a collaborative arrangement between two or more parties seeking to achieve a commercial objective without forming a separate legal entity. Unlike partnerships, these ventures are typically project-specific, allowing participants to share risks and resources while maintaining individual legal and financial responsibilities.

Entering into an unincorporated joint venture is best formalized through a written agreement that outlines scope, participants, financing, management, rights to transfer interests, dispute resolution mechanisms, tax implications, and termination clauses. Without a formal contract, joint ventures can be implied from circumstances, but this may lead to misunderstandings or disputes.

Unincorporated joint ventures offer significant flexibility, cost efficiency, and risk-sharing advantages, making them suitable for short-term projects, bidding consortia, market testing, cross-border collaborations, and land investments. They differ from partnerships in liability structure, taxation, and regulatory oversight, operating purely on contractual protections rather than statutory frameworks.