Expetitle Blog


Corporations vs. Joint Ventures

A corporation is a legal entity in which shareholders operate as a single business entity. Establishing a corporation is a useful strategy for business growth and development. Corporations are legally comparable to an individual business operation and treated with the same rights and responsibilities. Corporations are usually more insulated from personal liability than sole proprietorships.

In a joint venture, two or more businesses form a legally bound partnership to build a separate legal business entity. In a joint venture partnership, the participants have the opportunity to combine their resources for a specific business initiative or activities for mutual benefit.

Corporations are typically established for a long-term commitment. As part of incorporation, you typically agree to run your company with the intent to generate profit or provide goods and services until the business is acquired or ceases to exist.
A joint venture company is usually set up for a temporary period of time. Although some joint ventures last indefinitely, other agreements have predetermined timeframes of a few months or years.

The limited liability corporate structure guarantees that corporations don't incur debts beyond what they can pay off with their assets. If the corporation encounters financial difficulty, it won't directly affect the personal assets the shareholders hold. Only the assets of the corporation are at risk; the shareholders' assets are not at risk for debts, judgments, or foreclosure settlements against the corporation.

Generally, joint venture agreements are crafted so as to avoid joint liability and state explicitly that the joint venture partners' responsibilities, duties, obligations and liabilities are not shared.
In spite of such clauses, the courts have found that where a business liability is incurred, the joint venturers are all jointly and severally liable. In respect of third-party claims, therefore, joint venturers will share the liability.

The business and affairs of the corporation are managed by the board of directors. The shareholders elect the directors of the corporation. Directors, once elected, have full authority to manage the corporation and are not obligated to consult with or take directions from the shareholders, except under certain specific business laws and regulations. The elected board of directors then appoints the officers of the corporation: President, Vice President, Secretary, and Treasurer. A corporation may delegate authority to those officers to manage its day-to-day affairs.

If the shareholders are dissatisfied with how the directors choose to manage the corporation, they may elect new directors. Alternatively, a shareholder agreement can also be implemented to limit the powers of the directors.

The manner in which a joint venture will be managed will be determined by the joint venture agreement, which you can read more about here. Often the joint venturers will agree to delegate the day-to-day management of the joint venture to one of the venture participants.

Ownership & Earnings
Corporations have individual, private, or business owners who invest in the company for partial or full ownership. Investors participate in the corporation by purchasing shares. Investors' ownership percentage in the corporation, and their right to receive profits or assets from the corporation, is determined by the number of shares they hold. Earnings are distributed to owners in proportion to their share of ownership in a corporation.

Every joint venture partner typically contributes some kind of financial amount, which allows it to earn a percentage interest in the joint venture (sometimes known simply as "participation interest"). This participating interest will entitle the members to a pro-rata ownership interest in the assets of the joint venture, meaning that each joint venturer has a defined percentage share of ownership in the assets, rather than an undefined collective interest in the whole.

The contributed portion is an agreed-upon amount required for the venture to be successful. A joint venture may have a 50-50 ownership split, or another split like 60-40 or 70-30. The majority shareholders or investors usually have greater control over decisions and earn a high percentage of profits from the partnership.