Have you ever thought about your collaboration from a legal perspective? When you are riding the wave of inspired connection, very few people stop to think about where their boundaries are in relation to this new relationship they are forming, to clarify what they expect to get out of it and what their obligations are beyond the basic to-do list, or to consider what kind of existence this relationship has in a legal sense. That last point is the aspect of collaboration I want to focus on today.
What is a collaboration?
There are numerous definitions of collaboration, but today I am referring to collaboration in the following sense:
“Collaboration: Cooperative arrangement in which two or more parties (which may or may not have any previous relationship) work jointly towards a common goal.”
From a legal perspective, a collaboration between entrepreneurs is likely to fall into one of two main categories of legal relationship:
Let’s look at them in turn.
A joint venture is generally the most appropriate structure when you are starting out in your collaboration, particularly if you are entrepreneurs contributing your talents and skill to an inspiring idea which may or may not take off. Joint ventures are best suited to specific projects with a defined time-frame. However, the joint venture relationship is broad enough to encompass any collaboration which does not suit the definition of partnership, or where the formalities of a partnership is not desired.
If you are in Australia, the joint venture relationship is defined by section 4J(a) of the Competition and Consumer Act 2010. This is Commonwealth legislation, meaning that the same definition applies in every Australian State and Territory.
A joint venture must be:
“an activity in trade or commerce” = you are planning to sell the product or service that you are collaborating around.
“carried on jointly by two or more persons” = make sense. After all, you can’t collaborate with yourself (at lease not in a way recognised by the law). You can have as many people involved in a joint venture as you like, but the more people, the more complex the arrangements you need to have in place.
“whether or not in partnership” = a joint venture can be entered into by two or more individuals, partners or companies or any combination of that entity. It is the most flexible form of collaborative relationship. For example, you and your partner might enter into a joint venture with a company… you as an individual might collaborate in a joint venture with another individual, or with other people who are in a partnership, or with a partnership and a company… make sense?
and then there is a whole pile of stuff about how body corporates can enter into joint ventures that you are very unlikely to need to know about.
That’s it. A joint venture can also be incorporated, which is where the parties to the joint venture (the people taking part in the collaboration) decide to create a new company for the purpose of owning the assets and conducting the business of the joint venture.
The legal definition of a partnership is also contained in legislation. Each State and Territory of Australia has a Partnership Act. In New South Wales this is the Partnership Act 1891. Thankfully, the definition of a partnership is the same in each State or Territory’s Partnership Act.
Partnerships are a much more formal relationship than a joint venture. In one sense, a partnership has its own legal existence – it requires its own ABN and its own Tax File Number, and must lodge its own tax return (although it does not pay tax in the same way as a company – each partner pays tax on the share of partnership income that she receives.) Where a company has a separate legal existence (it is an entity separate from its owners and directors) a partnership does not. The partners are the partnership. It is important to understand this because partnership debts can be enforced equally, in full, against either of the parties (more about this in a future post).
A partnership is a relationship:
“between two or more persons” = yep, still can’t collaborate with yourself. Unlike a joint venture, however, there is a limitation on how many partners you can have in a partnership. For most types of business activity, you can have a maximum of 20 partners.
“carrying on a business” = this is a bit different from a joint venture, which covers any activity involving trade or commerce. You have to actually be carrying on a business. So what does this mean? There is no single definitive test for whether you are carrying on a business, but you can draw guidance from the ATO, which says you are carrying on a business if:
- “You repeat similar types of activities.
- The size or scale of your activity is consistent with other businesses in your industry.
- Your activity is planned, organised and carried out in a businesslike manner. This may include:
- keeping business records and account books;
- having a separate business bank account;
- operating from business premises;
- having licenses or qualifications;
- having a registered business name.”
“in common”= this means that all members are working together in the same business activity. For example, if a bookkeeper and a naturopath teamed up together (with the bookkeeper running the office, advertising and administrative tasks and the naturopath serving the clients), their relationship would be a joint venture, not a partnership, as they would not be carrying on a business in common. The bookkeeper would be carrying on the business of bookkeeping and administration, while the naturopath would be carrying on the business of naturopathy, even though they were collaborating together to build a great business and sharing the profits.
“with a view to a profit” = this means that you cannot form a partnership for a hobby or a leisure activity, a club or society, or a voluntary or charitable association. Note that you are not required to actually MAKE a profit, but that it has to be your intention, and you have to be capable of doing so. Nor does making a profit have to be your primary intention. You and your partner may have the primary goal of providing the best service you can, of fulfilling an urgent need, or of supporting each other to achieve your mutual dreams… but so long as your goals include making a profit, you will be fine.
How I can help…
There is, of course, a lot more to all of this than just understanding the basic definitions. I hope this has been sufficient to persuade you that understanding the differences and making a conscious choice around how to structure your collaborative relationship is a very important first step. We could also talk more about the differences between joint ventures and partnerships, the pros and cons of each structure, when to use each one and what you need to include in your strategic collaboration, joint venture or partnership agreement.
If you are thinking about a collaborative relationship, you can download a copy of my free Collaborate with Confidence Checklist to help you have the important discussions that clarify how you want the relationship to operate.
For more support, you are welcome to book a Collaborate With Confidence consultation with me.