Partnerships vs. Joint Ventures at Ontario Law

By Mark D. Hazlett

Key Differences

In Ontario, both partnerships and joint ventures are common legal structures used when two or more parties collaborate in business. While they may seem similar, they serve different purposes and are governed by distinct legal principles.

1. Purpose and Duration
   Partnerships are typically long-term arrangements where parties join together to operate a business for profit on an ongoing basis. Joint ventures, by contrast, are usually short-term or project-specific collaborations.
2. Legal Structure
   In a partnership, the business operates under a single legal identity, and all partners are considered part of the same entity. In a joint venture, each party retains its separate legal identity.
3. Liability
   Partnerships involve joint and several liability, meaning each partner can be held personally responsible for the debts and obligations of the business. In joint ventures, liability is generally limited to each party’s role in the specific project.
4. Taxation
   Partnerships are treated as pass-through entities for tax purposes. Income is reported on each partner’s personal tax return. Joint ventures do not have a uniform tax treatment and are typically governed by the terms of the joint venture agreement.
5. Regulation
   Partnerships in Ontario are governed by the Partnership Act and may require registration under the Business Names Act. Joint ventures are governed primarily by contract law.

When a Joint Venture Becomes a De Facto Partnership

Under Ontario’s Partnership Act, a partnership is defined as “the relation which subsists between persons carrying on a business in common with a view to profit.” Courts may find that a joint venture is actually a partnership if the arrangement exhibits characteristics such as joint control, profit sharing, ongoing business activity, and lack of clear separation between parties. This would trigger partner liability for the actions and liabilities of joint venturers, fiduciary duties between the now deemed partners, and other potential problems with how the JV was intended to be run.

How to Avoid Your JV Being Deemed a Partnership

To protect your joint venture from being reclassified as a partnership, consider the following best practices:

1. Draft a clear and detailed JV agreement specifying that the relationship is not a partnership.
2. Avoid profit sharing language and terms like 'partners' in documentation.
3. Maintain separate operations, including bank accounts and branding.
4. Limit joint control by assigning specific roles and responsibilities.
5. Include indemnity and liability clauses to clarify each party’s obligations.

Final Thoughts

When you are thinking of engaging in a joint venture, it is important to get legal counsel involved at an early stage to help you avoid the numerous potential pitfalls that could result in it being deemed a true partnership.