How to Choose a Legal Structure for your Project

Last revision: Last revision:23rd September 2020
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If you are considering a new project or venture for your business, then there are a number of ways you may choose to structure it. We have a number of documents available to help you with this, but they all serve a different purpose. Therefore, it is important for you to first spend some time understanding your options, so that you can choose a structure that suits your circumstances and will help you to achieve your goals.

1. What do we mean by a "project" or a "venture"?

In this guide, we are talking about specific projects or ventures that several businesses might embark on together. These generally are specifically defined and temporary in nature, as opposed to a business, which may continue indefinitely. By working together, the businesses are able to combine their resources and expertise, in order to mutually benefit from the project.

For example, two construction businesses could work together on a particular apartment development. Once the development has been completed and all of the apartments sold, the businesses could part ways and the project comes to an end.

Or a number of local bars, restaurants and musicians could decide to work together to set up a multi-day food festival. Each of the businesses involved could share in the costs of setting it up, as well as the revenue that it creates for them. Once the festival is over, the project comes to an end, and the businesses could go their separate ways again.

So when we are talking about a project or a venture, we are referring to the apartment development or the food festival. These are temporary projects which the businesses are developing together.

2. What options do the businesses have?

There are many ways that businesses may choose to cooperate on a project.

As a starting point, most businesses choose to use a Memorandum of Understanding to set out the general terms of the project, before they go ahead and create more formal arrangements. Alternatively, some businesses find that an Agreement Between Co-Founders is more appropriate for their circumstances.

Once they are ready to finalise their arrangements, one of the most common options is for the businesses to use a Joint Venture Agreement. This is a contract which sets out the details of the project.

Or the businesses might choose to create a partnership together. We have a Partnership Agreement which can be used for this purpose.

Alternatively, one business might choose to lend some money to the other business, to finance the project. We have a Loan Agreement which can be used for this purpose.

And in some cases, the businesses might choose to create a new company. While this a process that needs to be handled through the Australian Securities and Investments Commission, we have a number of documents which can be used in the ongoing administration of the company, such as a Shareholders Agreement, Directors Resolution, Members' Resolution, Share Certificate and various other related documents.

But which structure is right for you? That's a good question. We will discuss these options in some more detail below.

2.1. Memorandum of understanding

A Memorandum of Understanding (sometimes called an "MOU") is an informal document, outlining the basic terms of a deal, but not going as far as a formal contract does. It is intended to be quick and easy to prepare, so that the parties can set out their basic agreement, and can confirm they are on the same page. It is not usually legally binding, but of course, this all depends on the particular circumstances of the parties, and in some cases, MOUs have been found to be legally binding.

MOUs are often used when one party is buying a business, a property, or a piece of expensive equipment from the other party. The MOU will set out the basic terms that have been discussed, and a formal contract will be prepared later.

We have a separate guide that goes into more detail about this matter, called What is a Memorandum of Understanding and is it Legally Binding? If in doubt as to whether an MOU is going to be legally binding, the parties should seek legal advice.

2.2. Agreement between co-founders

In many ways, this is similar to an MOU. It is not usually legally binding (but it can be, depending on the circumstances).

However, an Agreement Between Co-Founders is generally designed for parties who are planning to go on and create a long-term business together.

An Agreement Between Co-Founders is popular among parties who are planning to start a company, partnership or some other business structure together. This is different from an MOU, which is more commonly used for shorter term projects and is therefore a more common choice for parties that are planning to work on a temporary project or venture together.

We discuss the purpose of an Agreement Between Co-Founders in more detail in our guide How to Start a Business in Australia.

2.3. Joint venture agreement

One of the most common ways that parties may choose to set up a project together is by using a Joint Venture Agreement.

This is a contract between two or more parties that are working on a project. It sets out the essential details of the project, such as:

  • Purpose: a brief description of the purpose of the joint venture
  • Party information: the legal names and addresses of the parties involved in the joint venture
  • Capital contributions: a description of the cash initially contributed to the joint venture by each party
  • Ownership interest: a description of the percent of the joint venture owned by each party
  • Profit/Loss distribution: a description of how the profits and losses of the joint venture will be distributed between the parties, often based on capital contributions and/or ownership interest
  • Duties: a description of the duties of each of the parties
  • Termination: how or when the joint venture will terminate
  • Meetings: optional information about the time and structure of meetings
  • Transference: boundaries on how interests in the joint venture may be transferred

A Joint Venture Agreement is a good option for parties that do not want to create a new legal entity together.

A Joint Venture Agreement does not create a company or any other legal structure. It is simply a contract between the various parties. It says what the parties will do together, and what their various rights and obligations will be.

2.4. Partnership

Another option that some parties may choose is a partnership structure.

In some ways, a partnership is similar to a joint venture, although a Joint Venture Agreement is more limited than a Partnership Agreement.

In a joint venture, the parties are only working together for one specific activity (for example, to develop and sell one piece of real estate). By contrast, in a partnership, the parties may work together on an ongoing basis (for example, by continually buying, developing, and selling different pieces of real estate).

Therefore, if the parties are planning to work together on a more long term basis, then they may wish to consider a Partnership Agreement. For further discussion about partnerships, see our guide Does my Partnership Need a Partnership Agreement?

2.5. Company

In some cases, several parties choosing to engage in a project together may choose to create a new company.

It is possible for a company to be a shareholder in another company. Therefore, for example, if Company A and Company B wanted to work together, they might choose to come together to create Company C.

A company structure is quite different from a partnership or a joint venture. It can be more complicated and expensive to set up and to administer, but in some cases it can offer tax advantages. It can also allow the parties to limit their liability. For these reasons, for larger projects, some parties choose to go down this path.

A company structure is popular among parties that want to take advantage of the limited liability nature of the company structure, or the fixed company tax rates that are available.

For further information about this matter, see our guide How to Choose the Best Legal Structure for your Business.

As mentioned above, the company registration process needs to be handled through the Australian Securities and Investments Commission. However, we have a number of documents which can be used in the ongoing administration of the company, such as a Shareholders Agreement, Directors Resolution, Members' Resolution, Share Certificate and various other related documents.

2.6. Loan

A loan is a much more "hands off" means of support as the lender generally has no other tasks to perform, apart from providing finance.

If a party has the financial capacity to support the project, but does not have the time or resources to commit, then it may choose to provide a loan.

In addition, while the lender is usually entitled to interest payments under the loan (as well as the repayment of the principal), it is not usually entitled to any other share in the profits (or the expenses) of the project. This is generally different from the arrangement under the other structures we have discussed, where the parties tend to share in the profits and losses of the project.

As always, if lending money, then the lender should conduct their own due diligence to ensure that it is a sound investment. They should make sure the terms of the loan and the repayment are clearly documented, and if in doubt they should seek legal and/or accounting advice before advancing any funds.

Our Loan Agreement document provides an easy way to document the terms of the loan.

3. In conclusion

Combining forces with another business can be a great way to develop a project that would not have been possible otherwise. There are a variety of ways that the parties can structure their relationship so it is important for the parties to carefully consider the situation and what they are trying to achieve, and then choose a structure that will make this possible.

We have a number of documents which can help to streamline the process.

As always, if the parties have any concerns then they should seek legal advice.

Templates and examples to download in Word and PDF formats

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