A joint venture can be a great way to test a business relationship. It can also be a way to help the next generation get started. Follow this best advice for setting up and running a successful joint venture.
– April Stewart, CG Associate Editor
Corporations, partnerships and joint ventures are the three most common business structures that make up Canadian farms. Each has its own set of legal and tax implications and offers its own suite of benefits, depending on the business structure and parties involved.
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According to Cole Fornwald, partner with Virtus Group in Regina, joint ventures are among the most common types of business arrangements on farms today, especially with the high number of farms currently undergoing succession.
A joint venture is a business arrangement between two or more parties who share resources to accomplish a specific purpose or project, and Fornwald agrees that farming lends itself to the strategic use of joint ventures such as when sharing farm equipment or farmland or helping the next generation get a start on the farm.
Here are some important details. Joint ventures can be implemented for a specified period of time or until the project is complete. From a financial perspective, there are no tax filing requirements to a joint venture, but income or losses incurred from the arrangement must be filed by each venturer involved.
Fornwald recommends creating a balance sheet and income statement to keep track of financial contributions and benefits made by each party.
No matter the project or objective, a joint venture should be formalized in writing. “In practice, a joint venture is an informal arrangement, but it still requires more than a handshake,” says Heather Richardson, senior lawyer and managing partner with Staples & Swain Professional Corporation in Kawartha Lakes, Ont.
“This type of business arrangement isn’t as formal as a partnership or corporation, but it still has legal implications and should be documented.”
Richardson recommends writing down the details of the joint venture and outlining clear expectations from the start. The details should include the projected duration of the venture, financial obligations, contributions and expected proportional benefit of each party, how income and expenses will be allocated (i.e. by percentage or capital contributions) and how disputes or tragic events, like the death of a venture partner, will be managed.
“Establishing clarity around the terms of agreement early in the endeavour avoids misunderstandings, especially if family members are involved,” recommends Richardson.
Formalizing the joint venture in writing is a prime opportunity to clarify the objectives of the business arrangement. Richardson recommends engaging professional assistance in drafting an agreement and explains that her role as legal counsel is to support the joint venture by providing clarity and addressing potential pitfalls in an effort to reduce future problems.
“Fighting over the value of contributions or expected renumeration just leads to inefficiencies,” says Richardson. “Taking the time to clearly document the details of the joint venture can avoid unnecessary misunderstandings.”
How did that happen?
In many cases, farm families may enter into joint ventures without realizing it. Something as simple as bringing a child into a farm operation or establishing a working relationship to help get the next generation started on the farm can qualify.
Richardson says a common example can be loaning a young farmer or family member the use of farm equipment, which may be considered a joint venture since each party maintains their own farm business operations using the equipment as a shared resource.
A commitment to good business procedures helps reduce the exposure, and Richardson reminds farmers of the value of establishing and recording the proportionate benefit each party will receive from the use and loan of the machinery. For example, a percentage of the net value of the crop being combined could be used to compensate the rental or loan of the combine.
While still relatively informal, establishing the parameters for both parties ensures that everyone is fairly compensated and also ensures that provision has been made for paying for and managing any costs incurred by breakdowns, parts or labour requirements.
There’s also another potential benefit with joint ventures, Richardson adds.
“A joint venture can be a great way to test a business relationship before jumping into something more formalized,” she notes. “It’s a way to pool resources while each party remains responsible for their own financial situations and obligations.”
– This article was originally published in the November 2023 issue of Country Guide.
