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Joint Ventures — A Business Structure To Consider

Joint ventures are pretty common in some sectors, like oil and gas exploration, but they have never

been used much in farming. A joint venture is an agreement or business structure where two or more individuals or business entities (partnerships or companies) agree to contribute assets, services and/or capital to a common commercial enterprise. In my view farmers could and should use joint ventures more as there are real advantages in some situations. In this column I will explain more about joint ventures — what they are, how they work and outline some of the challenges and advantages.

JV VERSUS PARTNERSHIP

Based on the definition above you might think that a joint venture sounds a lot like a partnership, but they are not the same thing and it is important to understand the differences. The main difference is that the participants in a joint venture have teamed together for a particular purpose or project usually for a defined time frame, while the partners in a partnership have joined together to run “a business in common” for an undetermined time frame.

A partnership itself is a legal entity that can own assets, but in a joint venture the individuals retain ownership of their own assets and each participant in the joint venture shares only the expenses and revenues of the particular project or venture. Partners can bind the partnership, and therefore other partners, contractually for partnership debt. A joint venture does not borrow money, only the individuals participating can borrow and then contribute those funds for the use of the joint venture. In fact, a partnership could participate in a joint venture just like an individual or a corporation, but a joint venture could not be in a partnership because it’s really just an agreement or business structure not a legal entity (as it does not file a tax return). Confused yet?

HOW IT WORKS

Let’s look at some examples to help explain the difference. If you formed a formal partnership with a son or daughter that you farm “with” or even a brother or neighbor, you would

basically run and account for the combined farm as one and split the net income (or loss) to the partners based on their share of the partnership. Using the joint venture structure, the same individuals may agree to farm an amount of land owned by one or more of the participants in a joint venture for a set number of years. The joint venture agreement would detail the contributions of each individual to the venture: land, equipment, labour, management and inputs or money for inputs. The share of revenue each would receive would be included.

In the case of farmland or even a cattle operation, that share of revenue may be grain or calves/fed cattle before sale

rather than cash after the production is sold depending on the joint venture agreement. That share of revenue is income to the individual venturer and each may have different expenses related to earning that revenue that they would report for tax purposes. For example, if one individual contributed all the land to the joint venture only he or she would have land taxes as an expense and the individual contributing the equipment would have the related operating expenses and the capital cost allowance. If both contributed an equal share of the fertilizer, seed and chemical costs these expenses would be allocated to them equally.

A GOOD FIT WITH MACHINERY

It is fairly common for farmers to buy and own some equipment jointly with farming family or neighbors. Maybe you do that yourself — it can reduce your cost and give you access to newer or better equipment than you can justify for just your farm. Things like grain vacs, grain baggers or unloaders, heavy harrows and in some cases even high clearance sprayers and combines are sometimes involved in these types of arrangements. However the agreements themselves (if they are even written down) are often a little loose and lacking in detail and that can sometimes lead to disputes or hard feelings especially related to repairs and unequal use.

One way for farmers to perhaps avoid those problems is to think about that jointly owned machinery in terms of a joint venture and structure the agreement based on that approach. The stated purpose of the joint venture might be to own and rent a piece of equipment to two or more farming operations owned by the joint venturers. Although each may own a share of the actual machine, thinking about participating in that ownership as a separate business venture and writing up an agreement on that basis will create clarity in terms of responsibilities and what is being contributed by each party and help remove potential controversy over issues like hours of use, repair bills, storage, insurance, etc.

CHALLENGES

Like any form of joint operation, one significant challenge with joint ventures is ensuring there is good, ongoing communication between those involved. With joint ventures that work well there is no question that frequent and meaningful discussion and interaction is the key to success and sustain-ability of the agreement. Good communication also ensures that participants are accountable and fully engaged. In our experience, another challenge can be proper documentation and measurement of each venturer’s contributions to, and share of revenue from, the venture. For example, in the case of joint venture crop production described above, documentation of inputs applied and measurement of crop output are key to eliminating disputes and having all participants feel they were treated fairly and as agreed.

One of the major advantages of joint ventures is flexibility. Unlike some other forms of business structure, dissolution of a joint venture is simpler since all assets are owned by the individuals; share ratios can be easily adjusted between years; and the cost to establish and maintain joint ventures is relatively low. For a beginning or growing farmer, joint venture farming can be a great option as it provides access to outside capital in the form of, for example, land and operating cash as well as the sharing of production risk. At the same time they gain the opportunity to contribute their labour, management and perhaps some equipment and cash on a larger land base and have their contribution recognized as earning a share in the total returns and potential upside. This provides a middle strategy between a cash rental type agreement and a traditional custom work type deal or even paid employment.

EarlSmithisvicepresidentandco-founderof groPartnersInc,awesternCanadianfarmand landmanagementcompany.AtgroPartnersEarl’s consultingworkisfocusedonfarmbusiness analysis,financialmanagement,andsuccession. HewaspreviouslyManager,Agricultureand Agri-business,PrairiesatRBCRoyalBank. ContactEarlat403-586-2504or [email protected] withquestionsorcomments

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In a joint venture, individuals retain ownership of their own assets and share in the expenses accordingly

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