Partnerships, Joint Ventures and Collaborations: Understanding the Legal Relationship in Your Online Business Collaboration

This is the second part in a three-part blog series on online business collaborations. If you missed part one about the benefits of collaborations for your online business, you can read it here.  Next week, in part 3, I’ll cover the important terms to include in your legal agreement for more successful online business collaborations. 

Frappes and Milkshakes

Here in New England where I live, there’s always been a bit of terminology shuffle around frappes and milkshakes.  Traditionally, New Englanders use the term “frappe” for what the rest of the U.S. calls a milkshake:  a blended mixture of ice cream, milk and flavored syrup. As a kid, my cousins from Nebraska would come to visit sometimes in the summer.  I remember fondly taking them out for ice cream after dinner, and the puzzled looks on their faces when we stepped up to the order window and asked for “frappes.” What was this concoction we called a frappe, they asked?  When we explained the ingredients, they replied, “Isn’t that just a milkshake?” 

When ordering up a cool and frosty dessert, it might not matter so much what you call it, but when defining your business relationships, managing expectations with a collaborator and limiting your liability, how you refer to your project can matter. When you’re considering teaming up with another online business owner for a project, it’s equally important to know how you’re structuring your relationship legally, and how to refer to it.  There are some important differences among Partnerships, Joint Ventures and Collaborations. Let’s dive in and learn about how they’re different, and the best option for online entrepreneurs. 

General Partnerships are Not the Best Vehicle for Collaborations 

When two (or more) people are partners, they are carrying on a business as co-owners for a profit. This means that each partner shares equally in the profits and losses of the partnership. Each partner is actively participating in the business, and each partner has the ability to obligate the partnership on contracts and commitments. Partnerships also carry with them unlimited  personal liability. This means that each partner is personally liable for the actions of the other partner, and someone suing the partnership can bring claims against one or all of the partners. General partnerships are also taxed as “pass-through” entities, meaning that the partners file income earned from the partnership on Schedule C of their 1040 Federal income tax return. 

While some characteristics of a general partnership can be changed through a partnership agreement, like what percentage of the partnership each partner owns or the roles of the partners in the partnership, the general rules about liability and allocations of profits and losses can’t be changed with a partnership agreement. Modern-day partnership arrangements are often created inside of a limited liability entity, such as a limited liability company or a limited liability partnership. This allows the participants in the partnership to take advantage of the pass-through tax treatment, but provides limited liability protection to the partners and allows for more flexibility in the allocation of profits and losses. 

Partnerships are complex arrangements and they are used when two or more people want to own a business together.  The scope of the partnership is more than a single project. Instead, the partners desire to create and build out a business together by combining their resources, expertise and skills. When people refer to their relationship as a partnership, this will carry with it certain rewards, entitlements and risks.  Each partner will be entitled to their share of the profits.  But on the flip side, they will be exposed to personal liability and will be bound by the actions of the other partners.

Many People Call Their Collaboration a Joint Venture, But This May Be Too Complex

Although the term “joint venture” is used loosely in the online business world, its true meaning in the U.S. is more complex.  Traditionally, a joint venture means two (or more) parties developing a single project for profit.  Each party contributes money, labor, knowledge, experience or other resources to the project, and typically each party has some control over the operation of the joint venture.  The parties can agree orally or in writing to be joint venturers and usually they have some type of mechanism to share profits and losses.  

Joint ventures are similar in many respects to a partnership, but one key difference is that a joint venture is targeted at a specific project or task, whereas a partnership is established to run an entire business. Though not a requirement to be considered a joint venture, usually the parties to a joint venture will form a new legal entity to carry out the joint venture project.  Each participant then takes an ownership interest in the new joint venture entity. Although joint ventures can be formed without a written document, without one there will likely be a lot of confusion in the event of a dispute among the joint venture parties. 

Smaller and Project Specific Collaborations are Best Handled with a Collaboration Agreement   

Collaborations in the online business space are typically informal short-term arrangements to accomplish specific marketing and business development objectives. Collaborations run the gamut from inviting someone to speak inside of a course or membership, to cross promoting products to creating a joint live event, such as a webinar. Although this sounds a lot like a joint venture, a collaboration lacks the formality of creating a new legal entity and is unlikely to have the complexities of a true joint venture. 

Although it isn’t totally wrong to refer to your joint project as a “joint venture,” the better terminology to use is a collaboration. Think back to the frappe and the milkshake. In New England anyway, there is definitely some confusion around these terms. When you use the right terminology, then you and those you are communicating with know exactly what you are referring to. 

You might be asking, 'If my collaboration is a small or simple project, do I really need a written agreement?’ The short answer is Yes!  Even though your project or collaboration may be straightforward or limited in time, there are still plenty of details to iron out with your co-collaborator. Even short and simple collaborations between online business owners benefit tremendously from a written agreement. 

Planning an Online Business Collaboration? Put it in Writing with a Collaboration Agreement 

A written collaboration agreement serves many important functions. Putting the terms of your collaboration in writing helps manage the expectations of the collaborators and helps avoid misunderstandings and disputes during the collaboration. When the rights and obligations of the parties are written down, each party can proceed with the project with more confidence that the project will proceed smoothly and the collaborators will have a successful outcome. 

You may be tempted to use email to work out the terms of your collaboration. There are a couple of distinct problems with relying solely on email to set up your collaboration. First, it’s easy to miss important details because when we respond to emails, we often don’t address all the questions the other person is asking us. It’s easy to lose track of the details. It’s easy for each party to make assumptions about how the collaboration is going to work, but these assumptions might not line up at all. And with the back and forth of email, minds are changed and it’s easy to forget what the “final” agreement was on a particular point. Second, your emails might be interpreted by a court as your contract, but your emails probably won’t contain any of the legal protections you’d find in a solid contract. If you had a dispute with the other party, how this dispute gets resolved would be left entirely up to the courts. It’s much better if you can make some choices about how things might play out in your written agreement. 

Part 3 of this Online Business Collaboration Series will review collaboration agreements in more detail.  Look for Part 3 of the Collaboration Series next week. 

And remember, when you visit New England, if you want a blend of ice cream, milk and syrup, order a frappe, otherwise you might be disappointed if you’re served a cup of milk and syrup shaken together. And if you do visit New England and order a frappe, let me know your favorite flavor!  My favorite frappe?  Coffee - super thick, and plant-based, of course!