Joint ventures let you take advantage of the fundamental concept of strength in numbers. These ten points will guide you as you create and define your joint venture.
Synergy. “Joint venture” is a generic term referring to any business activity carried on with the active involvement of more than one company or person who share the profits or losses. Importantly, the term “joint venture” means something different to everyone. Proposing a joint venture is the beginning of the negotiation, not the end.
What’s the Point? In general, a joint venture can be appropriate when several parties can combine their unique skills, opportunities, or attributes to meet some business goal that could not be met by any of the parties acting alone. Every joint venture should have a specific purpose—the more specific, the better—and the specific purpose should be described in a written joint venture agreement. A joint venture differs from a general business company because of its specific, limited purpose or term.
Define the Relationship. A joint venture can be structured as a contractual relationship or a partnership, or something in between. There are several important differences, including taxation, sharing of liabilities, and authority to bind the parties. Given the particular purpose of the joint venture, one structure or the other will be more appropriate.
Feet to the Fire. Each party to a joint venture should have specific obligations and duties drawing on the particular skills, opportunities, or attributes of the party. This is the purpose of the joint venture, so the obligations and duties should be spelled out in great detail. The written joint venture agreement should also spell out how each party’s performance will be evaluated and what happens if a party does not deliver.
How Does It End? The written joint venture agreement should specify when the joint venture will end. The end can either be a specific date or the happening of a specific event. Unlike a general business company, the joint venture should not be expected to continue for an indefinite period, unless the joint venture agreement includes a mechanism for the parties to terminate the joint venture.
Joint Custody. Intellectual property is often produced by a joint venture. Who owns it? The written joint venture agreement should be specific about who owns any intellectual property. If the parties will jointly own the intellectual property, the joint venture agreement should describe how the intellectual property will be used during and after the joint venture.
The Fruits of Labor. The manner in which parties to the joint venture share profits and losses is closely related to whether the joint venture is closer to a contractual relationship or a partnership. In a contractual relationship, each party keeps the profits or bears the losses from its own contribution to the joint venture. In a partnership structure, the profits and losses of the joint venture are aggregated and shared by the parties.
Bullet Points. Because joint ventures are very specific, very customized relationships, the parties should focus on negotiating the key terms of the joint venture before producing a formal written joint venture agreement. A Term Sheet, Letter of Intent, or Memorandum of Understanding is a good way for the parties to focus in on the key terms without getting bogged down in details.
Joint Venture Personified. If a joint venture will be structured as a partnership, it is probably best for the parties to create a new limited liability company (LLC) to embody the joint venture. Structuring the joint venture as an LLC can help the parties with the management of the joint venture, the sharing of profits and distributions, and the filing of tax returns.
Is there a Better Way? While joint ventures can be profitable relationships, there may be a better way. Each party should ask some important questions:Why will our ordinary way of doing business not work in this situation? What new or different risks will we face from the joint venture?
Primarily working with business owners and their families, Trevor advises clients on business structuring and sale transactions, regulatory compliance, third-party contracts, liability protection and general matters facing small business owners.