When it comes to why companies pursue joint ventures, they do so for a wide variety of reasons, some of which include developing new products or expanding into new markets, or perhaps for a temporary business project. In these instances, the pooling of two or more parties’ resources can provide a unique opportunity for growth. While joining with another party to accomplish a certain task or make aspirations a reality might sound like a win-win, there are important legal essentials to consider and pitfalls to avoid with the goal of maximizing success in joint ventures.
Understanding Your Legal Obligations When Forming a Joint Venture
Put simply, a joint venture (JV) involves two or more persons or companies combining their resources, including assets, such as property and cash, and human capital to collaborate in a specific and defined project. It’s important that individuals and entities that are parties to the joint venture invest the time and resources necessary on the front end to memorialize their collective goals, rights, and obligations to minimize unforeseen legal and financial liabilities. Joint ventures should always involve defining the newfound arrangement in a contract; and the often involve founding a new joint company to carry out the joint venture. In joint ventures implemented through a new company, the choice of entity is often a limited liability company, and the “contract” governing the joint venture is the new company’s operating agreement.
Whether the joint venture is implemented through a new company or not, having a joint venture agreement in place is essential.
Matters Your Joint Venture Agreement Should Address
The fact that you even considered forming a joint venture suggests that you and the party you’re planning to work with have shared goals and objectives for this business arrangement; however, it’s important to properly and formally document that information in aJV agreement, as well as other details, such as:
- How much each party is contributing to getting the joint venture off the ground (in terms of assets and capital)
- Details about how long the JV is intended to last
- What will become of intellectual property rights secured and whether entering into a confidentiality agreement is necessary to protect them
- Descriptions of each party’s rights and responsibilities
- Details about how the JV will be managed
- Each party’s rights and obligations with respect to profits, losses, and taxes
- Procedures to follow if disputes arise or there’s a desire to terminate the agreement
This is not an exhaustive list of the details you’ll want to cover in the JV agreement, which is why you’ll want to have an experienced business law attorney help you draft this contract to ensure it upholds your best interests.
Ways To Avoid Problems When Setting Up or Operating Joint Ventures
One of the biggest impediments to the success of joint ventures is that parties in these arrangements rush into the joint venture without first making sure that they’re on the same page in terms of goals and expectations and consequently find themselves needing to make decisions as a collective despite having different management styles or perspectives on the business’ direction, i.e., who to hire on for key roles. So, having extensive conversations about this is critical, and if you decide to move forward with the venture, then documenting how you’re going to blend your approaches is key.
Another issue that often arises with joint ventures is something that commonly plagues partnerships, which is ensuring equitable allocation of obligations between entities. For example, in strategic relationships, an equitable sharing of the workload may not always be feasible, which is why one party may contribute more financial resources, and another entity, more labor. Properly documenting these matters in the JV agreement, is key to minimizing potential conflicts.
It is also crucial to agree in advance regarding unwinding the joint venture should it not prove successful. Such an agreement mapping a potential dissolution of the joint venture minimizes legal battles that could be costly, time-consuming, and could affect reputations with vendors and customers. Conversely, if the joint venture is a success, the agreement should outline options for continuing the project once the initial term of the contractual agreement has come and gone.
Learning More About Joint Ventures and If They Are Appropriate for You
Wilson Ratledge, PLLC has long assisted entrepreneurs and businesses in creating a solid foundation for their companies to operate by negotiating and drafting agreements that accurately reflect their understanding and represent their best interests. A solid, well-written contract is key to minimizing potential disputes and costly and time-consuming litigation.
We want to be of counsel to you as you assess whether entering a joint venture is in your best interest or whether some other business arrangement is. So, call or email our law office to meet with a business law attorney who will ask you some questions about the goals for your business enterprise and advise you whether setting up a joint venture or some other type of arrangement is best, and if so, craft an agreement incorporating each parties’ desired terms and conditions.
And, if you’ve already entered into a joint venture and are facing a business dispute, you can also contact us to review your JV agreement and advise you of your options.