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What is a Joint Venture Agreement?
What’s essential to know about it?
In this article, I will break down the Joint Venture Agreement so you know all there is to know about it!
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What Is A Joint Venture Agreement
A joint venture agreement is a commercial transaction between two or more parties where they pool resources, knowledge, and assets for a common purpose.
The main purpose of this contract is to join both parties’ assets to achieve a particular goal.
Both companies benefit from the joint venture by proportionately splitting profits and business costs.
The parties can decide how the joint venture profits, losses, and costs will be split between them.
Typically, businesses or individuals looking to get into a joint venture will form a separate business entity so they can operate the joint venture under it.
In business, there can be joint ventures between companies that have complementary products and services, companies in different industries but targeting the same market or companies with unique and complementary expertise.
For example, a software company can enter into a joint venture with a software implementer to attract more business.
The software company brings a software product to the table and the software implementer brings the knowledge and expertise to have the software implemented in the client’s infrastructure.
How do Joint Venture Agreements Work
A joint venture contract is a type of contract allowing the individuals or businesses forming a joint venture to mutually agree on their duties, responsibilities, obligations, and limitations.
Usually, a joint venture agreement starts when potential businesses identify an opportunity that is mutually beneficial.
The parties will then enter into a non-disclosure agreement to discuss the business opportunity with one another.
If the joint venture is viable, the parties may then enter into an agreement in principle where they agree on the key elements of their joint business collaboration.
Then, the parties will draft, negotiate, and agree on the terms of a joint venture agreement to clearly define roles, responsibilities, how profits and losses will be shared, and who will assume what costs.
You can form a joint venture by entering into an agreement individually or using a business entity such as a corporation, limited liability company, partnership, or other.
In many cases, joint ventures are formed where one company brings research and development expertise to the table while another company brings production or distribution capacity.
The joint venture will allow the first company with a particular knowledge to tap into the customer-based of the other entity and the second company can offer a new product to its customers.
This type of relationship is mutually beneficial.
Advantages of Joint Venture Agreements
Entering into a joint venture can have several key benefits.
The primary advantage of a joint venture agreement is that it allows you to share knowledge and resources with another entity allowing you to create additional value.
The combination of the two company’s resources and knowledge allows them to take advantage of greater leverage.
Both entities have the necessary infrastructure, market share, customer base, knowledge, resources, or skills to bring to the table immediately upon entering into the joint venture.
Another key benefit is that the joint venture allows the entities involved to reduce their liabilities and costs.
By sharing business risks, the joint venture can bid on larger projects or engage in more complex transactions.
In addition, the two entities can reduce their project or production costs by splitting them with one another.
Joint ventures also allow the companies involved to quickly enter into new markets.
Since both entities have an established customer base and have a presence in different markets, the joint venture will allow both entities to provide their products and services to one another’s customer base.
As a result, the joint venture can quickly scale and benefit from the parties’ combined customer base and market share.
Disadvantages of Joint Venture Agreements
Although joint ventures can bring important advantages to the parties involved, joint venture agreements also have important drawbacks.
The first disadvantage is that joint venture agreements can be difficult to agree upon and negotiate.
The parties need to have a clear objective and purpose when getting into a joint venture.
If the objective is not clear enough and there are many uncertainties, the parties may not be able to adequately define their roles and responsibilities in the agreement.
As time passes, there may be confusion as to who is responsible for what aspect of the project or which costs leading to disputes.
Another important disadvantage is that the entities involved will need to share internal or sensitive business intelligence or information.
When sensitive information is shared, the entities involved in the joint venture agreement may realize that getting into the other party’s customer base may be beneficial or even choose to compete in the same space.
If the parties to a joint venture agreement do not carefully protect their trade secrets and intellectual property rights, they may find that they just “trained” a new competitor in their industry.
Also, joint venture agreements are complex by their nature.
Typically, companies looking to set up a joint venture will retain external counsel and accountants to help them during the process.
The transaction cost can be quite significant.
As a result, the return on investment should be very interesting to make the joint venture worth the time and energy expended on it.
Joint Venture Agreement Vs Partnership Agreement
What is the difference between a joint venture agreement and a partnership agreement?
Although a joint venture agreement and a partnership agreement may appear to be similar, they are quite different.
A joint venture agreement typically includes the following elements:
- The parties have a direct or implicit agreement to collaborate on a specific project or task
- The parties have a common objective
- The parties share profits and losses
- The parties are both responsible for the success of the project
On the other hand, a partnership agreement is the union of two or more individuals who own and manage a company for profit.
For example, lawyers can get together to form a law firm as a partnership.
A joint venture is when two entities combine their knowledge and resources for a specific project or task whereas a partnership is the common collaboration of two or more individuals to generate profits.
Joint venture agreements are generally limited in time and scope.
Partnerships, on the other hand, are indefinite in time and general in scope.
How to Create a Joint Venture Agreement
Depending on the nature of the joint venture agreement, the contract can be simpler or more complex.
A typical joint venture agreement includes:
- Name of the parties
- Scope of the joint venture
- The structure of the joint venture
- Capital contributions of each party can include cash, properties, technology, etc.
- Timeframe of the venture and if it’s possible to extend the duration
- What circumstances allow withdrawal of capital
- How many employees or assets each party will transfer to the union
- Proprietary rights of products, services, or intellectual property developed by the arrangement
- Profits distribution via cash payments or dividends
- Administration and supervise functions
- Factors that might end the joint venture
- Non-disclosure and non-competitive clauses
- Insurance provisions
- Voting and formal meetings guidelines
Joint venture agreements are complex, mainly if they’re multi parties joining the deal.
If you’re going to engage in a joint venture, make sure your joint venture agreement provides you with the baseline protections you need to succeed.
Joint Venture Agreement FAQ
Do Joint Venture Agreements Outline How to Share Profits, Losses, Risks, and Liabilities?
Yes, joint ventures should typically establish how the parties intend to share profits, losses and allocate risks and liabilities.
For example, the agreement could define that the profits and responsibilities will be divided according to the number of shares of each party in the joint venture.
The parties can also define a different allocation of profits, losses, risks, and liabilities from their percentage ownership in the joint venture.
Very often, the parties to a joint venture will form a new business entity to operate the joint venture, such as:
- An incorporated joint venture which is a type of joint venture where businesses form a new corporation to operate the joint venture’s commercial activities
- A limited liability company is similar to a corporation but gives the parties more flexibility in how the joint venture revenues are taxed
- A limited liability partnership is where the obligation of at least one of the parties is limited, while the responsibility of others is unlimited
- A partnership is where all parties are responsible for the partnership’s liabilities
Are Joint Venture Agreements Legally Binding?
Yes, joint venture agreements are legally binding and enforceable.
When creating a joint venture agreement, businesses must determine what percentage of the partnership each party owns, as well as duties, obligations, responsibilities, and profit distribution.
If a party breaches the terms of the joint venture agreement, it can be exposed to a lawsuit and having to pay damages.
Also, joint ventures are required to comply with the law just like any other business.
For example, the parties must pay taxes on the joint venture’s earnings.
If the joint venture is structured as a corporation, it pays taxes at the corporation level.
However, if the joint venture is an LLC, its earnings and losses can be passed through the members’ tax returns or it can be taxed in the hands of the LLC.
Should Joint Venture Agreements Require an Exit Strategy?
Although the parties are free to include any terms and conditions in their joint venture agreement, it’s best to include exit provisions.
Typically, the joint venture agreement should end when the parties successfully achieve their objective or complete the project.
However, if things do not go as planned, it’s a good idea for the parties to have the right to get out of the joint venture.
A joint venture can be terminated or a party may exit for different reasons such as the project is not as successful as they thought, the parties are not able to collaborate properly, there’s a dispute between the parties, or the product or service offered is not profitable, and so on.
So there you have it folks!
What is a joint venture agreement?
In a nutshell, a joint venture agreement is a contractual arrangement between two parties where they agree to pool resources to achieve a specific objective.
There are many reasons why companies can get into a joint venture agreement to join focus.
The joint venture may want to take advantage of synergies, combine complementary skills, share resources for a common goal, tap into one another’s customer base, and so on.
However, joint venture contracts can get complicated as the parties typically try to clearly define their roles and responsibilities.
If the joint venture agreement is not properly structured or the project objectives are not clear, the parties can end up in a dispute or even in court.
If you are dealing with a joint venture agreement or need legal advice, it’s best you consult with a qualified contract attorney or business lawyer to help you in the process.
Now that you know what a joint venture agreement is and how it works, good luck with your research!
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