A joint venture is a special type of business partnership. Forming a joint venture can help small businesses enter new markets or combine resources with another business to accomplish business goals that neither company is capable of achieving on its own. They are particularly popular with international ventures because a foreign company can provide access to markets and business connections that would be difficult for a nonlocal business to obtain.
A Joint Venture Is a Type of Partnership
Generally, a partnership is automatically formed whenever two or more people or companies agree to do business together and share profits and losses. A joint venture differs from a typical general partnership because it is usually formed for a limited period of time to accomplish a specific business goal.
There are different ways businesses can enter into joint venture arrangements. One way is for the two companies to enter into an agreement to work together. No new entity is created and no government filings are required. Instead the parties create their joint venture by agreement or contract. Alternatively, two businesses may decide it’s better to handle the joint venture business through a separate business entity such as a corporation, limited liability company, or partnership. In that case, they would need to comply with any governmental filings required to create the new business entity for their joint venture.
JV Agreements Should Be Comprehensive
With any type of joint venture, the parties should have a written agreement that clearly specifies how the business relationship will work, including:
- a specific business goal for the joint venture
- how profits and losses will be shared
- the parties’ contributions to the venture, including cash, assets, or property
- how the parties will share management and control, and
- the term of the venture or early termination provisions.
The agreement should include other standard contract provisions like dispute resolution and confidentiality provisions. If the joint venture is international, there may be other issues you will need to cover like currency conversion, government regulations, or import policies.
If the parties fail to enter into a written joint venture agreement, state law will govern by default. In that case, issues like how profits and losses are distributed and how the joint venture can be terminated will be governed by state law. To avoid uncertainty and the potential for costly disputes later, it’s always best to have a well written agreement so that both parties understand the terms and conditions of the relationship they are entering into.
JV Partners Must Observe Fiduciary Duties
Parties in a joint venture relationship are bound by the fiduciary duties of loyalty and care, even if these duties aren't specifically mentioned in their joint venture written agreement. The duty of loyalty requires that parties in a joint venture arrangement always place the interest of the joint venture above their own personal interests. They must avoid any conflict of interest between the joint venture business and their own personal or business dealings. The duty of care requires that the parties make and execute business decisions on behalf of the joint venture with reasonable care.
A Lawyer Can Help
The law surrounding creation of a joint venture is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a business lawyer.