Joint ventures between two or more existing entities may take shape in different ways. The existing organizations may simply enter into an agreement to work together or pool resources for a specific purpose or may opt to form a new entity for the purpose of conducting their joint business. Regardless of which form the joint venture takes, there are many issues that must be considered and explicitly agreed upon, especially with larger organizations. Failure to anticipate and address issues may lead to costly conflict, a breakdown of the joint venture or even litigation.
To ensure that you have thoroughly considered all issues and contingencies and that your contract or formation documents accurately reflect the intentions of all parties, work with a commercial lawyer experienced in the formation of joint ventures.
Considerations in the Formation of Joint Ventures
When your company enters into a joint venture with another organization, some key issues you will have to consider and resolve include:
- Will the joint venture be formed as a new business entity, such as a partnership or LLC?
- What is the specific goal of the joint venture?
- How long will the joint venture continue, in terms of either fixed time or achievement of an objective?
- How will decision-making occur and what procedure will be followed if the parties disagree?
- What will the financial contribution of each party be and, if the contribution is not fixed, precisely how will it be determined?
- Will revenues be distributed, reinvested, or some combination thereof?
- If revenues are to be distributed, in what shares and when?
- Are there potential conflicts of interest between the joint venture and the individual endeavors of the parties?
- How will those conflicts be resolved or avoided?
- How will profits and losses be allocated for tax purposes?
- What will happen if a party withdraws from or fails to fulfill its obligations to the joint venture?
Of course, when two entities decide to enter into a joint venture, they have a purpose for doing so. Thus, it may seem unnecessary to list questions such as “What is the purpose of the joint venture?” However, clearly articulating the purpose and its scope serves important purposes.
First, it ensures that the parties have clearly thought through their objectives and have a measurable goal;second, it ensures that the parties are actually in agreement as to their objective- in the formation of a joint venture, as in many other areas of business, it is easy for people talking in generalities to assume that they are in agreement when in fact their understandings and goals are quite disparate; and third, a clearly stated purpose provides a useful benchmark for decision making as the joint venture moves forward.
An Experienced Commercial Attorney Can Help
The short list above provides an overview of the type of questions you and your partner or partners in a joint venture will need to answer. Depending on the purpose of your joint venture, the nature of the entities working together and any issues specific to your industry, there may be additional issues to resolve.
The attorneys in our firm are experienced in the formation of joint ventures and can guide you through the process of considering every aspect of your joint effort and clearly articulating your agreement. If necessary, we can negotiate with your prospective partner or partners to settle the details of your agreement. Then, we will draft your documents or review documents drafted by your partners to ensure that your interests are fully protected.
Official Formation of Your Joint Venture
If your joint venture is simply two or more companies working together toward a common goal without forming a new entity, you will need a detailed contract spelling out the role of each party, contributions, decision-making power, the right to revenue distributions, and many other details. You will also need to agree upon a duration for the contract, which may be time-based or may be tied to the completion of a certain task or achievement of a goal.
If on the other hand you are forming a new entity such as an LLC or partnership, you will need all the usual documents and filings associated with the creation of such an entity, along with an operating agreement or other contract clarifying the roles and obligations of each party. Our attorneys are prepared and qualified to help with the process from beginning to end, guiding you through the planning and negotiation stage and then creating clear, binding agreements and formation documents to secure your plans. Contact KPPB LAW today.