Forming a joint venture is an excellent way for business entities to combine their resources to start a new enterprise. Although every joint venture is different, they all require certain elements to ensure the proper formation, structuring, and governance of what can be complicated business agreements. The Business and Corporate Law attorneys of SederLaw bring their vast experience to bear in representing clients at all stages of their joint ventures.
The Basics Of Joint Ventures
Two or more existing businesses may pool their efforts to form a joint venture. While in some sense this arrangement resembles a partnership, one can actually be a combination of any business organization, such as a corporation or limited liability company (LLC). The joint venture itself is a new entity, but the prior existing companies remain distinct and will go their separate ways once the objectives of the venture are accomplished.
The purpose of forming a joint venture may be to accomplish a specific task, such as enhanced production efforts, or to create an ongoing business endeavor. For example, one may be formed to enter into a foreign market.
Different businesses have different skills and resources that can be brought to the table when they form a joint venture. One business, for example, may have vast capital and labor resources that can be used to quickly get a new company off the ground. Conversely, another business may possess specialized knowledge about a product, industry, or location in which the business may hope to operate.
When properly executed, a joint venture allows these two separate firms to share their unique talents for the benefit of the new operation. But there’s more to it than two companies simply agreeing to work together. Important considerations come into play even before the new business is created.
Legal Issues Concerning a Joint Venture
Understanding how to properly form a joint venture takes both business and legal acumen. Our dedicated Business and Corporate Law team assists with these and other related matters:
The joint venture agreement. This document should encompass all aspects of the legal and business relationship between the member firms. An attorney will be essential in drafting this agreement so it is comprehensive and covers, among other things, the items listed below.
The name and purpose. This is a frequently overlooked but critical step in creating the joint venture. An entity with a confusing name, or a purpose that is overly broad, can create conflict with the separate business endeavors of the member companies. Naming and giving a precise purpose to the venture will help manage the parties’ expectations.
Investment obligations. The members should have a clear understanding of what they will both contribute to the joint venture and which assets, rights, and entitlements may be needed to commence the operation. These responsibilities are often set forth in a pre-formation letter of intent.
Ownership rights. Joint ventures necessarily involve the sharing of confidential and proprietary information between two businesses, such as trade secrets. A well-drafted agreement will therefore protect the respective members’ ownership rights, including those concerning intellectual property. It will also handle how confidential information is to be used.
Financial obligations and future capital requirements. Prior to forming the joint venture, all equity and debt contributions should be formally agreed upon and carried out so the new entity is financially viable. There should also be a means to raise future capital, either to cover unexpected costs or simply to ensure continued operations.
Profit and loss allocation. An essential element of any successful joint venture is clarifying how profits and losses will be shared between the parties. These are usually divided in proportion to the relative contributions of the individual members. In any event, they should be clearly defined.
Tax issues. The agreement should spell out how profits and losses will be taxed. The legal formation of the venture will also affect this. For example, the joint venture may be operated as an LLC, which allows profits and losses to pass through to the members for tax purposes. An attorney can explain these and related tax matters.
Governance. The agreement will also explain how it is to be operated and governed. This section should cover such matters as how decisions are to be made and how disputes or deadlocks are to be resolved.
Breach remedies. Because the joint venture agreement is a contract, it can be breached. Litigation over a breach is possible but usually not optimal. Instead, the agreement may provide alternative remedies such as a forced buy-out option or reduction in ownership rights. Here again, dispute resolution will also prove an important feature.
Termination. Once the objectives are accomplished, it is presumed the entity will terminate. It must be decided how thee assets are to be distributed upon termination. The parties can also agree to early termination methods if they decide to do so prior to fulfilling the original purpose of the joint venture.
Contact Our Worcester Joint Ventures Attorney
These are only a few of the issues you will need to consider in forming your joint venture. Our team is ready to help. SederLaw has the experience necessary to ensure your joint venture is formed, organized, and operated in a way that protects your rights and interests. Call us today to schedule your confidential consultation.