The Definition: What is a Joint Venture Agreement?
A JV Agreement is a contract between two or more parties who want to do business together for a period of time. Instead of creating a formal partnership or new legal entity, a contractual joint venture (“JV”) allows the parties to continue filing their tax returns yet reap the financial benefits of sharing resources and risks. A Joint Venture will outline how much money, property and time each partner will invest into the project.
A Joint Venture Agreement will identify the following fundamental elements:
• Parties or Co-Venturers: the two entities that have agreed to work together.
• Contributions: how much money, property, or time each of the co-venturers will invest.
• Management: the person responsible for the day-to-day operations of the venture.
• Purpose: scope of JV activities and reason to join resources and collaborate.
• Profits: how profits will be distributed, either based on contributions or another formula.
• Term: whether the venture is for a limited time or indefinite period.
Here are some other useful details a Joint Undertaking Agreement might include:
• Assignment: neither party may assign the venture
• Confidentiality: both parties agree to keep all proprietary information confidential
• Exclusivity: neither party is required to do business only with the other co-venturer
•Termination: the venture will end when a goal is accomplished or by a certain time
JVs have a limited life and purpose, requiring less commitment than a more permanent partnership that imposes more responsibilities and obligations on each partner.
As a reference, people often refer to this document by other names:
• Consortium Agreement
• Cooperative Agreement
• Co-Venture Agreement
• Joint Undertaking
• Joint Venture Agreement
• Strategic Alliance
The Reasons to Form a Joint Venture Agreement
A Joint Venture that is well executed may significantly boost the profits of each company. If your business could benefit from sharing resources with another company, a joint venture for a limited period of time and limited purpose may increase your chances of succeeding. Companies often enter into Joint Venture Agreements in the following circumstances:
• Create strategic alliances to gain access to wider markets
• Develop new technologies, products, or services
• Expand business development through new networks
• Leverage one company’s brand and reputation to increase sales
• Lower research and development costs through collaboration
• Share expertise or relationships to penetrate new markets
Since most co-ventures in the United States are formed as LLCs, an LLC Operating Agreement is often needed to define each owner’s responsibilities.
Unlike a formally organized partnership, co-ventures are not permanent and are often dissolved in these kinds of situations:
• One company buys the other business
• Market conditions change
• New goals developed
• Purpose has been fulfilled or not
• Shared goals no longer apply
• Time period for the business relationship has lapsed
Here are just a few of the differences between a venture and a partnership:
Joint Venture Partnership
• Temporary basis • Permanent basis or indefinite period
• Contractual relationship • New legal entity created
• Limited scope and purpose • Broad scope and purpose
• Individual tax returns • “Pass through” tax entity
• Individual liability of each co-venturer • Jointly and severally liable for debts
• Limited fiduciary duty to the JV • Broad fiduciary duty to the partnership
• Both co-venturers must sign contracts • Partners can sign contracts as agents
• Custom ownership percentages • Default 50/50 ownership
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