Rather than setting up an LLC or other entity, a joint venture agreement may be another alternative for people to use when considering how they will do business with one another.
The term joint venture itself is often misused or people simple feel it is another way of referring to a partnership without really forming a partnership. Either way, it is strongly recommended whether you call it a partnership, joint venture or something else, you have a carefully drafted agreement in place setting forth the terms and conditions of the relationship between the parties.
The term joint venture itself is often misused or people simple feel it is another way of referring to a partnership without really forming a partnership. Either way, it is strongly recommended whether you call it a partnership, joint venture or something else, you have a carefully drafted agreement in place setting forth the terms and conditions of the relationship between the parties.
What is a Joint Venture?
A joint venture takes the form of a short term partnership in which the persons or entities involved in the project jointly undertake a project or even a single transaction for mutual profit. Generally, each person will be contributing assets and sharing risks. Like a partnership, joint ventures can involve any type of business transaction and the "persons" involved can be individuals, groups of individuals, companies, or corporations.
The Internal Revenue Service does not require joint ventures to file a tax return as a separate entity. Technically it is not a separate entity and the only thing really evidencing there is one would be the joint venture agreement. Likewise, a joint venture is not specifically required to acquire a separate Employer Identification Number (EIN) from the IRS. A joint venture is not considered a legal entity while a joint partnership or a limited liability company has its own legal status which means you are able to make business decisions on behalf of your joint venture
Schedule K-1 is required for partners in partnerships and shareholders of an S corporation. Schedule K-1 also known as Form 1065, Partner’s Share of Income, Deductions, Credits, etc. Partnerships and S corporations file K-1 Form 1065 and Form 1120-S, respectively, while individuals file a Schedule K-1 with their personal tax returns. If you are an owner of an S-corp or a member of a partnership or an LLC, then you have received a Schedule K-1 in the past. The IRS will not accept your personal tax return if your Schedule K-1 isn’t included along with it. Also, if you fail to file your Schedule K-1, you could be subject to penalties and back taxes.
The Internal Revenue Service does not require joint ventures to file a tax return as a separate entity. Technically it is not a separate entity and the only thing really evidencing there is one would be the joint venture agreement. Likewise, a joint venture is not specifically required to acquire a separate Employer Identification Number (EIN) from the IRS. A joint venture is not considered a legal entity while a joint partnership or a limited liability company has its own legal status which means you are able to make business decisions on behalf of your joint venture
Schedule K-1 is required for partners in partnerships and shareholders of an S corporation. Schedule K-1 also known as Form 1065, Partner’s Share of Income, Deductions, Credits, etc. Partnerships and S corporations file K-1 Form 1065 and Form 1120-S, respectively, while individuals file a Schedule K-1 with their personal tax returns. If you are an owner of an S-corp or a member of a partnership or an LLC, then you have received a Schedule K-1 in the past. The IRS will not accept your personal tax return if your Schedule K-1 isn’t included along with it. Also, if you fail to file your Schedule K-1, you could be subject to penalties and back taxes.
Why Choose a Joint Venture Relationship Instead of an LLC or Partnership?
Some of the key reasons for choosing a JV are that the transaction or project is limited so the parties do not want to form a long term relationship or partnership, especially if the parties already have their own partnerships, LLCs or corporations. The JV could also be of limited duration, say one year, and at the end of that time period the project or transaction should be completed, or it will have failed to come to fruition.
Some of the key factors to keep in mind when drafting a joint venture agreement include joint control and joint ownership. The joint venture agreement should address these issues by including joint authority, joint ownership, a joint committee to oversee the joint venture, dissolution notice procedures in case of a termination or expiration of the joint venture partnership agreement (by expiration date), rights and obligations of each party during the life of the joint venture partnership as well as upon termination or expiration of the partnership.
If you are considering creating a joint venture with someone else, it is important you evaluate all options before signing an agreement. An experienced business attorney can provide you with information on what your best course of action may be for protecting yourself from potential legal liabilities while still getting your idea off the ground. A good business attorney can also assist you in drafting agreements that protect you legally while not being overly prohibitive.
All you need to begin a joint venture is a written contract setting forth all the terms of the agreement with your joint venture partners. Make sure both parties understand clearly what each party's obligations and rights are in the joint business before signing anything. If the other party does not fulfill his/her joint venture obligations, consider terminating the joint venture agreement. Unless otherwise stated in a written agreement signed by the parties, a joint venture business may be dissolved by either mutual consent or by a joint venture partner's abandonment of the joint business.
The joint venture agreement should also address the issue of terminating or dissolving the joint venture partnership by including a termination clause as well as other issues that might affect the dissolution such as debts and liabilities, outstanding joint ventures, patents, trademarks and investment property.
Some of the key factors to keep in mind when drafting a joint venture agreement include joint control and joint ownership. The joint venture agreement should address these issues by including joint authority, joint ownership, a joint committee to oversee the joint venture, dissolution notice procedures in case of a termination or expiration of the joint venture partnership agreement (by expiration date), rights and obligations of each party during the life of the joint venture partnership as well as upon termination or expiration of the partnership.
If you are considering creating a joint venture with someone else, it is important you evaluate all options before signing an agreement. An experienced business attorney can provide you with information on what your best course of action may be for protecting yourself from potential legal liabilities while still getting your idea off the ground. A good business attorney can also assist you in drafting agreements that protect you legally while not being overly prohibitive.
All you need to begin a joint venture is a written contract setting forth all the terms of the agreement with your joint venture partners. Make sure both parties understand clearly what each party's obligations and rights are in the joint business before signing anything. If the other party does not fulfill his/her joint venture obligations, consider terminating the joint venture agreement. Unless otherwise stated in a written agreement signed by the parties, a joint venture business may be dissolved by either mutual consent or by a joint venture partner's abandonment of the joint business.
The joint venture agreement should also address the issue of terminating or dissolving the joint venture partnership by including a termination clause as well as other issues that might affect the dissolution such as debts and liabilities, outstanding joint ventures, patents, trademarks and investment property.
Joseph B. LaRocco is a business and corporate attorney that handles business contracts, business transactions, entity formations, and corporate governance.
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Joint Venture Agreement - What is the Main Purpose or Transaction of the JV?
Some key areas to cover in a joint venture agreement would be identification of the parties, identification of the project or transaction, roles or work each of the parties are to perform, risks being assumed, who bears the risk of loss or liability and how are the benefits or profits to be shared between the joint venturers. Often the main purpose or transaction of the JV will determine if a joint venture agreement is even needed. Maybe a partnership agreement would be more appropriate or a revenue sharing or royalty agreement.
Key Factors to Consider when Drafting a Joint Venture Agreement
If you are in a business setting where there is more than one partner involved here are four things to consider before drafting an agreement:
1) What are the roles of each party? Examples may include but are not limited to which party will be seen as the owner and public face of the joint venture partnership? Will this person have final say on decisions or will another partner have veto power over all joint decisions? What areas does each party specialize in or want to specialize in and how will joint projects be split? How will joint decisions be made? Majority rule or by unanimous vote?
2) What assets or investments have each party made into the joint venture partnership? Keep a detailed ledger of all joint business expenses as well as personal joint investment property. These should be clearly laid out in your joint venture agreement. What is the investment each partner has put into joint property besides capital, such as IP, land and equipment or other joint business expenses. Keep a clear ledger of joint business expenses so that you can properly distribute them at the end of the joint venture partnership and have this also be clearly laid out in your joint venture agreement.
3) How long do you want to work together? A good guide is usually three to five years but can go on indefinitely if both parties are satisfied with the joint venture partnership partnership. A time frame helps avoid future disputes over ethics, ownership or freedom to pursue other areas of interest while still working within your joint venture partnership.
4) Are there any issues that may cause contention between the two parties such as personality, moral disagreements or religious differences? It is best to discuss these issues openly and honestly beforehand.
5) The joint venture agreement should also address the issue of terminating or dissolving the joint venture partnership by including a termination clause as well as other issues that might affect the dissolution such as debts and liabilities, outstanding joint ventures, patents, trademarks and investment property.
1) What are the roles of each party? Examples may include but are not limited to which party will be seen as the owner and public face of the joint venture partnership? Will this person have final say on decisions or will another partner have veto power over all joint decisions? What areas does each party specialize in or want to specialize in and how will joint projects be split? How will joint decisions be made? Majority rule or by unanimous vote?
2) What assets or investments have each party made into the joint venture partnership? Keep a detailed ledger of all joint business expenses as well as personal joint investment property. These should be clearly laid out in your joint venture agreement. What is the investment each partner has put into joint property besides capital, such as IP, land and equipment or other joint business expenses. Keep a clear ledger of joint business expenses so that you can properly distribute them at the end of the joint venture partnership and have this also be clearly laid out in your joint venture agreement.
3) How long do you want to work together? A good guide is usually three to five years but can go on indefinitely if both parties are satisfied with the joint venture partnership partnership. A time frame helps avoid future disputes over ethics, ownership or freedom to pursue other areas of interest while still working within your joint venture partnership.
4) Are there any issues that may cause contention between the two parties such as personality, moral disagreements or religious differences? It is best to discuss these issues openly and honestly beforehand.
5) The joint venture agreement should also address the issue of terminating or dissolving the joint venture partnership by including a termination clause as well as other issues that might affect the dissolution such as debts and liabilities, outstanding joint ventures, patents, trademarks and investment property.
Key Clauses to Include in a Joint Venture Agreement
Depending on the nature of the project or transaction involved the parties should consider the following clauses to include in the agreement, some of which may actually be separate agreements themselves, rather than just a one or two paragraph clause. Also, depending on what state you will be doing business, there are different nuances from state to state so for instance you may want a Connecticut Business attorney if you will be entering into many Connecticut business contracts rather than just one project based joint venture.
Confidentiality Clause – Assuming there is certain information that one party must share with the other and which is of a confidential nature that should not be made know to the general public for competitive reasons, the parties should include such a clause. If the parties are separate operating companies with trade secrets, formulas, customer lists, patents, proprietary technology, and other non-public information, then a separate Confidentiality Agreement would more likely be used to cover all the issues. Confidentiality language in the joint venture agreement is quite important. If you have an idea that may be more profitable or beneficial to both parties involved, joint partnership is a great way to go about starting and running your own business while still getting your idea off the ground. A good business attorney can also assist you in drafting agreements that protect you legally while not being overly prohibitive.
Non-Compete Agreements - Do not neglect non-compete agreements which are just as important as confidentiality agreements; these issues can save you much aggravation and possible litigation later on. The importance of these steps cannot be overstated. Non-competition agreements should be drafted before the joint venture commences. These agreements will usually detail how long the joint venture agreement is expected to last, along with a number of other provisions (for example termination conditions).
Non-Circumvention and Non-Disclosure Clauses – Non-circumvention is also very important to joint venture agreements. These clauses are very often included in a confidentiality agreement, but not always. Sometimes they are used by themselves just to prevent the other party from going around them or circumventing them and doing the project themselves so they can make all the profit. The non-circumvention clause can also be used to prevent each of the parties from going direct to a customer, institution, government agency or even a single individual for future work of the same nature and kind as the project covered in the joint venture agreement.
Non-Solicitation Clause – Similar to the non-circumvention clause, this clause can be used to prevent a party in the JV from soliciting the other party’s employees to steal them or to prevent soliciting the owners, developers, or company which is hiring the JV to do the project.
Hold Harmless and Indemnity Clause - This type of clause may or may not be necessary of the joint venturers are able to obtain insurance to cover the project or transaction. Even if insurance can be obtained, the parties may want to include language that states one party must hold the other party harmless and indemnify them form any damages caused by the other party’s fraud, negligence not covered by insurance, or intentional acts that cause damage.
Warranty and Disclaimer Clauses – Again this would depend on the subject matter of the joint venture agreement, but it might be relevant if one of the parties is supplying their own software, manufactured parts or special experience. The question is whether or not one party will require warranties that the software, manufactured parts or special experience of the other party is as represented so that the project can be completed with no problems or liability of failure. Alternatively, the party supplying the software, manufactured parts or special experience might want to disclaim any warranties because of the perceived risk of completing the project as anticipated and may just represent it will be on a reasonable best efforts basis.
Buy-Sell Clause - It is also good practice to include a buy-sell agreement which will dictate what happens if any of the parties want out of their joint venture. Including a right of first refusal and mechanism to determine the buy-out price often leads to a fair and amicable parting of the ways if one of the parties want out and the other one wants to continue to grow the business or project.
Confidentiality Clause – Assuming there is certain information that one party must share with the other and which is of a confidential nature that should not be made know to the general public for competitive reasons, the parties should include such a clause. If the parties are separate operating companies with trade secrets, formulas, customer lists, patents, proprietary technology, and other non-public information, then a separate Confidentiality Agreement would more likely be used to cover all the issues. Confidentiality language in the joint venture agreement is quite important. If you have an idea that may be more profitable or beneficial to both parties involved, joint partnership is a great way to go about starting and running your own business while still getting your idea off the ground. A good business attorney can also assist you in drafting agreements that protect you legally while not being overly prohibitive.
Non-Compete Agreements - Do not neglect non-compete agreements which are just as important as confidentiality agreements; these issues can save you much aggravation and possible litigation later on. The importance of these steps cannot be overstated. Non-competition agreements should be drafted before the joint venture commences. These agreements will usually detail how long the joint venture agreement is expected to last, along with a number of other provisions (for example termination conditions).
Non-Circumvention and Non-Disclosure Clauses – Non-circumvention is also very important to joint venture agreements. These clauses are very often included in a confidentiality agreement, but not always. Sometimes they are used by themselves just to prevent the other party from going around them or circumventing them and doing the project themselves so they can make all the profit. The non-circumvention clause can also be used to prevent each of the parties from going direct to a customer, institution, government agency or even a single individual for future work of the same nature and kind as the project covered in the joint venture agreement.
Non-Solicitation Clause – Similar to the non-circumvention clause, this clause can be used to prevent a party in the JV from soliciting the other party’s employees to steal them or to prevent soliciting the owners, developers, or company which is hiring the JV to do the project.
Hold Harmless and Indemnity Clause - This type of clause may or may not be necessary of the joint venturers are able to obtain insurance to cover the project or transaction. Even if insurance can be obtained, the parties may want to include language that states one party must hold the other party harmless and indemnify them form any damages caused by the other party’s fraud, negligence not covered by insurance, or intentional acts that cause damage.
Warranty and Disclaimer Clauses – Again this would depend on the subject matter of the joint venture agreement, but it might be relevant if one of the parties is supplying their own software, manufactured parts or special experience. The question is whether or not one party will require warranties that the software, manufactured parts or special experience of the other party is as represented so that the project can be completed with no problems or liability of failure. Alternatively, the party supplying the software, manufactured parts or special experience might want to disclaim any warranties because of the perceived risk of completing the project as anticipated and may just represent it will be on a reasonable best efforts basis.
Buy-Sell Clause - It is also good practice to include a buy-sell agreement which will dictate what happens if any of the parties want out of their joint venture. Including a right of first refusal and mechanism to determine the buy-out price often leads to a fair and amicable parting of the ways if one of the parties want out and the other one wants to continue to grow the business or project.
What About Fiduciary Responsiblities?
Joint venture partners owe each other fiduciary responsibilities, so joint venture agreements must address this. The joint venture partners should be able to trust each other with sensitive and important information in the joint business. It is important that joint venture agreement clearly specify how the business partners will share a common budget, split profits and losses and any expenses they incur together. Keep in mind that partners can have individual rights to equipment used by the joint partnership, unless it was not included as joint venture property or bought with revenue from the joint venture business.
General Considerations for Joint Venture Partners
Cooperate with joint venture partners. Joint ventures often do not survive if joint venturers have competing ideas for the joint venture. It is important to keep things civil and remain moderately competitive so that all the partners can prosper from their joint partnership efforts.
Joint Ventures can be a difficult and tricky business, but once you get comfortable with the partnership relationship, they can prove to be highly profitable and rewarding experiences. There are many advantages for forming joint ventures including increased growth and profits to share between partners as well as tax advantages in some cases where companies act jointly instead of on their own .
Make sure you have carefully weighed all the issues, risks, benefits and opportunities when deciding on a JV relationship and be sure to have experienced counsel advise you and prepare the joint venture agreement to be sure you cover all the bases.
Joint Ventures can be a difficult and tricky business, but once you get comfortable with the partnership relationship, they can prove to be highly profitable and rewarding experiences. There are many advantages for forming joint ventures including increased growth and profits to share between partners as well as tax advantages in some cases where companies act jointly instead of on their own .
Make sure you have carefully weighed all the issues, risks, benefits and opportunities when deciding on a JV relationship and be sure to have experienced counsel advise you and prepare the joint venture agreement to be sure you cover all the bases.
