What Is a Joint Venture Agreement?
A joint venture agreement is a written contract outlining the circumstances of two parties pursuing a business activity or project. This agreement details the arrangement between separate entities (often with interrelated strengths) who combine their resources, capital, and expertise to accomplish a common goal.
Instead of creating a formal partnership or new legal entity, a contractual joint venture (JV) allows the parties to continue filing their tax returns separately yet still reap the financial advantages of a partnership, such as sharing resources and risks.
A well-written joint venture agreement clarifies each party’s expectations, responsibilities, and rights relating to the venture.
Is a Joint Venture Agreement Legally Binding?
When both parties execute a joint venture agreement properly, it’s legally binding. If one party doesn’t uphold their end of the agreement, the other party can initiate legal action against them.
Some elements that make this written agreement legally binding include the following:
- Offer and Acceptance: One company asks another to enter into an arrangement and proposes the terms of their collaboration. The parties can negotiate the specific terms but must agree to cooperate.
- Consideration: Each party receives something valuable from the arrangement. For example, one party gains access to a new market, while the other gains access to the first party’s industry expertise.
- Mutuality: Both parties agree to sign an enforceable contract.
- Legality: The entire agreement only contains lawful considerations and promises. For example, the companies agree to work in conditions that align with their jurisdiction’s labor laws.
- Capacity: Each party legally signs the contract. For example, they’ll ensure any representatives have legal authority to sign the document.
What to Include in a Joint Venture Agreement
It identifies the following fundamental elements:
- Parties or Co-Venturers: The two entities that have agreed to work together.
- Financial Contributions: The amount of money, property, and time each co-venturer will invest.
- Management Structure: The people responsible for the venture’s day-to-day operations.
- Purpose: The scope of JV activities and the reasons to join resources and collaborate.
- Profits: How the parties will distribute profits, either based on contributions or another formula.
- Term: Whether the venture is for a limited time or indefinite period.
- Assignment: Whether either party can assign their responsibilities to another entity (most documents require prior written consent from the other party).
- Confidentiality: Both parties agree to keep all proprietary information confidential.
- Exclusivity: Whether either party can perform business with other entities outside of the agreement.
- Termination: The conditions under which the joint venture will end.
Joint ventures have a limited life and purpose, requiring less commitment than a more permanent type of partnership that imposes more responsibilities and obligations on each partner.
Characteristics of a Joint Venture
Here are some defining characteristics of a joint venture:
- Legal Independence: Both entities are legally independent. They only work together to achieve their desired goal.
- Common Goals: Both parties agree to achieve a specific goal that benefits them.
- Shared Resources: Both parties share ownership of the venture assets, liabilities, and implementation. They both contribute resources, but their contributions might be unequal. For example, one party might contribute 60% of the necessary resources while the other party offers the remaining 40%. The parties can allocate profits accordingly.
- Temporary Relationship: The arrangement is usually short-term, ending once the parties reach their established business goal.
Why Else Might a Joint Venture End?
The involved entities might agree to end a joint venture when:
- One company buys the other.
- Market conditions change.
- One company develops new goals.
- The companies’ shared plans don’t apply.
- The companies are taking too long to fulfill their goals.
The Benefits and Risks of Forming a Joint Venture
Explore some of the benefits and risks of forming a joint venture:
- Larger companies can gain access to research materials from newer companies working on innovations.
- Smaller companies can benefit from larger companies’ market presence.
- Domestic companies can learn about the social reality of a local area from a foreign company.
- Foreign companies can gain new relationships and expertise from domestic companies.
- Companies can experiment outside of their core business to develop new products or services.
- Companies can merge their wealth of knowledge in a specific niche.
- The involved parties may have unclear business objectives if they have poor communication.
- The parties may experience misunderstandings due to differences in management styles or culture.
- One party may bring a disproportionate amount of value compared to the other, resulting in an asymmetrical business relationship.
- The parties may not have the same viewpoints on how to share and distribute profits.
How to Form a Joint Venture
Explore the steps to forming a joint venture so you can decide if this path is right for your existing business:
Step 1 – Find a Suitable Partner
Find a suitable partner who complements your company’s existing structure. For example, suppose your business developed an innovative new product, but you don’t have adequate distribution channels. You might look for a business partner with established channels and a good industry reputation.
Contact different distributions to assess their interest in partnering with you. Ensure you trust the company leaders you choose, evaluating their skills, industry expertise, and cultural fit. When you conduct this due diligence, you can have more confidence in your chosen partner.
Here are some elements to consider about a potential partner:
- The company’s financial situation
- The company’s expectations from the venture
- Other partnerships the company may already have (conflicts of interest)
- The company’s expressed commitment to your proposed goals
Step 2 – Choose a Type of Joint Venture
Once you find a partner, you can negotiate with them to decide on the type of joint venture you’d like to start. Consider the two types:
- Contractual joint venture: A contractual joint venture is a business arrangement you enter with another company in which you both continue to operate separately. You only combine resources to strive toward common goals.
- Equity joint venture: An equity joint venture is a business arrangement in which you and another company create a new entity under which you conduct business. Each party will hold equity in the new company, and the new company will operate separately from the two parties’ businesses.
Creating a separate legal entity is more complex and expensive, but it can offer more legal protection if an issue arises. A simple contractual agreement allows for more flexibility, as the parties don’t have to pay taxes and report profits for an entirely new entity. Instead, the profits flow through to each party’s business.
Step 3 – Draft a Joint Venture Agreement
Use our joint venture agreement template to start drafting your own document. Tailor it to your and your partner’s needs and preferences. Negotiate with the other party to ensure you detail mutually beneficial terms.
While drafting and signing this document, you should have legal representation for each party. A third party with legal knowledge for each entity can ensure the document is fair and legally enforceable.
Step 4 – Pay Taxes
No matter what kind of profit-seeking business you have, you must pay your share of taxes. The same applies to owners of joint ventures. The taxes you pay for your joint venture will depend on how you structure your arrangement.
If you and your partner create a separate entity, all its profits will be subject to taxation based on the business type. For example, C corporations pay a tax rate of 21% on profits they earn. Alternatively, limited liability companies (LLCs) account for business losses and income on each owner’s individual tax return.
Contractual joint ventures don’t file their own tax returns. Instead, their tax responsibilities flow to each party’s respective entity.
Step 5 – Abide by Other Regulations
Ensure you abide by federal, state, and local laws for your joint venture’s activities. For example, if you plan to use the labor of another entity’s employees as part of your joint venture agreement, you must follow applicable labor laws.
You might also need to acquire a business license or permit to legally operate, depending on the industry to which your joint venture belongs.
Joint Venture Alternatives
Here are some alternatives to a joint venture you may consider:
A partnership is a business structure in which two or more parties lead a company together. They share the business’s profits and losses. It lasts indefinitely, unlike a joint venture that usually has an end date.
The main similarity between a partnership and a joint venture is that each party often shares liability if something goes wrong.
A franchise is when a parent company grants an individual the right to operate a business using the parent company’s brand and approaches. Some examples include Dunkin Donuts, Ace Hardware, and The UPS Store.
The business purchasing the franchise pays a fee to the franchisor to obtain operating rights. The franchisor will maintain some control over how the franchisee conducts their business. Alternatively, neither party is in complete control in a joint venture, as both contribute their ideas and resources toward a common goal.
Licensing involves a licensee obtaining the right to use a company’s intellectual property to perform services to make products.
It’s similar to franchising but offers more freedom to the licensee, as the licensor doesn’t have much control over how the licensee conducts their business.
A merger occurs when two companies unite to become one entity. It takes place when two companies of similar size mutually agree to come together. They remain one entity for an indefinite period.
An acquisition occurs when a larger company assumes a smaller company’s assets. A larger company performs an acquisition when it has the resources to buy out a smaller business.
Joint Venture Agreement Sample
Download a joint venture agreement template as a PDF or Word file below: