Legal Pros and Cons of Joint Ventures
The decision to sign onto a joint venture agreement is both exciting and daunting. On the one hand, joining two or more companies could lead to the creation of something truly innovative, but it could also lead to severe conflicts of interest. Consider this information before making such a commitment.
First, be aware of the difference between a joint venture agreement and a partnership agreement as many people confuse the two. A joint venture agreement involves two or more companies that come together with a specific goal in mind. They each keep their business or entity during the contract. A partnership agreement relates to the ongoing relationship between two or more parties. Everyone takes responsibility for everyone else's actions, and each side shares the profits and risks associated with the business. Partnerships are continuing business ties while joint ventures tend to be goal specific and terminate once those objectives are achieved. There is more to lose with a partnership agreement, which is why most companies sign a joint venture agreement instead.
To ensure a joint venture is successful and productive, it is essential to start with fair and transparent guidelines. These are the criteria that should be included in a joint venture contract:
- Obligations of all parties
- Percentage of profits and losses shared
- Level of control of all parties
- Outline of decision-making processes and all parties authority on matters
- The share of supply and collaterals
- The percentage of capital investment
- Type and period of payment
- Source and type of insurance
- Mode of dispute resolution
A joint venture contract can take on several forms and so the legal concerns for a venture will depend largely on the medium used to build the project. At the most basic level, a joint venture will require that you establish a separate legal entity. All parties hold investments in the entity, and the entity holds its own assets, allowing it to sue and be sued through its own name. Most joint ventures are companies or relationships between participants such as trusts, partnerships, or other types of association.
Once you become familiar with the components of a joint venture agreement, you can start to consider whether the benefits outweigh the risks for your particular enterprise.
- Provides the opportunity to invest in new partners and broaden each companies market prospects
- Liability is equally shared, reducing the level of risk
- All parties get access to diverse resources
- The contract is flexible as its term is limited
- Coming together for mutually beneficial goals
- Can complete a project that may otherwise be impossible individually
- Increased growth opportunities
- Adapt to other work arrangements, workplace cultures, and management styles
- Poor decisions could lead to poor results
- Lack of commitment from any parties to the project
- Lack of clarity of obligations
- Ineffective conflict resolution
Most of the risks associated with joint venture agreements can be mitigated with a thorough contract. Book an appointment with our experienced law firm to get personalized information about joint venture agreements. We can help you draft a fair agreement that covers every contingency.