Joint ventures occupy a unique place in American commerce. Many entrepreneurs and business people often confuse this legal structure with business partnerships. The two structures share numerous characteristics, but there are many key differences, which are crucial to understanding the advantages and disadvantages of each.
What is a Joint Venture?
To lay a solid foundational understanding of joint ventures, the rudimentary definition is a business arrangement in which two (or more) individuals or commercial entities combine resources in order to accomplish a specific task or project. This might sound exactly like a partnership, but often a joint venture is a shorter-lived endeavor, whereas a partnership may plan to operate indefinitely. So, the main difference between a joint venture and partnership is in scope; a joint venture is often formed for a single purpose and, upon completion of that purpose, will typically cease to exist.
What Should You Address When Starting a Joint Venture?
Yet another area in which business partnerships and joint ventures overlap is the nature of considerations that must be tackled at the outset. Considerations will vary significantly based on the parties’ general objectives and goals, but some common questions are:
• How will the joint venture be structured? To be more specific, will the joint venture be a corporation, LLC, or partnership? Co-venturers should consider both limitation of liability and tax implications in order to determine the optimal structure for the joint venture. While it may be tempting to avoid creating an entity and just operating the joint venture through the existing businesses, such an arrangement could be constructed as a general partnership, which has unlimited liability for each of the partners. Thus, often, it may be wise from a liability standpoint to create a limited liability entity through which to run the joint venture.
• How will the joint venture be managed? Will all parties equally contribute expertise and engage in day-to-day activities of the joint venture? Answering this important question can also affect financing arrangements in the strategic alliance, including allocation of profits (and losses).
Who owns any intellectual property developed during or as a result of the joint venture? It is not wise for the joint venture to be designated as the owner of any patents, trademarks, or copyrights that arise from the endeavor due to the limited duration of the joint venture itself. Who, then, should assume ownership?
• What is the eventual exit strategy? The goal for joint ventures is to wind down operations when the stated goal is reached. Along the way, though, one or more parties to the joint venture might wish to exit before it otherwise winds down. If this occurs, will the other parties be able to buy out the other’s interest in the joint venture? Should the interest be sold to a third party? Metaphorically crossing this bridge before you get to it will add a layer of professional and financial security to the joint venture.
How Can You Be Sure You Have a Joint Venture and Not a Partnership?
The line between a joint venture and a business partnership often blurs. Each case is fact-specific; for this and so many other reasons, you need to consult with an experienced business law firm like Doida Law Group. We offer a variety of fee structures to our clients, including flat fees, so you can have price certainty and enjoy maximum efficiency. Let’s do business soon!