Everything You Need to Know About Joint Venture Partnerships
Is your business ready to partner with another firm and make it formal with a joint venture partnership agreement? The promise of potential revenue, increased sales, heightened brand recognition and leveraging each other’s expertise must be balanced against the risk of any business venture. However, joint venture partnerships multiply the problems one can encounter if you don’t do things right. Here is everything you need to know about joint venture partnerships.
The Structure of the Joint Venture
Before you write out a joint venture contract, determine how you want it to be structured. The first option is a limited liability company. The main advantages of this include limited liability for the shareholders and a separate legal entity that can enter its own contracts and access a wider range of financing options. At the end of the venture, interest can be transferred or sold to a 3rd party.
The second would be by forming a limited liability partnership set up by a joint venture agreement. A limited liability partnership or LLP provides greater flexibility in sharing profits, and this structure permits additional partners to join. Annual accounts have to be filed, but far less information has to be made public.
The third way to structure a joint venture is as a contractual joint venture or partnership. There is no statutory framework with these types of partnerships, which makes them more versatile for both parties, but riskier as well. Another disadvantage is that there are no liability limits for any party involved in the joint venture.
One of the major risks is that a poorly worded or incomplete contract will create problems down the line. This type of framework is prone to problems if you leave out crucial terms, since there are no statutory regulations to fall back on. Work with corporate solicitors like Harper James Solicitors to draft a proper contract to minimise risks.
Choose the right type of business venture based on how much risk you want to accept before you start drafting the legal agreement.
The Necessity for Proper Contracts
In order for a joint venture to go well, the joint venture agreement governing the entire joint operation must be clear and concise. Everyone must be completely certain of their rights, responsibilities and obligations. And all of this must be spelled out in a properly drafted contract. Don’t assume that a memorandum of understanding is sufficient – put it in writing in the contract that stakeholders sign. This keeps conflicts, miscommunication, and misunderstandings to a minimum. Dispute resolution mechanisms built into the contract could keep you out of court altogether.
Seek legal advice to understand what other legal documents may be appropriate such as confidentiality agreements or non-disclosure agreements.
The Tax Considerations
Different joint venture agreements create different tax obligations. If the joint venture is set up as an LLP, each partner is taxed individually. If a limited liability company is set up, both the company and the shareholders have to pay taxes on profits and dividends. Seek legal and financial advice so that you can minimise the tax bill and necessary paperwork while maximising the profits.
Joint ventures are a proven vehicle for businesses coming together for specific projects or long-term alliances. With a well-drafted joint venture agreement, the odds of it being successful improve while the chances it will become a nightmare are dramatically reduced.