Joint Venture Formation and Dissolution
What is a Joint Venture?
A joint venture is a less formal type of business relationship wherein two or more parties (“co-venturers”) agree to share funds, resources, and skills to undertake a particular business project. Joint ventures are usually non-transferable and do not involve the creation of a new entity unless one is filed for (such as an LLC).
The business relationship in a joint venture will typically last any where form 5-7 years. Joint ventures are formed with a specific business goal in mind and are generally dissolved once the specific goal has been achieved. The laws covering business formation and dissolution may vary according to state.
What does Joint Venture Formation Involve?
The most common way for different individuals and/or companies to form a joint venture is through a contract. The contract agreement will usually contain all the relevant provisions for the entire project, from beginning to end. The contract need not be embodied in a formal agreement; sometimes a court may infer the existence of a joint venture from the circumstances, facts, and conduct related to the parties.
Other ways for a joint venture to be formed are through legal proceedings, by creating a memorandum of understanding, or by obtaining regulatory approval.
Some of the essential elements and characteristics of a joint venture may include:
- A communal interest and joint effort in reaching the purpose of the joint venture
- The right of each co-venturer party to control and manage property to be used in the venture
- The right of each co-venturer party to direct the policy of conduct of which will guide the joint venture
- Sharing in both the profits and losses from the venture
- The existence of a contract between the various parties
- Proportionate contributions by each party
- Mutual risk-sharing
Joint ventures may be created for nearly every conceivable type of business aim. Therefore there are no uniform guidelines which determine when a joint venture has formally been entered into.
Determining whether a joint venture has been formed is usually done on a case-by-case basis and will depend on the facts of each individual venture. However, a valid joint venture agreement or contract is usually more than sufficient to establish the existence of a joint venture. Generally, courts will consider the various parties’ intent to exercise control over operations more than they will consider their economic interest in the project.
How is a Joint Venture Dissolved or Terminated?
Likewise, dissolution or termination of a joint venture will depend largely on the facts of the circumstances. Joint ventures may be terminated through the following means:
- According to termination or dissolution provisions in the joint venture contract. (Most joint venture contracts will state a date upon which the venture is to expire)
- According to a court-ordered decree
- At the will of any one of the co-venturers. Again, provisions regarding at-will dissolution will likely be contained in the contract.
The following are some of the common reasons why joint ventures are dissolved:
- The stated aims of the venture have not been met, or have already been satisfied
- The aims of the venture have become impossible to fulfill
- One or more parties disagree with the aims of the venture, or have developed different business goals
- Market conditions have rendered the joint venture unprofitable, inappropriate, or irrelevant
- Legal or financial hardships have arisen
Upon dissolution, the different co-venturers are usually entitled to profits which are proportionate to the amount of contributions that they have provided. Or, distributions may be dictated by the terms contained in the contract. Debts will also be dealt with similarly.
However, if there are any outstanding claims or liabilities, these will likely be deducted from the party’s distributions during the wind-up phase. Finally, a party to a joint venture may be terminated from the project prior to dissolution if they have significantly refused to perform their obligations.
Do I Need a Lawyer for legal issues with Joint Venture Formation and Dissolution?
Joint ventures may range from simple business collaborations to complex, multi-corporation enterprises. It is highly recommended that you contact a lawyer if you will be involved in a joint venture. This is because several different parties and interests are always involved. Your attorney can help you with such tasks as document drafting and review, and can help defend your interests in court if necessary.
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Last Modified: 08-23-2012 11:52 AM PDT
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