A joint venture describes a relationship with another individual concerning pooling their talents, resources, wisdom, or money to obtain a specified business objective.
It is unnecessary for the parties involved to form a separate entity to carry out the business purpose between the parties. However, there are important considerations for why doing so might make sense.
Joint ventures may be designated in several ways, including contractually, through legal proceedings, forming a memorandum of understanding, or getting regulatory approval.
What Are the Characteristics of a Joint Venture?
A joint venture functions similarly to a business partnership. Nevertheless, there is one key difference between a joint venture and a partnership. A partnership is deemed a single entity that serves as a continuous business for as long as it is profitable or until the parties opt to dissolve the business.
In contrast, a joint venture only exists for as long as the shared business goal or project takes to complete. The entities in a joint venture also keep their separate businesses.
Some other common characteristics that joint ventures often share include:
- Agreements: The parties to a joint venture generally enter into an oral or written contract. The contract serves as a compass for the parties by establishing the goals of the joint venture, the responsibilities of all interested parties, and the duration or estimated duration of the joint venture.
- Control: Each entity within a joint venture will be granted the right to manage and oversee the property or funds contributed towards achieving the primary purposes of the joint venture.
- Termination: Unlike a partnership, a joint venture does not automatically terminate if a joint venturer becomes incapacitated or dies. In addition, a joint venturer can dissolve or end the relationship between the entities at any point after the business transaction or project is done.
- Expenses and profits: In most examples, those involved in a joint venture will share all of the profits and expenses equally. Nevertheless, the parties may contract to divide the costs and profits per a preferred ratio.
What Are Some Examples of a Joint Venture?
Generally speaking, a joint venture can take on various types of business projects in almost any industry. For example, two independent contractors may enter into a joint venture to combine all of their resources, talents, and funds to obtain a major construction contract, like building a mall or a housing development.
Another instance of a joint venture is when two large corporations undertake a business project to engage in expensive transactions, such as when two car companies merge their resources to manufacture motor vehicles. Although the car companies would still conduct business as two separate entities in this instance, the manufacturing process would be deemed a joint effort to make motor vehicles.
What Are Common Contractual Terms of a Joint Venture?
In establishing your joint venture relationship, decide whether you want to create a new entity or remain separate entities governed by a contractual agreement.
Several elements that may influence your choice of one over the other include:
- Managing liability;
- Sharing earnings and losses;
- Distribution of property, resources, and funds;
- Defining the obligations and duties of each party;
- Structuring of governance;
- Cessation of the joint venture; or
- Sharing of confidential and trade information
The failure to address factors such as these before you enter into a joint venture can raise complicated issues for the parties involved. For instance, even if one of the parties to the joint venture dies, the other party’s rights do not automatically end.
Moreover, unless otherwise laid out, each party to the joint venture will share the gains and losses equally. Unless otherwise specified in a contract, each co-venturer has equal ownership and control over the project.
How Do You Terminate a Joint Venture?
Although the death of one party to the joint venture will not automatically conclude the venture, you can contractually agree for that to be the case. You can also agree to end the relationship when certain specific conditions are present, such as:
- The attainment of the business goal;
- Legal or financial loss;
- Disagreement between the parties as to how to accomplish the plan; or
- Other aspects that impact the completion of the stated purpose.
The joint venture also may be concluded by court order or at the will of the joint venturers. Learn more about How to Terminate a Joint Venture.
What Are My Duties to My Co-Venturer?
As with any legal arrangement, there are specific obligations that the parties owe each other. There is a disclosure duty, which means that information regarding the joint venture must be shared between the parties.
Each party owes a fiduciary duty to the other. This means that you must act in the best interest of all involved and cannot act only for your personal interest. The consequences for breaching a fiduciary duty can be quite severe, even if there is no criminal or fraudulent intent.
In granting relief to the injured party, the court may order an accounting of profits, compensation of losses, and freezing any asset gained due to the breach of the fiduciary duty or recession of the contract.
What Is the Legal Liability Of Each Party to a Joint Venture?
Injury may arise in any case despite the utmost care of the parties involved. If a third party is injured while the co-venturers carry out the joint venture’s activities, each party may be held equally responsible.
Principles of joint liability apply, whereby the law considers each co-venturer liable for the injury, and each co-venturer is fully liable for the amount of damages. Joint liability means that more than one defendant is liable for the plaintiff’s injury.
In some business scenarios–usually involving forming a new entity–limited liability may be applicable. Limited liability in which a new entity is formed means that the parties may bargain in a contract for the responsibility for liability.
As such, contractually, parties may redirect or avoid liability entirely. Co-venturers, however, may find themselves shouldering the entire liability for the whole venture.
How Does a Joint Venture Differ From Other Identities?
A joint venture is often used interchangeably with a joint enterprise. Like a joint venture, a joint enterprise involves a relationship between two or more individuals pooling talents, resources, property, and the like to achieve a common purpose.
Both are centered around a limited transaction or project. Nevertheless, a joint enterprise is not usually governed by a written contractual agreement and is not limited to business law. For instance, a joint enterprise is used in criminal law to describe an illegal activity.
Like a joint venture, a partnership is an arrangement with one or more individuals to conduct business activities. Nevertheless, a joint venture is usually governed by a contract and is not required to be a separate entity.
The co-venturers may seek to form a separate partnership to carry out the objects of the co-venturers, or the co-venturers may each operate a partnership that has agreed to engage in a joint venture.
Should I Consult a Lawyer for Issues with My Joint Venture?
Joint ventures can be pretty involved, and the laws governing the actions of the co-venturers can be quite complex. The liability issue is an especially problematic one, and a corporate attorney should be consulted before you undertake a joint venture.