Joint Venture Formation and Dissolution

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 What is a Joint Venture? How Does a Joint Venture Work?

Joint ventures between two current entities develop in various ways. Most of the time, entities decide to work jointly for a particular goal. As you will see commented beneath in more detail, multiple problems must be evaluated and decided upon regardless of the joint venture structure. A failure to predict and handle problems may result in disintegration of the joint venture, competition in the business, and even litigation.

A joint venture is a narrow type of enterprise association where two or more parties decide to share reserves, aids, and talents to launch a certain business. Joint ventures are usually not transferable and do not concern the innovation of a new entity unless one is filed for.

The company association in a joint venture will normally last anywhere from 5 to 7 years. Joint ventures are created with a distinctive company plan in mind and are typically dissolved once the explicit purpose has been fulfilled.

The company formation and dissolution regulations may vary according to where the case is filed. In a joint venture, each of the entities is liable for gains, losses, and expenses associated with it. But each venture is its own entity, separate from the participants’ other business interests.

When forming a joint venture, it is essential to have faith between the two parties. In most circumstances, a joint venture will be a lengthy association from which you will be operating closely with people from both parties. That is why it is important to guarantee you can rely on both parties. As you will read below, there are multiple other contemplations to consider when creating a joint venture.

Some joint venture models are listed below:

  • Example 1: Company A and Company B enter into a joint venture. Company A owns 45 percent of the joint venture, and Company B owns 55 percent. The joint venture lasted five years, and the total capital was worth 100 million. This would be an illustration of a thriving joint venture.
  • Example 2: Company A and Company B have diverse skill sets. Company A assembles widgets that Company B desperately requires to help his failing business. Company B has goods and land that will drastically enhance Company A’s sales. Company B and Company A decide to join into a joint venture with Company A as it is beneficial to both businesses.

What Goes Into Joint Venture Formation?

The most significant portion of a joint venture is not the procedure itself but the motivation behind starting a joint venture. When forming a joint venture, there should be a standard agreement and arrangement between the parties to materialize a thriving joint venture. However, it is very easy to ignore the fact that you will be entering another company. Some parties run into problems when computing earnings and other shared responsibilities.

It is most expected for various people or businesses to create a joint venture through a contract. The contract agreement will include all of the applicable requirements for the total project from start to end. The contract need not be created through an officially-drafted agreement; and sometimes, a court may assume the presence of a joint venture from the circumstances, facts, and behavior related to the parties. For instance, a joint venture can be created through the court system, a memo of arrangement, or by getting regulatory approval.

Some of the standard features and elements of a joint venture may include:

  • A joint interest and collaborative effort in the culture of the business and achieving the goal of the joint venture
  • The freedom of each venturer to maintain and operate the property to be used in the venture
  • The liberty of each venturer to control the policy of conduct which will steer the joint venture
  • Sharing in both the profits and losses from both ventures and whether that is decided on before the joint venture was created
  • The presence of a contract between the different parties and if there are clauses or conflicts of interest between either party in the joint venture
  • Equal and proportional donations by each party
  • Reciprocal sharing of risk and other liabilities

Joint ventures may be assembled for almost every type of company, and there are no uniform policies that define when a joint venture has formally been entered into. Deciding whether a joint venture has been created is usually accomplished on a case-by-case basis and will rely on the facts of each venture.

Nevertheless, a proper joint venture agreement or contract is usually more valuable to establish the presence of a joint venture. Eventually, the courts will evaluate the different parties’ intention to exert command over operations more than they will consider their monetary stake in the undertaking.

How Is a Joint Venture Disbanded or Concluded?

Dissolution is the cessation of a joint venture. Dissolution or termination of a joint venture will rely primarily on each case and the applicable facts. Listed below are the ways a joint venture can be terminated or dissolved:

  • According to the termination or dissolution provisions in the joint venture contract. Most joint venture contracts will declare a date upon which the venture is to end.
  • Because a court decree ordered it.
  • At the direction of one of the ventures. Moreover, conditions concerning at-will dissolution will likely be included in the contract.
  • The declared objectives of the venture have not been met or have already been completed.
  • The venture’s ambitions have become impossible to achieve, and consequently, the joint venture is in trouble.
  • There are one or more entities that conflict with the ambitions of the venture or have formed different business goals.
  • The market circumstances could have rendered the joint venture unprofitable, unsuitable, or nonessential.
  • Legal problems or other monetary difficulties have taken place.

Upon dissolution, the different co-venturers are usually entitled to returns proportional to the number of contributions they have provided. Likewise, allocations may be dictated by the terms included in the contract, and debts will also be dealt with similarly.

It should be noted that if there are any unpaid claims or liabilities, these will likely be subtracted from the party’s allotments during the wind-up stage. Ultimately, a party to a joint venture may be removed from the undertaking before dissolution if they have especially declined to fulfill their duties.

Do I Need a Lawyer for Legal Issues with Joint Venture Formation and Dissolution?

As explained above, starting a joint venture involves many moving parts that can hurt or harm your company depending on whether you have the right match. That is why it is important to be thorough and detailed when picking a partner to start a joint venture with. Furthermore, joint ventures may range from simple business collaborations to complex, large, multi-corporation enterprises.

It is suggested that you contact a corporate lawyer if you are involved in a joint venture. This is because many different parties and interests are always involved. Your attorney will help you with such tasks as document drafting and review and can help defend your interests in court if necessary. They will be able to guide you through your case from beginning to end. Use LegalMatch today to schedule a free consultation with a lawyer in your area.

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