A joint venture is an informal type of business relationship wherein two or more parties 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 or a corporation.
These partnerships 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.
A joint venture is similar to a partnership, but with a key difference. While a partnership concerns ongoing business in all regards, a joint venture only concerns a single project or a related series of transactions. Here are some other common characteristics of joint ventures:
- Profits and expenses: Unless otherwise agreed to, joint venturers share profits and losses equally
- Duration: Unless otherwise specified, a joint venture terminates upon the completion of the project or series of transactions
- Termination: Unlike a partnership, a joint venture does not terminate upon the death or incapacitation of one joint venturer. Additionally, a joint venturer does have the power to terminate the relationship at any time once the project or transaction is complete.
- Control: The right of each joint venturer party to control and manage all of the property to be used in the venture
- Contract: The existence of a contract, whether oral or written, between the parties to engage in the venture together
Joint ventures are formed in all kinds of business realms. Examples include:
- Private persons - Independent contractors can combine resources through a joint venture to get a major contract to build a housing development.
- Corporations - General Motors and Volvo Trucks formed a joint venture to build heavy-duty trucks. This is a joint venture instead of a partnership because the two companies conduct business separately except for this related series of transactions (manufacturing heavy-duty trucks).
Parties in a joint venture have duties to one another. Such duties include:
- Fiduciary duty - A fiduciary duty means that each party has a duty to act in the best interests of all involved. Acting only for your personal best interests is a breach of fiduciary duty (which can also be a breach of contract if the joint venture was formed by a contract).
- Disclosure - All information regarding the joint venture shall be disclosed to the involved parties. This becomes an issue when certain trade secrets, patents, or other sensitive information is involved. Make sure the contract clearly specifies what information each party is required to disclose.
- Liability - If a third party is affected by the joint venture, all parties involved in the joint venture are equally liable. For example, a joint venture is formed to construct a building. During construction, a brick falls and injures a pedestrian. All joint venturers would be liable for the pedestrian’s injury.
Parties in a joint venture have certain rights. These rights include:
- Equal control, influence, and power over the project or transaction. However, the contract can give one party complete control.
- Equal ownership of the project.
Joint ventures may be terminated through the following means:
- According to termination or dissolution provisions in the joint venture contract
- According to a court-ordered decree
- At the will of any one of the joint venturers
Common reasons why joint ventures are dissolved include:
- The stated aims of the venture have 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, necessitating the dissolving of the joint venture
Often, a joint venture is a contractual relationship. If you are planning to engage in a joint venture, a business attorney can draft and negotiate the contract to your liking. If you are already in a joint venture, an attorney can review the contract and inform you of your legal rights and duties. An attorney can also help you solve a dispute if a joint venture goes sour.