If you want to establish a business with a partner, then you’ll probably want to look into a joint venture agreement. Joint ventures are all about bringing two parties together to create one business entity. You share risks, expertise, and resources between two parties. In return, profits are also shared. This guide will cover exactly how joint venture agreements work and what steps you need to take to establish one.
What is a Joint Venture Agreement?
A joint venture agreement is a type of contractual agreement between two parties, where each party combines their resources for a specific business objective. Both parties proportionately share profits and losses, based on the terms of the agreement. Joint venture agreements can take two forms: contractual agreements and separate legal entity agreements.
Contractual agreements are when the venture is determined based solely on a written contract. In a separate legal entirety agreement, a limited liability company (LLC) is formed through the agreement. The basic idea behind a joint venture agreement is to provide fairness and protection if two people go into business with each other. These agreements outline how partnerships will work, what the responsibilities of each party are, what each party’s rights are, and how disputes will be handled.
How Does a Joint Venture Agreement Work?
When you put together a joint venture agreement, your aim is to outline the specific terms and conditions that both parties in the agreement will follow when they work together. This is done to achieve a set business objective and ensure the venture operates smoothly.
Once the joint venture agreement is agreed upon and signed, both parties become legally bound by the agreement and need to stick to the terms and conditions laid out. Here are some of the steps and strategies involved in putting a joint venture agreement into action.
Establish the Purpose of the Agreement
First, you need to define the overall objective of the joint venture agreement. What are the business objectives that both parties have, and why does a joint venture make sense for achieving this?
Define the Roles and Responsibilities
A key element of a joint venture agreement is establishing what specific roles and responsibilities each party in the agreement has. This is important for understanding how the venture will operate, and knowing when a certain party might not be contributing their weight. The agreement should also outline the financial responsibilities of each party. This could include determining what financial contributions will be made, and how this affects each party’s role.
Set an Ownership Structure
A joint venture agreement outlines how the venture is owned by each party. This should include each party’s ownership percentages, and what ownership rights each party has. Establishing this is necessary for determining how profits and losses will be shared within the joint venture. The venture agreement should also outline how profits from the venture will be shared and distributed, as well as hope losses and risks will be taken on.
Establish Governance and Decision-Making Responsibilities
When creating a joint venture agreement, you need to establish what the governance structure of the agreement will look like. This includes how the venture will be managed and how decision-making processes will take shape. It’s also important to establish how possible disputes will be handled. Finally, the agreement should outline how the joint venture could be terminated and dissolved and what terms would result in this. If this happens, asset distribution needs to be established.
Creating and Maintaining a Joint Venture Agreement
It’s important that the correct processes are followed when a joint venture agreement is established and maintained. Here are some of the essential steps involved in creating these agreements:
- First, discuss possible joint venture opportunities with partners
- Consult with a business lawyer for advice on how to proceed
- Choose the right type of joint venture agreement to use
- Establish your joint venture agreement terms and conditions
- Correctly pay your taxes as a joint venture
- Continue to consult with the right professionals to maintain legal compliance and get the right advice
One last thing to note is that joint venture agreements are not necessarily partnerships. It’s important to understand the technical differences between the two when establishing your venture. If you create a joint venture agreement, be sure to follow the right processes and create the agreement carefully. It could be a great way to work with a different party and combine your skills and resources to achieve greater success in your objective.
SEE ALSO: WHAT MAKES A BUSINESS PARTNERSHIP WORKS.