Joint ventures are a hot topic in certain business circles, and I get asked about them a lot. Savvy business owners are in touch with their company’s strengths and weaknesses. In the event that an outside party’s strengths could bolster your weaknesses, it may make sense to enter into a joint venture. Just what would this entail for your business?
What is the Definition of a Joint Venture?
I hear this question A LOT. Texas state law requires four elements for a joint venture —
(1) a community of interest in the venture,
(2) an agreement to share profits,
(3) an agreement to share losses, and
(4) a mutual right of control or management of the enterprise.
Parties must either expressly or implicitly intend to create a joint venture. Though not the legal textbook definition, I define a joint venture as a type of partnership between two or more people (or companies) to contribute resources to a mutual goal. In the end, I think it’s easiest to think about joint ventures as a certain type of partnership, although the word “partnership” has a distinct legal meaning and technically a joint venture isn’t necessarily a legal partnership. However, in my experience, this is a helpful way to explain to people what a joint venture is and mirrors how most people think of them.
Fiduciary Duties in a Partnership vs Joint Ventures
Partners in a ‘legal partnership’ owe each other fiduciary duties. Fiduciary duties are a very high standard. That is what I, as a lawyer, owe my clients. It means I have their backs and their best interests in mind. Sometimes in joint ventures the parties expressly say they don’t owe each other those types of duties. They should still work together in good faith and, if you know anything about me, you know I believe in the power of great relationships.
However, fiduciary duties are a heightened obligation and some joint venturers want their relationship to simply be contractual. Therefore, always be careful when using the word “partner” and do not use it unless you want to have a very high standard of trust and care in the relationship, much more so than a typical contractual relationship.
What are the Different Types of Joint Ventures?
There are two main types of joint ventures – contractual and separate legal entity. A contractual joint venture is exactly that – a contract between the joint venture partners. This may be in writing or it could be an oral contract (always be careful of oral contracts because it can be hard to prove they exist and various state laws require certain things to be in writing in order to be enforceable).
A separate legal entity may be a limited liability company or a corporation. Limited partnerships aren’t technically legal entities, although I think about them the same way I do an LLC or corporation – they are formed by registering with the state and they require separate tax returns and they can sign on contracts in the same manner as an LLC or corporation. All of these types of business structure are more involved than simply creating a contract.
Contract vs. entity is a decision primarily about how to document the JV. The actual relationship – what the parties contribute to the venture, their various rights and obligations, etc. – are separate decisions and the documentation does not have a bearing on these issues. The issue of documentation is usually decided based on money and commitment. If the JV is going to be a short-term relationship and there isn’t a lot of money at stake, a contract is quicker and less expensive than everything that goes into forming a separate legal entity.
Who Can Enter into a Joint Venture?
A joint venture, like any partnership, requires at least two parties. Some joint ventures will have many more. The parties can be:
- Individuals
- Companies, or
- A mix of individuals and companies.
What are the Advantages of a Joint Venture?
Joint ventures can be good for all of the parties involved. Potential benefits include the chance for increased growth, a greater pool of resources, a boost in technical capability and access to new markets and distribution channels that might be otherwise impossible.
Of course, entering into a joint venture is not a decision to make lightly. One of the most important things to assess is whether you are getting involved with the right joint venture partners. Part of choosing joint venture partners is assessing what they bring to the table. It’s good to choose joint venture partners who possess resources that your company does not. That might be money, intellectual property, available personnel, experience, a foothold in a given market or any number of other things. You also want joint venture partners you can trust to be fair and transparent with you. A joint venture is a complex, evolving relationship. As with other business partnerships, it’s kind of like a marriage. Choose wisely!
What Documents and Contracts Are Needed for a Joint Venture?
If you know who you want to joint venture with and what your goals are from a business perspective, it sounds like you are ready to put together the documents for the joint venture.
Joint ventures come in all sorts of flavors. Some are not documented at all. Technically, that would likely be considered a general partnership.
Other joint ventures are documented with contracts and they look a lot like service agreements, which is to say not that much like a joint venture at all. I have had clients who want to keep things very simple and streamlined and agree to a seven or eight page joint services agreement. The difference between a joint venture that is documented with a simple joint services contract and any other services agreement you’ll see out there is the intent of the relationship. If I hire an accountant to perform an audit of my business and sign a services agreement for them to perform the work, the accountant is a vendor of mine. If I hire an accountant to create a seminar series together that’s aimed at business owners, we are essentially partners (see my note about exactly what that word ‘partner’ means). That’s the difference.
Can a Joint Venture be a Corporation?
Parties that want to create a more formal JV relationship may create a new entity entirely. In that case, the parties to the joint venture will each own a percentage of the entity. The entity may be a limited liability company, a limited partnership, a corporation, a public benefit corporation or any one of a number of different types of legal entities. Creating a separate entity requires a little more upfront time and cost and more ongoing upkeep, although it makes things simpler for separating the joint venture from the other businesses of the joint venture parties. It also makes it easier to later sell the joint venture.
If a corporation is used, the joint venturers will file a Certificate of Formation, Articles of Incorporation or similar document to actually form the entity. They will prepare Bylaws, Resolutions and usually a Shareholders Agreement that spells out issues around decision making and voting. They will decide other issues like what happens if they get in a dispute and how will they unwind the JV later when the time comes to do that (very few JVs are intended to exist in perpetuity)?
Do I Need a Business Lawyer to Form a Joint Venture?
Some business owners may wonder, “Do I need a lawyer to help create a joint venture?” The answer is that you likely should have a lawyer involved. There are lots of options for filing a Certificate of Formation online or for preparing some sort of joint venture or services agreement. However, when it comes to complex relationships like joint ventures, my experience is that the off-the-shelf (DIY) options usually fall short. Those solutions aren’t built for highly-custom, constantly evolving contractual relationships, such as joint ventures.
Is it absolutely required that you have any lawyers involved? No. However, they usually are involved. In fact, in every joint venture I’ve worked on where we create a separate entity, the parties have their own individual lawyers. The context and the dollars at stake typically call for that.
That doesn’t mean creating the joint venture has to be expensive because it does not. But, that all depends on what your goals are and the overall structure of your joint venture. I encourage you to not take shortcuts when it comes to talking through and documenting your JV relationship. For a different take on why it’s important to create thorough joint venture contracts (it’s not the reason you think!), read The Most Important Reason to Create a Business Contract.
Other Joint Venture Issues to Consider
Parties considering this type of JV need to be sure they fully understand all accounting, antitrust, intellectual property, licensing, and tax issues before they actually sign on the proverbial dotted line.
We touched on it earlier, although an important issue to consider is what each joint venturer will contribute to the JV. You will document that clearly in the joint venture agreement and other documents. It’s important to manage your expectations and those of the other joint venturers by talking thoroughly through what you each will contribute and what your goals and expectations are regarding the venture.
Another key thing to think about is how the joint venture members would handle ownership of the JV entity once the JV dissolves. Is the entity going to similarly fade away, with each separate participant taking control over any of its own brands or intellectual property that went into the entity? Or can the entity be sold off (or taken public) as its own separate business? If the JV develops and owns its own assets, such as intellectual property or even things like customer lists, you will want to decide ahead of time who will those once the parties go their separate ways.
A big issue in JVs often revolves around competition. Specifically, will you be able to compete with your joint venture partners either during the existence of the JV or after? That’s important to think through. You are likely to have a very unhappy JV partner if they think the JV should operate exclusively in certain markets and you intend to compete with the JV in those markets through your current company.
Do Joint Ventures File Tax Returns?
One tax consideration to bear in mind is that, even without creating an official separate entity under a joint venture agreement, Uncle Sam and the IRS may require your joint venture to file a partnership tax return. Every entity must file its own taxes, but so do general partnerships (which may seem odd because general partnerships don’t even require filing with the Secretary of State for the initial formation of them – they are created by what we used to call “a meeting of the minds”). Simply entering into a contractual agreement where the parties will be sharing a combined profit doesn’t automatically mean that tax authorities will view the relationship as a tax partnership. You’ll want to talk to CPAs about your specific tax situations.
Do Joint Ventures Need to be Registered in Texas?
No. The word joint venture is confusing. It seems like it must have distinct legal meaning. But, it does not. A joint venture may be just a contractual relationship where two or more parties agree to contribute certain resources toward an end goal, typically servicing a certain geographic area or type of customer. At times, the parties to a joint venture create a separate entity, such as a limited liability company or corporation. In this case, the entities are registered (formed) with the Secretary of State. Other times, the joint venture will be a simple partnership. In Texas, general partnerships do not need to be registered with the Secretary of State.
What are Examples of a Joint Venture?
Some years ago, I was the Chairman of a joint venture between the oilfield services company where I worked and a division of the Chinese government. We contributed large supply vessels (big boats!) worth a couple hundred million dollars and our joint venture partner contributed money to the venture. We each contributed people. Our joint venture was operated as a separate legal entity, of which we each owned a percentage.
At the other end of the spectrum (less dollars, less paper), I helped a technology client put together a contractual joint venture with another company in its industry. The other company contributed certain technology and we brought customers and website traffic to the table. Together, we agreed to monetize our traffic by selling visitors and customers the other company’s technology. This is very similar to affiliate marketing, which is big business on the internet. Bloggers and publishers with content and traffic team up with companies that have products to sell. The bloggers and publishers sell the products to their readers and they keep a percentage of the sale price. This is a type of joint venture.
What is a Joint Venture Agreement?
A joint venture agreement is the contract that spells out the various rights and obligations of the joint venture partners. A joint venture agreement will address what each party is contributing, how decisions are made, how long the JV will last and many other things. The actual name of the agreement will vary depending on the type of joint venture the parties create. For example, if the parties create a corporation for the joint venture, the Shareholders Agreement will be the main operative document. In a contractual joint venture, the name of the joint venture agreement may be Shared Services Agreement, Partnership Agreement, Joint Venture Agreement or many other names. The actual name doesn’t matter very much. The substance of the agreement is what is important.
Joint ventures can be complex. It’s fairly rare that parties can locate a joint venture agreement online that will work well for their specific relationship. I appreciate the desire of clients to keep legal fees down, although this is a type of agreement that is not suited for LegalZoom or other template contract systems. JV relationships are too custom. If you want to create a joint venture and are not willing or able to spend money on attorneys, you are, in my opinion, better off with a clear, thorough email of the deal than grabbing an agreement offline, changing the names and signing it.
What are the Disadvantages of a Joint Venture?
Joint ventures are a type of partnership and partnerships take effort. They are like marriages. You have two distinct companies with their own cultures and goals. They will not always agree and there are bound to be gray area issues where the partners need to talk things through and spend time seeing things from each other’s perspectives. Some people/companies are less inclined to care about other people’s perspectives. So, be careful about who you partner with – it can be maddening to work hard and be very fair when you find out that your partner is entirely in it for themselves.
Also, joint ventures take time to develop and document and they cost money. If you create a separate legal entity and each party to the JV has its own legal counsel, the fees may be more than nominal. On an ongoing basis, the JV may need its own personnel and have annual filing and auditing requirements.
Why are Joint Ventures Popular Now?
The pace of change in the business world is so quick and it keeps getting quicker. 50 years ago, a company on the Fortune 500 list could expect to be there for 75 years. Today, that expectancy is 15 years! With things changing so quickly, companies have to move very fast. This requires being nimble. It also means that the old fashioned method of organic growth (e.g., hiring employees and moving into each new market with your own staff) is often inadequate. If your company has a great product in a quickly changing market, partnering up to enter other markets and exploit opportunities may be the only realistic option. If you’re talking about entering international markets, your company likely lacks the understanding of the culture to pull that off. You could hire a large team in that country, although that’s a lot of overhead and management time. Or, you could take your existing product or service and establish a JV with a company that already has distribution in the target country. That’s quicker and safer, provided you choose the right partner!
What Next?
If you have questions about how to form a joint venture, the costs, the pros and cons or anything related, please get in touch. I help clients all over, including Texas and Delaware, the hub of US corporate law. I have experience with international joint ventures and JVs of all sorts of sizes and in various industries, including technology, oil and energy, manufacturing, financial services and others.
Author: Brett Cenkus
Brett Cenkus is a business attorney with 18+ years experience based in Austin, Texas. He has worked with a variety of businesses and has clients throughout Texas as well as many technology clients throughout the United States. Brett is a Harvard Law graduate with a sharply seasoned mind and an entrepreneurial heart. As a founder of 6 companies himself, he is especially passionate about helping startups succeed. In 2016 Brett was named the winner in the Individual category for RecognizeGood’s Ethics in Business & Community Award. He offers businesses solutions that are in sync with their culture, goals and values. You can learn more about Brett by visiting the About page on this website.