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| Joint Venture Agreements Require Astute Foresight and Plain language |
Legal Definition of a Joint Venture
The American Bar Association’s “Model
Checklist for Joint Ventures” describes a joint venture as “a
commercial collaboration in which two or more unrelated parties pool, exchange,
or integrate some of their resources with a view to mutual gain, while at the
same time remaining independent.”
What Are the Different Kinds of Joint Ventures?
What Are the Different Kinds of Joint Ventures?
This Post concerns joint ventures between two smaller business enterprises, often closely held corporations, unincorporated sole proprietors and/or independent contractors (incorporated or unincorporated). The three most common scenarios for such joint ventures are as follows:
1) Both of the
participants are created for the sole purpose of participating in the joint venture,
and do not conduct operations independent of the joint venture.
Example: Joe is employed as painter/carpenter and Sally is employed as an
interior designer. They decide to start a home remodeling business, “Home
Designs, Inc.” They then quit their jobs, act as joint incorporators and
officers of Home Design Inc., create a website and enter into a lease for
office space. They then dedicate all of
their time and resources to making HDI a success.
2) One of the
participants is created solely to participate in the joint venture and has no operations
independent thereof while the other is an existing business with operations independent
of the joint venture.
Example: Joe
is employed as chef and Sally operates a restaurant, Sally’s Place. Joe wants
to “be his own man” but lacks knowledge as to how to operate a restaurant, and
Sally wants to start a new restaurant but lacks sufficient funds. Joe quits his job and creates a corporation, “Joe’s
Eats Company.” They then pool their resources and start “New Bistro Americano.”
They act as joint incorporators and
officers of “SallyJoe, Inc.,” create a website, enter into a lease, create a bank
account with point of sale technology and open up NBA. Although Joe dedicates all of his time to
NBA, Sally continues to operate Sally’s Place, and spends about 20 hours a week
at NBA.
3) Both participants
have been in existence for some time prior to the creation of the joint venture
and may or may not maintain separate operations subsequent to its creation.
Joe operates a small company with a few employees
known as “Joe’s Painting,” which provides painting/carpentry services. Sally operates
an unincorporated sole proprietorship, “Sally’s Designs,” which provides interior
designing services. They decide to start a home remodeling business, “Home
Designs, Inc.” They act as joint incorporators and officers of Home Design
Inc., create a website and enter into a lease for office space. Although they then dedicate a lot of their
time and resources to making HDI a success, they both continue to operate their
primary, preexisting businesses.
The key to such a business relationship
is to have a well-drawn business contract setting forth the parties’ respective obligations where capital funding, day-to-day operations and management responsibilities are concerned.
What Should be in a Joint Venture Agreement?
Here are some of the issues that must
be addressed in such an agreement:
* What is the scope and purpose of the joint venture?
* What corporate form (i.e. LLC, PC, etc.) will the
venture establish?
* How much in the way of capital contributions, that is
cash, equipment and/or inventory, will each respective party be contributing to
the joint venture at its outset?
* To the extent that purchasing additional operating
capital, equipment and/or inventory are required, who will be responsible for paying
what proportionate share of same?
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| Gotta Figure Out Capital Investments - and Capital Interests! |
* Who will be responsible for managing and overseeing
the day-to-day operations of the enterprise?
* Who if will be responsible for managing the sales and marketing aspect of the enterprise
* Who will be responsible for staffing the joint venture
if necessary?
* Who will be responsible for maintaining the joint venture’s books and records?
* Who will be responsible for creating and maintaining
the bank accounts of the joint venture?
* How will the party that is not in control of managing the financial records and accounts of the venture be provided full access to such information upon request?
* Does either party have the right to buy the other
party’s interest out of the joint venture?
* How will profits be allocated between the members of
the joint venture?
* What will happen to the interest of a member of a joint venture who
becomes disabled or dies?
* What will happen if one of the members was to give up
their interest in the joint venture?
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| Failing to Contemplate Potential Divorce Unwise |
* What will happen if one of the members wants to force
the other member to give up their interest in the venture?
* What will happen if one member feels of the other one is breaching its obligations under the joint venture agreement and/or engaging in malfeasance?
* If the joint venture has an expected termination date,
how will the assets of the venture be allocated upon liquidation?
We Can Discuss Your Initial Questions at No Cost to You
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The above list, which is in no
particular order, is not exhaustive. If an attorney you are
considering to represent you to prepare such an agreement cannot recite at
least the above list of the top of his/her head, you may not have the right attorney.
Though the parties to any joint venture certainly
want to enter into the relationship with a high degree of trust in one another,
is foolhardy to not prepare the possibility of conflict, including a possible
business divorce.
Should Each Party to a Business Agreement Such as a Partnership Agreement, Buy-Sell Agreement or Joint Venture Agreement Have Their Own Counsel?
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| Partners....for Life? |
When selecting counsel to prepare a
joint venture agreement, there are always two good options: 1) each party
secures its own counsel; or 2) the parties together secure one independent and wholly neutral counsel to author the joint venture agreement. That
lawyer should be able to represent both sides without conflict of interest. This
is often possible, but not always.
Common sense and foresight are the key
characteristics of any attorney you would want to retain to prepare a joint
venture agreement. Cost effective representation is important as well. Your
attorney should not need to conduct a vast amount of research to prepare such
an agreement and, in fact, ordinarily should not charge you for more than several
hours or so of time at a maximum to complete a solid draft of same.
610-647-5027
Experienced Philadelphia-Area Joint Venture Agreement Attorneys Providing Flat Fee Business Contracts at Reasonable Cost
Questions? If you are in Philadelphia, Chester County, Montgomery County, Delaware County or Bucks County and need assistance with the preparation of a business contract, call 610-647-5027 for a FREE consultation.
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