Because a joint venture usually consists of a contractual agreement between two or more businesses, there are legal issues to consider when forming one of these partnerships. Handling the legal side of joint ventures ensures that expectations are clearly defined and carried out for the best interests of all parties involved. We have four legal concerns of JV partnerships to consider before entering into one of these business agreements.
While it might be tempting to enter into a verbal agreement with a business you are already familiar with, it is rarely advisable to form any type of partnership without a legal contract. This simple exercise ensures that all parties involved with the partnership adhere to the terms laid out at the beginning of the process and offers recourse to businesses when their partners don’t hold up their end of the bargain. Templates for JV contracts can be found online, or businesses can hire a legal professional to help them draw up a customized contract for their specific needs.
Creating a New Entity
If your JV partnership will create an entirely new and unique business entity, you will need a tax ID number from the IRS and possibly a trade name affidavit for the title of your new partnership. Check with the IRS, as well as your state government, to learn the requirements of creating a new partnership. While joint venture partners can undertake the task of creating a completely legal entity on their own, it can be helpful to enlist the help of a lawyer to ensure all necessary documentation is filed.
Purpose and Terms
When you are creating a JV partnership, you are generally doing so with a specific purpose in mind. This purpose should be the same for all businesses involved in the joint venture to ensure expectations are properly met. The terms of the agreement, including profit sharing, marketing strategies and accounting basics should also be settled before the partnership is official. All of this information should be included in the contract to ensure the interests of all parties are properly protected.
Unlike other types of business partnerships, a joint venture is usually a temporary endeavor. All the partners involved in the joint venture should know up front exactly how long the partnership would continue. If you are unsure of a length of time for your joint venture, at least agree on a specific date to sit down together and review the partnership. At this time, all the businesses involved can determine whether they want the joint venture to continue or dissolve.
A joint venture is a binding agreement, just like any other business negotiations into which you might enter. By addressing all the legal concerns at the beginning of the process, your joint venture will be less likely to cause disappointment and frustration for the members. When you set your JV partnership up correctly from the get-go, you will be more likely to see mutual success and benefits from your joint venture.