Joint Venture Agreement: Definition, Key Terms, How It Works

What is a Joint Venture Agreement?

Joint venture agreements, also called JV agreements, are contractual consortiums of two or more parties. They usually seek to join both party’s resources to achieve a specific objective, such as entering a new market, or sharing risks and costs. The party’s benefit by receiving proportionately split profits and distributed ventures.

There are two types of joint venture agreements, including:

• Type 1. Contractual
• Type 2. Separate legal entity

A contractual joint venture is formed through a written contract, while a separate legal entity is formed through a corporation or LLC.

In other words, contractual joint ventures exist solely through a written contract. In contrast, a separate legal entity is formed when the parties combine to form a corporation or limited liability company (LLC). You should generally put your joint venture agreement in writing to protect your rights if a dispute arises. Though, it is important to note that oral agreements can also be legally binding in some jurisdictions.

Here is an article on Joint Ventures.

How Joint Venture Agreements Work

Joint venture agreements are accommodating and can be drafted to merge companies of any size on specific projects. Doing so allows targeted outputs to be delivered more efficiently and effectively. The contract ensures that all parties understand their rights, responsibilities, and limitations.

The steps below outline how joint-venture agreements work:

• Step 1. Discuss opportunities with potential partners
• Step 2. Hire business lawyers to offer legal advice
• Step 3. Select the correct type of joint venture
• Step 4. Draft the first iteration of your joint venture agreement
• Step 5. Pay your taxes correctly and promptly
• Step 6. Seek ongoing advice to maintain legal compliance
• Step 7. Enter JV agreement amendments as necessary

Although JV agreements are similar to a partnership agreement , there are still several differences. A joint venture agreement is often used in the commission for a single activity for a specified period, whereas partnership agreements indicate an ongoing, long-term relationship. However, joint ventures can also be long-term and ongoing, depending on the nature of the agreement.

Key Elements of a Joint Venture Agreement

The most essential element of a joint venture agreement is evaluating if the chosen partner is right for your company. Ask yourself if the relationship truly strengthens your market position. After deciding on the right partnership, move the relationship forward by drafting a joint venture agreement that includes specific provisions.

Below, we’ve outlined a checklist of the 10 key elements of a joint venture agreement:

• Business address. The business address is the principal office of the joint venture, or where the product or services will be offered.
• Joint venture types. The parties may elect to clarify the type of joint venture they will be engaging in together, such as a consortium, conglomerate, cross-border, limited life, or equity arrangement.
• Purpose of the agreement. The purpose is the business objective of the joint venture, such as allocating capital, risk, or costs.
• Names and addresses of members. The names and addresses of the members are the legal names and registered addresses of each party.
• Duties and obligations. The contract ought to address the various legal requirements each partner agrees to undertake to further the purpose of the joint venture.
• Voting and formal meeting requirements. It is important to include information on voting, shares, and meetings, to clarify how decisions will be made on various tasks of the joint venture.
• Assignment of percentage ownership. The agreement will specify how much each partner receives from the profits and losses of the venture.
• Profit or loss allocation. Separately, the agreement may stipulate that ownership is divided differently than profits and losses. For example, a partner may own only 30% of the venture while receiving 60% of the profits, depending on other terms agreed upon by the partners.
• Dissolution terms. The parties will often decide how to dissolve or end the joint venture under various contingencies.
• Non-compete and confidential agreements. The agreement may contain various restrictions on the parties not to compete against one another during or after the joint venture for a period of time.

While the list referenced above is a great start, you may need to include other provisions within your agreement. Business lawyers can learn more about your business relationship and draft a joint venture agreement that satisfies both party’s needs. This strategy will ensure you avoid making legal mistakes that haunt you in the future.

Here is an article on Joint Ventures and Income Statements.

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Examples of Joint Ventures

Well-known companies and small businesses alike engage in joint ventures. It’s a great way to achieve synergies that either entity would not be able to accomplish without each other.

The list below outlines examples of joint ventures:

Construction

Joint ventures for construction companies allow both parties to maximize their earnings and outputs. Types of joint ventures in construction companies include:

• Type 1. Contractual joint ventures
• Type 2. Equity joint ventures
• Type 3. Combination joint ventures
• Type 4. Non-integrated joint ventures
• Type 5. Integrated joint ventures

Automotive

Automotive joint ventures are emerging through technology in today’s market. Types of joint ventures in automotive companies include:

• Type 1. Manufacturer collaborations
• Type 2. Rideshare company ventures
• Type 3. Government and school contracts
• Type 4. Industry consortiums and engagements
• Type 5. Supplier relationships

Often, joint ventures in the automotive manufacturing industry are brought about by the immense cost of research and development. By agreeing to share cost to build new technologies - such as EV's - the partners to the joint venture can share in the risk while obtaining a competitive advantage over those in the industry who did not participate in the venture.

Technology

Joint ventures for technology companies are perfect since they allow for maximum flexibility. Types of joint ventures in technology companies include:

• Type 1. Affiliate partnerships
• Type 2. Financing agreements
• Type 3. Vertical joint ventures
• Type 4. Project-based joint ventures
• Type 5. Application programming interfaces (API) JVs
• Type 6. Retargeting/republishing joint ventures
• Type 7. Functional joint ventures

Retailers

Joint ventures for retailers can be a smart and fun way to revitalize the consumer shopping experience. Examples of high-profile retailers engaging in joint ventures include:

• Example 1. Starbucks and Barnes & Noble
• Example 2. Home Depot and Pinterest
• Example 3. Pottery Barn and Sherman Williams
• Example 4. Doritos and Taco Bell
• Example 5. Ben & Jerry’s and the Tonight Show

Joint ventures among retailers have been successful where there is a cross-selling opportunity among shared customers. For example, people who like to read may also enjoy a cup of coffee, thus the basis for the Barnes & Noble joint venture. Or, customers who are renovating their home with new furniture may also need to paint their walls at the same time, forming the basis for a successful joint venture between Pottery Barn and Sherman Williams.

Image via Pexels by Eunice Lui

Here is a list of more joint ventures to review.

Married Couples

Qualified joint ventures are created specifically for married couples. They can achieve special tax considerations and efficiencies by using this structure type. Moreover, a qualified joint venture allows both spouses to receive social security and Medicare credit for the tax year.

For married couples to receive tax benefits under the qualified joint venture classification, then the relationship must meet the following elements:

• Element 1. The married couple files a joint return
• Element 2. Both spouses participate in the business’s operation
• Element 3. The married couple doesn’t want to enter into a partnership

Some of the tax benefits include joint filing status for a lower combined tax liability versus filing separately; a higher standard deduction; a higher capital gains exclusion on the sale of a primary residence; and exemption from the gift tax, among other tax-related benefits.

Regardless of the project, a joint venture is an easy way to create market benefits for both parties. There are endless opportunities regarding joint ventures. However, you must have a solid joint venture agreement to ensure that everyone is on the same page.

Joint Venture Agreement Samples

Joint venture agreement samples allow you to anticipate what the agreement may include. However, no two business situations are alike, which means that the terms contained in a sample may not apply to your situation.

Here are a few joint-venture agreement samples:

• Sample 1. Small Business Association’s (SBA) joint-venture agreement
• Sample 2. Securities and Exchange Commission’s (SEC) joint-venture agreement

The above-referenced set of joint venture agreement samples are perfect for reviewing since they are used by government entities. They apply to other business situations instead of your specific goals, which means hiring business lawyers to draft an original agreement for your project is the most practical approach. The samples can then be used as a platform to make changes and revisions to fit the individual needs of your joint venture.

Joint Ventures and Taxation

Joint ventures are usually taxed as partnership business entities, corporations, or LLC. If the joint venture is taxed as a corporation business formation, it’s subject to double taxation on corporate and shareholder profits.

In contrast to partnership agreements, joint ventures aren’t recognized by the IRS as a taxable entity. As such, your joint venture agreement establishes how taxes are paid. Your venture will be taxed in accordance with the rules that apply to the business entity you elect for the venture. For further assistance you should speak with a qualified financial professional for tax advice.

You must also consider the taxation of profits and account for them correctly. Depending upon the type of deal you are facilitating, this usually straightforward process can quickly become challenging.

Getting Help with a Joint Venture Agreement

Getting help with a joint-venture agreement starts by speaking with business lawyers. They can provide you with the legal help you need to draft and execute the perfect document while avoiding common and not-so-common legal mistakes. A business attorney can also offer more complex services include contract negotiations and revisions on your behalf.

It’s helpful to organize a dossier of essential documents surrounding the joint venture. Some items to bring to your initial consultation include:

• Meeting and telephone call notes
• Communications between you and the other party
• A short description of how you would like the deal structured
• Names, addresses, and phone numbers of both parties
• Copies of operating agreements
• Copies of relevant licenses and certifications

Business lawyers are experienced in translating it into the best joint venture agreement for your specific situation based on the information provided. Even if you already have a contract in hand, your attorney can conduct a simple or complex review that ensures the agreement is legal and fair.

Post a project in ContractsCounsel's marketplace if you need help creating a joint venture agreement. We will provide multiple proposals from business lawyers for you to review to hire the best resource.