In many industries there are opportunities for individuals or companies to team up with one another to accomplish a mutually beneficial goal. This is most commonly accomplished by way of a joint venture.
A joint venture is somewhat amorphous as a concept as there are no bright line legal rules. It is a contractual arrangement, either through an outright joint venture agreement, an oral agreement, an LLC through its operating agreement or something similar. This post gives a broad overview of what it is and why it may be something that would work in your situation. We’ll look at it in more depth in future posts.
A joint venture is similar to a partnership but generally seen as being less formal. It is usually more short lived than a partnership, and usually more narrowly focused. It can between any individual or company or combination thereof. It may also be accomplished by using a seperate legal entity such as a corporation or LLC, although the most common is through a standard joint venture agreement (or some other similar agreement).
A unincorporated joint venture is usually taxed as a partnership. This is the default setup that the IRS will adopt, unless the joint venturers decide to check the box and elect to be taxed as a corporation.
In New York (with other jurisdictions having similar factors), a joint venture requires five elements:
1. Two or more persons must enter into a specific agreement to carry on an enterprise for profit;
2. They must have an agreement showing this intent;
3. Each much contribute something of value to the venture;
4. Each must have some degree of control over the venture; and
5. There must be a sharing of the profits in some fashion.
Joint ventures can be useful, especially in international settings. One company may have the business savvy to market a product or service in a certain country, but not be legally authorized to do business in that country (or not willing to get licensed). Such a company can negotiate a joint venture agreement with a company located in its intended target country, and the other joint venture company (the ‘local’ company) can undertake the activities in the target country. They are especially useful in transactions in China and other countries with strict business regulations that may make doing business as a foreign company difficult. They are used routinely for real estate transactions, power deals, high tech partnerships, and other more conventional deals.
In an international joint venture agreement, it is very important to ensure that there is an international arbitration provision where both parties consent to such an arbitration. It also needs to lay out how the arbitration will be conducted, under which rules, in what language and where. Alternatively, the parties can consent to litigation in one of the home jurisdiction of one of the venturers.