A joint venture is when two or more separate people, businesses or organizations work together for a period of time to their mutual benefit. Those who enter into a joint venture are advised to put a joint venture agreement in place at the start of their working relationship, as this will provide a contractual framework for the collaboration.
Joint ventures explained
A joint venture is best illustrated with an example.
Imagine two farmers who each have a large area of hay to cut and bale. One farmer has three combine harvesters but no one to help, whereas the other has surplus workers yet no machinery. It will save both farmers time and money if they join forces to achieve their end goal. Once the last of the hay is baled, their working relationship can come to an end.
This is a basic example and joint ventures are often more complex than this (and they are not just limited to agriculture). However, it effectively demonstrates that a joint venture is not a continuous relationship. Rather, the parties will come together for a certain amount of time to meet a common goal, project or purpose.
Additionally, those involved in a joint venture do not have an ownership interest in each other’s businesses. This is the fundamental difference between joint ventures and partnerships. Joint ventures are also subject to different tax laws than partnerships, especially when it comes to Capital Cost Allowance.
For many business owners (notably small business owners), these factors make joint ventures an attractive proposition. It allows them access to greater resources and exposure, and allows them to share expenses and liabilities, yet ownership is ultimately retained. This can make it an effective way for a business or organization to maximize profits.
Joint venture agreements
If you wish to enter into a joint venture, it is highly recommended that you put a joint venture agreement in place first. This agreement will set out the rights and obligations of each party, protecting your position and limiting the chance of disputes occurring. Every joint venture is different, but an agreement can allow you to set out the following:
- The aims and limitations of your working relationship;
- The decision-making abilities of each person or organization;
- When the joint venture is to end;
- The financial obligations of each person or organization;
- How debts, profits and other assets (such as intellectual property) are to be split; and
- What should happen in the event of a dispute.
With a joint venture agreement in place, everyone will know the parameters of their business working relationship. It is much better to decide this at the start of the joint venture, or the relationship can quickly become complicated, potentially putting your personal and business assets at risk. Ideally, a business lawyer should draft the agreement, to ensure all relevant concerns are addressed.
Contact us now
If you would like to know more about joint venture agreements, please do not hesitate to contact North Shore Law LLP.