Joint Venture Contracts: Everything You Need to Know
Joint venture contracts are when two parties come together in an agreement for a specific business project. 3 min read
Joint venture contracts are when two parties come together in an agreement for a specific business project. The contract outlines the expectations, obligations, terms, and responsibilities that are expected of both parties during the project. In a joint venture, the two companies no longer act as two separate entities, but rather function as a partnership for the purpose of the contract.
Many elements go into a joint venture contract, but some of the most important items to include are:
- The objectives that the joint agreement was created for.
- A layout of the contributions provided by both companies whether in cash or assets, as well as the value of those contributions.
- Each of the parties' individual function in the project, such as technical contributions or commercial commitments.
- Instructions on how the parties will meet to stay updated on the progress of the project.
- The length that the partnership will be in effect.
- Instructions for how the agreement can be terminated if it no longer works out.
- Terms laid out for who will manage the day-to-day options of the project.
- Whether profits will be based on the level of contribution of each party or by a specific formulation.
- A section that includes specific terms for details of the project such as confidentiality agreements.
Why You Want to Form a Joint Venture
There are multiple reasons why a company may want to embark on a joint venture. Some of the most common reasons for forming one include:
- Your business may need or could benefit from resources that another company can supply.
- You want to create an alliance to gain stronger access to what may be a wider market.
- You need the other company to help you develop new products, services, or technologies.
- You want to expand your business by creating a larger network.
- You need the ability to leverage the other companies brand image or business reputation to gain access to other clients or increase sales.
- The partnership may allow you to reduce the costs for research and development of a project.
- It may benefit both companies for you to share your expertise.
Reasons for Termination of a Joint Venture Contract
While there can be a number of reasons that the two companies may decide to terminate the partnership and dissolve the joint venture agreement, some of the most common reasons are:
- One company may be interested in buying the other business.
- The market may have changed, making the partnership no longer necessary.
- One or both of the companies may have newly established goals.
- The purpose of the contract was not fulfilled.
- The shared goals of the joint venture may no longer be applicable.
- The time period set in the contract has lapsed.
Differences Between a Joint Venture and a Partnership
While joint ventures are similar to partnerships in many ways, a joint venture is a collaboration on a specific goal or project, and a partnership is a business structure that will dictate how it needs to operate in regards to state law and how it will be identified for tax purposes.
The joint venture will be a temporary partnership created by a contract, while an established partnership will be permanent. Additionally, the scope of the joint venture will be limited to a specific project or venture, while a partnership will be a broad scope.
Joint ventures and partnerships can also be different in regards to taxes as well as handling of debts. In a joint venture, each party will file an independent tax return, while a partnership will be taxed as a pass-through tax entity. Liability in a joint venture will lie with each individual, while liability in a partnership will be shared. They are also different in terms of ownership with a partnership being 50/50 and a joint venture has ownership percentages assigned.
Sections of a Joint Venture Contract
When drafting a joint venture contract, there are multiple sections that should be included in every contract. While you will need to include all of the members and their contact information, other sections that you will want to make sure to include are:
- The formation of the venture
- The business name of the venture
- The purpose of the joint venture
- All parties contributions
- The profit distribution
- The management set up
- Parties responsibilities
- No-exclusivity clause
- Terms of the contract
- Termination information
- Confidentiality requirements
- A clause for further action
- Assignment and transfer of rights
- Governing laws and regulations
- Terms of severability
- Handling of notices
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