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What you must consider in a joint venture agreement

On Behalf of | Feb 14, 2020 | Business Formation & Planning |

Many businesses, large and small, find that creating a joint venture can be a lucrative arrangement. Two businesses combine forces and resources for a certain project to bring a new unique product or service to consumers.

However, because the businesses in a joint venture share in the organization, management, losses and profits of a joint venture, they must take time to create an effective joint venture agreement. This is critical for all business owners to protect their company and their assets, regardless of how long the joint venture lasts.

So, what are some critical elements of a joint venture agreement?

A joint venture agreement is like any other contract

Businesses should take great care in choosing their partner for a joint venture. Even after they evaluate their options and choose a partner, they must take great care to craft an agreement that establishes:

  • The goals of the joint venture;
  • How long the joint venture will last;
  • How the parties will structure the venture;
  • How the businesses will approach decision-making;
  • The financial responsibilities and contributions of each party;
  • How the parties will share profits;
  • How the parties will share liability for losses; and
  • How the parties will handle the intellectual property of the joint venture.

The agreement should also include how the businesses will terminate the joint venture, whether it is a short-term or long-term project. Planning for this proactively reduces both the risk businesses face as well as the stress over the unknown.

And like any contract, a dispute-resolution clause is necessary

Every contract that businesses enter should have a clause or agreement detailing how they will approach and resolve conflict.

Establishing the details of each party’s responsibilities usually helps reduce the chance of conflict. However, business owners cannot afford to take chances and face the risk of a serious dispute. Nowadays, many business owners establish dispute-resolution clauses with alternative dispute resolution strategies to avoid taking matters to court.

An effective dispute-resolution strategy is essential for any joint venture agreement to protect the venture itself, as well as both business entities.