A joint venture is a partnership established between two or more individuals for the purpose of completing a specific project.
Joint ventures are similar to LLPs; however, they are typically created for a limited period of time, rather than as a long-term business. Unlike a typical partnership, partners’ authority in a joint venture is limited. However, joint ventures are typically led by a managing partner who bridges the goals and intentions of all partners to create a uniform business plan.
Partners in a joint venture combine their skills, capital/equity, and products in order to make money and increase revenue. They also share in the venture’s profits and losses.
The advantages of a joint venture include:
Increased flow of capital and expertise: may reduce the time it take to enter a market
Limited liability: liability is spread over multiple partners
“Pass through” taxes
A joint venture is a type of partnership, however a JV can be structured under any type of business model including a corporation, partnership, LLC, and others. Joint ventures, much like the word implies are for a joint project, typically one that is not permanent.
Joint Venture Agreement
The specifics of each joint venture are different. Joint partners should have all of their rights and obligations set forth in the JV agreement so that there are no discrepancies regarding the rights of the parties. Specifics of the JV agreement include capital contributions of partners, time commitments, expertise that will be contributed, resources of parties contributed towards achieving goal of JV.
Having a solid JV agreement will help parties highlight the roles of each party to reconfirm duties which will ultimately reduce the possibility of future disputes.
What’s in a JV Agreement – Key Components to a JV Agreement
Names of parties in the partnership
Capital contributions
Time and resource contributions
JV management structure
Split of parties and duties of each party
Business arrangement (hours, time commitment, roles)
Goals of parties
Location where duties will occur
How Joint Ventures are Taxed
To avoid confusion or co-mingling of previous and new companies, it is advised that the parties of the joint venture create a new business entity together. This way everything that occurs between the two parties can easily be traced to one new entity, rather than older entities. Joint ventures aren’t taxed because the IRS doesn’t recognize such a structure.
Taxes on joint ventures are paid dependent on the business structure of each partner. For example, if a party operates their business as an corporation, the corporation is taxed, rather than the joint venture. Joint venture agreements state how profits and losses will be divided, which will also determine how the JV will be taxed.
Joint Ventures Compared to Other Business Structures
Joint ventures typically bring two parties, typically companies or entities, together for the purpose of fulfilling a specific objective and goal. It is not a partnership by the standard definition of a partnership, however they do function as a partnership in terms of working with one another. Oftentimes, the word consortium is used to describe a JV because a consortium encompasses the idea that two entities join together to reach a common purpose.
Concluding a Joint Venture Once Goals of JV Have Been Realized
As stated above, a joint venture is when two or more entities join together to reach a common goal. Once the goal has been realized, the parties can liquidate their assets and divide the profits and losses according to the JV agreement. This process will likely not happen overnight because the process of selling assets and dividing profits takes time.
A famous example of a joint venture is the merger between Sony and Ericson, later known as Sony Ericson. Ericson was a company that had advanced mobile technology and Sony was already a household name. Both entities joined together with the common goal of selling the most advanced mobile phones on the market. The merger worked very well as Sony Ericson gained a sizable percentage of the mobile phone market. After a few years, the merger ended and Sony became the owner of the name Sony Ericson and continued the business on their own.
Case Law That Relates to Joint Ventures
Case Review: Pacific Landmark Hotel, Ltd. v. Marriott Hotels, Inc. (1993)
The case, Pacific Landmark Hotel, Ltd. v. Marriott Hotels, Inc. (1993) 19 Cal.4th 615., involved a hotel owner that brought legal suit against the firm that managed the hotel.
Pacific Landmark Hotel signed a 50-year management contract with Marriott Hotels. The hotel owner/management company relationship is considered akin to the agency between a principal/agent, wherein the hotel owner is the principal, and management company is the agent.
Marriott Hotels and its subsidiaries subsequently lent the Pacific Landmark Hotel upwards of $20 million dollars. In exchange for providing the loan, Marriott Hotels was given a 5 percent ownership stake in the hotel. The agreement between the two parties did not form a partnership or a joint venture, but did have the makings of an agency coupled with an interest.
Later, the Pacific Landmark Hotel sued Marriott Hotels for an alleged breach of contract. Despite Marriott Hotels’ 5 percent stake in the hotel, Pacific Landmark Hotel contended that their agreement was not an agency coupled with an interest. Thus, it argued that it could terminate the contract without Marriott Hotels’ consent.
The Superior Court disagreed. It ruled that Marriott Hotels was an agent coupled with an interest, and that the agreement could not be terminated unless the provisions within it were violated.
The Pacific Landmark Hotel appealed, and the Court of Appeals reversed the lower court’s ruling. The court reasoned that the loan provided by Marriott was not provided by Marriott directly, but rather a subsidiary of Marriott. Therefore, Marriott did not have a direct interest in the Pacific Landmark Hotel. Thus, the court ruled that the Pacific Landmark Hotel had statutory power under California Civil Code, Section 2356, Subdivision (a)(1) to terminate Marriott Hotels as their agent.
