Characteristics of joint venture company
In the United States, the characteristics of joint venture company vary with the type of legal entity one uses to form the joint venture and the law of each U.S. state
Nowhere in the United States the joint venture is recognized as a type of legal entity. With that in mind, it is important to point out that the joint venture is not recognized as a distinct legal concept and joint ventures can be established in two ways – by forming a contractual joint venture or by establishing a joint venture entity.
The joint venture can be formed by a contractual agreement between two or more joint venture partners in which the parties specify form the outset the basis of their understanding and the terms governing their arrangement. However, more commonly today, the business partners can create a joint venture entity by establishing a new legal entity, owned in agreed proportions, by the respective partners or specially funded subsidiaries. Further, the business partners can establish a joint venture entity by purchasing ownership interest in an existing entity.
The new joint venture entity can be organized under state law as a corporation, limited liability company (LLC), limited partnership (LP) or another form of entity available under national, state or local laws
In Florida, a joint venture entity can take the form of a partnership, limited partnership, LLC or a corporation. However, the most popular joint venture entity is an LLC. The joint venture partners frequently use the LLC structure because of the flexibility it provides when structuring the governance arrangement for the venture and the tax treatment. The joint venture entity can be organized under the law of any U.S. state and the applicable rules arise primarily under the law of the state in which the joint venture is organized as well as U.S. federal law.
As discussed, the characteristics of joint venture company depends on whether the company is organized as a partnership, LP, LLC or corporation and the law of the U.S. state in which the venture is established. However, irrespective of which legal entity or in which U.S state you and your venture partners decide to form the joint venture entity, it is important to avoid common mistakes and pitfalls. In this respect, the following principal matters should be dealt with comprehensively in the governing documents of your joint venture entity:
- Ownership Structure. The governing documents of your joint venture entity should provide for the ownership structure and the percentage ownership of the partners in the joint venture.
- Management. The senior management or the management of the joint venture in general should be chosen early and have clear guidelines as to the authority, duties and performance standards.
- Governance. The structure of the board of directors or the management committee of the joint venture entity should be specified with particularity. The governing documents should at a minimum include the number of directors and the manner in which they are elected and terminated.
- Partner Contributions. The governing documents should describe in detail the contributions of each partner to the joint venture, both tangible and intangible.
- Allocation of Risks and Reward. The documents of the joint venture entity should specify who gets what, where, when and why. They should cover dividend distributions, capital calls and allocations of losses.
- Termination Provisions. Detailed termination provisions should include when and how the joint venture entity terminates, if either partner has an opportunity to buy the ownership interest of the other partner and the mechanisms used to accomplish this.
The rate of return from a joint venture can be very high and enticing for prospective partners. However, more than 50% of all joint ventures fail. The common mistakes joint venture partners make is failing to provide in their governing documents for correct management, governance structure and risks and rewards allocations.
We successfully plan and organize Joint Ventures Companies, including International Joint Ventures. Contact us, your business attorney in Florida to help you plan and organize your Joint Venture Company and discuss the characteristics of your Joint Venture Company and governing documents.