There are differences between an incorporated and an unincorporated joint venture in the United States
The area of joint ventures, and specifically the incorporated and unincorporated joint venture, is regulated by state law. In practice and for the purpose of the article, we discuss incorporated and unincorporated joint venture only as it pertains to the laws of the State of Florida. However, it is important to point out that a great share of the discussion applies generally to joint ventures in other states.
In the simplest sense, an incorporated joint venture is created by two or more business owners, entrepreneurs or investors who come together for a project or a commercial activity and contribute money, effort, knowledge or resources to set up a new legal entity. This new entity may be formed by at least two members, either companies or individuals, and is commonly referred to as an incorporated joint venture, corporate joint venture, equity joint venture or joint venture company. In other words, the incorporated joint venture is a type of joint venture where the participants arrange for the organization of a separate legal entity to pursue an agreed business objective.
In an incorporated joint venture, each participant contributes individual resources in exchange for equity or ownership interest in the joint venture. As such, the participants acquire ownership and control rights in the venture, including right to distributions and dividends. In addition, because the incorporated joint venture is a legal entity of its own, it may enter into contracts in its own name and purchase and hold assets. The incorporated joint venture is organized under state law, which means that state laws spell out specific provisions and rules for the joint venture. For example, if two businesses desire to work together for a commercial project and establish a corporate joint venture in Miami or Tampa, the newly formed joint venture is a Florida legal entity subject to the laws of the State of Florida. The default laws of the State of Florida apply to the incorporated joint venture and to the relationship among the shareholders or owners, management and distributions. The existence of a predetermined set of rules makes the incorporated joint ventures desirable because it preemptively addresses issues that can arise in the early stage of the venture with respect to decision-making, management and the owner’s rights and obligations. This is especially important in the context of international ventures where participants have to sort out cultural legal expectation of who does what, among other dynamics.
The difference between the incorporated and unincorporated joint venture, is that the unincorporated joint venture is not required to organize as a separate legal entity. Instead, the unincorporated joint venture is created by contract – the Joint Venture Agreement. The unincorporated joint venture has no predetermined rules established by law or any preexisting paradigm between shareholders or owners, management and the board. Consequently, any rules that govern issues concerning conflict of interests, shareholder governance or management of the unincorporated joint venture must be spelled out in an agreement. This can be extremely challenging because at the outset of the joint venture is difficult to predict what can go wrong among the owners, and it takes time to adapt and adjust to the way in which an unincorporated joint venture operates. However, if you are considering an unincorporated joint venture, work with an experienced attorney in joint ventures to ensure that adequate management procedures and contractual terms are set up in the Joint Venture Agreement.
As seen above, the major differences between incorporated and unincorporated joint venture are as follows:
- Incorporated joint venture is organized as separate and distinct legal entity at the election of the participants. Unincorporated joint venture is not incorporated as a legal entity and is only formed by contract.
- Incorporated joint venture is governed by state law and has pre-existing or default rules that apply to the relationship between shareholders or owners, management and distributions.
- Unincorporated joint venture does not have pre-existing rules and specific provisions of state law to govern the relationship among shareholders or owners, management and distributions
- Incorporated joint venture has clear rules around conflict of interest circumstances established by corporate law
Unincorporated joint venture has no rules established by law for conflict of interest circumstances and must be provided for in an agreement.
We successfully plan and prepare Incorporated and Unincorporated Joint Ventures, including for international joint ventures.
Malescu Law P.A. – Business Lawyers