Why Use Joint Venture Agreements?
Joint ventures allow companies and individuals to team up with others and pool their resources for the purpose of pursuing a specific business project. Joint ventures require members to have shared interest in the project, including a right to control and to share in profit and losses. Joint ventures are treated as partnerships for tax purposes, have many other similarities to general partnerships, and can often be confused for partnerships. A Joint Venture Agreement defines the relationship as a joint venture, as well as delineates each joint venturer’s rights and obligations with regard to the joint venture.
Although there is no bright-line distinction between a partnership and a joint venture, joint ventures may be best understood as a variation on a general partnership that is limited to a particular project. For instance, if two parties combine their capital for the one-time purpose of purchasing and constructing a building on a piece of property for sale, they likely have formed a joint venture. If two parties have combined their capital for the continuing purpose of purchasing and managing properties, they likely have formed a partnership. The primary difference between the two is that in the partnership example, if one of the partners is approached to purchase and manage a new building, this business opportunity likely would belong to the partnership. The partner would breach his or her fiduciary duty to the partnership if he or she were to usurp the opportunity for himself or herself. In contrast, in a joint venture, each joint venturer could still operate independent construction businesses without violating fiduciary duties to the joint venture.
Joint ventures should not be confused with a strategic alliance formed between two businesses. An example of a strategic alliance is the relationship between Costco and American Express in which American Express was the sole credit card accepted at Costco stores and Costco members could acquire American Express cards with special benefits. The key distinctions between a joint venture and a strategic alliance is that the two parties do not necessarily owe each other fiduciary duties, do not exercise control over one another’s businesses, and do not necessarily split profits.
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