How to Prepare Your Business for a Partnership or Joint Venture
Businesses and individuals may try to join together in pursuit of a specific project or in combination with each other for stronger long-term investment opportunities. They can often accomplish this through a partnership or a joint venture. Extensive preparations are necessary before people or businesses can begin a partnership or venture together. The most important thing is the actual legal agreement between the parties. In addition, you must choose the right formation for your business which suits your goal.
A Seattle business law attorney can help you with the many things you need to consider at the outset. They can do their part to help get your business off the ground and handle any issues that may arise along the way.
What Is a Joint Venture?
A joint venture is when two existing companies, entities, or people agree to start a business together. Each company retains its own corporate identity. For purposes of this specific venture, they would create a new company together. The joint venture may or may not be its own unique business entity.
In a joint venture, the two parties will share in the income and losses. Here, the parties are pooling their assets and resources to accomplish whatever task is required by the venture. A joint venture can be a new business in an entirely new line, or it can be related to the partners’ existing venture.
What Is a Partnership?
A partnership is similar to a joint venture in that the partners may contribute money or expertise to help reach a certain goal. Partners may be active in contributing to the business, while others may be silent, providing financing and other support.
There are differences between a joint venture and a partnership. In a partnership, the partners are joining together to create a new business. A partnership is usually a more lasting business entity to establish an overall business. A joint venture may not be a new business, and it is limited to a certain task.
Deciding Between a Joint Venture and a Partnership
One of the first major things you must do to prepare is decide whether you want to enter into a joint venture agreement or a partnership. There are pros and cons to each approach. Joint ventures are for a certain duration of time, while partnerships are open-ended and permanent until they are dissolved. You should seek advice from a business attorney and a financier before you decide which entity is right for you.
Any agreement that you make with someone else must be in writing to provide you with the maximum amount of protection. You should not have any business arrangement without a binding contract. When things are written down on paper, you will have rights and obligations under the terms of the contract. A partnership and a joint venture create a legal relationship between two parties. You need to strategize to consider what you want out of the agreement.
You will need to negotiate the legal arrangement with the other party or parties. Every term and clause in a legal agreement is given effect. If there are any disputes between the partners, the court will first go to the written agreement to determine whether there has been a breach. Thus, it is essential that the document is carefully drafted. Every word and comma can be an issue if there is a dispute that must be litigated.
If you are in a joint venture, each party will be contributing something to the joint venture. The contributions need to be worked out ahead of time and memorialized in an agreement. You will also set a purpose of the joint venture and a duration. You will need a specific contractual agreement that is tailored to your circumstances.
If you elect for a partnership, you will need to set the terms of the partnership agreement. There should be no such thing as an “off-the-rack” partnership agreement. There must be specific roles and responsibilities for the partners. In addition, the dispute resolution mechanism is an important part of your agreement. This clause is the first place you will go if there are any issues between the partners. A well-crafted disputes clause can both protect the individual partners and provide a framework for you to resolve disagreements. Difficulties between the parties do not have to result in the end of the partnership or litigation.
Get to Know Your Partners
Remember that you will be in business together with another person or company. Their actions can impact you and your personal finances. You should take your time to do your due diligence on your potential partner to know that they are someone with whom you can do business.
Presumably, both of you have something to add to a partnership or venture that can benefit the other. You may be combining unique talents or creating a cost advantage due to the ability to increase production. Not only must there be benefits for each party, but you must trust each other.
Determining Capital Contributions from the Parties
Each partner may contribute different things to the venture. For example, one may contribute more money, while others may contribute more in skills. Each party may have a specific task, or they can perform the same one. In a joint venture agreement, the parties are usually contributing two separate skillsets or pools of resources.
In addition, profit sharing may not be 50/50. One party may have a larger partnership share than the others and may not share in losses equally.
In a partnership or joint venture, there will likely be a need for continuing capital contributions. Some earnings may need to be retained in the business. At other times, there may be capital calls from the participants when the business needs more money.
Consider the Proper Structure for Your Agreement
Partnerships, in particular, can be challenging for each of the partners involved. A partnership can be dissolved when the partners are in disagreement. Partnerships can often lead to an harsh end, where the partners are litigating against each other in court. In addition, individual partners have the legal authority to bind the partnership. You can end up personally liable for something another partner has done, even if it was without your consent and permission.
With that in mind, you may want to consider a form of business structure that can protect each of the partners individually. There may be reasons why you may consider a general partnership, but this also comes with its own risks. You may contemplate a limited liability partnership, where the individual partners have some personal protection and are not liable for what happens with the partnership.
Consider the Tax Treatment of Your Business
One of the main distinctions between a partnership and a joint venture is tax considerations. In a partnership, the income passes through to each partner individually. Joint ventures can either be taxed as a partnership or a corporation. Depending on your situation, you may want to be careful about incorporating the joint venture because there can be double taxation (meaning the profits are taxed at both the corporate and individual levels). Your business law attorney may provide you with direct advice, or they may work with another lawyer with specific background in tax, to figure out the best structure for your business to minimize your tax obligations.
When you form a joint venture, it is a cooperative agreement between two or more business entities or parties. Further, each entity will have its own tax obligations if the joint venture is unincorporated. If the joint venture is incorporated, it will be the joint venture itself that has the obligation to pay taxes. You will need to set up a joint venture in a tax efficient way that minimizes the amount you will pay. A business law attorney can work with you on the most efficient tax structures for your joint venture.
The partnership itself does not pay taxes. Each partner takes on the responsibility to pay taxes based on the individual income that they earn from the partnership. They will file an individual tax return that details their income. One of the main benefits of the partnership is that you do not run the risk of double taxation.
Determine How Profits Are to Be Divided Between the Entities
Regardless of whether you have a joint venture or partnership, you will need to determine the income shares of the parties in the agreement. The income distribution in both of these entities does not necessarily have to be 50-50. Partners or entities may make more significant contributions than the others, so the split does not necessarily have to be equal.
The income will be distributed in accordance with the terms of the joint venture or partnership agreement. Partners may decide to take their profits, or they may reinvest them in the business. The agreement may determine when profits are distributed to the partners. Similarly, a joint venture may distribute profits to the partners as they are earned, or they may be reinvested back into the business.
Research Compliance and Regulatory Obligations
There are both overall legal requirements and those that may apply to the special field in which you operate. Compliance is an ever-shifting field, and you need to understand the most recent laws and the regulatory interpretations. For example, you may need to hire employees for your partnership or joint venture. There is an extensive body of employment laws and regulations that you must follow, or else you can face fines or potential lawsuits.
In addition, if you are maintaining a workplace, there are safety rules that you will need to follow, even if it is not an industrial setting. You can face fines for violating OSHA rules.
There may also be regulations unique to your own line of work. There can be local, state, and federal rules that you need to follow. Since you cannot have any contract for an illegal purpose, you have to be certain that your business venture itself will comply with the law.
Contact a Business Law Attorney
There are many things that you need to consider before you reach a partnership or joint venture agreement. You may not be equipped to handle some of the detailed matters on your own. Remember, you are bound tomorrow by the decisions that you make today. You are better off negotiating with the other parties to the agreement through your business law attorneys. A business lawyer will review any document you are given to sign, marking up the document with changes to the language, if necessary, and conducting negotiations by suggesting changes to the document. Your business law attorney can also draft an agreement that the other side may review.
A business law attorney can also point out other factors that can affect your agreement and chances of success. There may be things that you overlook because you want to reach a deal now. Your business law attorney’s job is to consider the overall legal landscape. Their advice can result in additional protections that are written into the agreement. It can also suggest what business structure you choose and the timing of your agreement.
You have many things to focus on at the outset of your partnership or joint venture. Ideally, You would like to focus on the business side of the equation and leave many details to those with more experience in these areas. A business lawyer can handle many of the details of your arrangement. They can draft or review the agreement that launches your venture. They can represent you along the way when you have any legal issues that arise.
There may also be disputes between joint venture entities or partners. A business lawyer can work with you to resolve these disputes. They can negotiate an agreement with the other parties that can help you avoid litigation. If your case goes to court, your business law attorney can represent you in litigation.
