There are several types of business organizations that are recognized by the law as a legal entity. This includes an individual (a natural person or individual proprietorship), corporation, partnership, limited liability partnership, joint venture or any other form of business organization.
A joint venture is an agreement between two or more entities to combine their property and/or efforts for an undertaking and to share the profits and/or losses equally (unless otherwise specified). Each party to a joint venture agreement (a “joint venturer”) contributes to and has control over the business venture. There must be intent by the parties to associate as joint venturers either by their actions or by a written joint venture agreement.
A joint venture’s closest entity “cousin” would be a partnership. The difference is that a joint venture is usually for a single limited purpose whereas a partnership is typically formed for an ongoing enterprise. A joint venture has a duration that is specified in the agreement, or if not stated, then until the undertaking is completed or no longer possible. A real estate example would be a joint venture to build a development. The joint venture would end when the agreement states it ends, when the development is built or when a municipality declared it not permissible to build.
A joint venture agreement should clearly define the scope of the joint venture and what activities are permitted and prohibited. In addition, a joint venture will have tax implications that should be considered and addressed upfront. The parties to a joint venture may also agree to confidentiality and non-competition agreements as well.
An important concern in forming a joint venture is potential liability to third parties. A lawsuit brought by a third party for damages or personal injury caused by one joint venturer can be imputed on the other participants. For example, joint venturer A could be liable for the negligence of joint venturer B in the undertaking.
In the context of a real estate transaction, a typical provision found in a commercial lease to protect the landlord and tenant from the possible imputed liability of a joint veture is:
“No Joint Venture. This Lease shall not be construed to create a partnership, joint venture or similar relationship or arrangement between Landlord and Tenant hereunder.”
The Bottom Line
At the end of the day, a joint venture can be quite an “adventure” and parties to a joint venture agreement should consider the benefits and risks before collaborating resources with the goal of mutual gain.