There are no specific requirements related to the capital required for the formation and therefore the parties can decide the price matters in other currencies according to the preference of Joint venture owners.
The JVs also called a Co-venture agreement is laid when two or more business entities or individuals come to form a temporary business relationship to achieve a mutual goal. A JVs clearly states the terms and conditions of the members joined in it and their obligations to perform during the agreement. The agreement potentially connects the resources to achieve a common goal for the parties involved. According to the agreement the parties joined through the agreement benefit by receiving the profits proportionally spilt. The JV is always written to protect the parties towards their rights. Therefore the article explains the key requirements and procedures to write a JV and its key features.
How Does it Work?
A broad range of sectors utilizes the benefits obtained through JV, as there are no restrictions or geographical limits. Also, the parties might initiate the JV (joint venture) to get into new markets with the existing partner who is familiar with the strategies or to build intellectual property.
The JV potentially merges companies that are willing to work on any specific projects, and the JV helps to reach these parties reach their common goal more efficiently than otherwise. The agreement begins by analyzing the opportunities of the potential partners and the partners decide to hire business lawyers for legal advice before setting up the agreement, and before selecting the right type for their business.
After the right type of joint venture is identified, the business partners carry out the following steps:
- Draft their first iteration of the JV (joint venture)
- Pay the taxes, analyze them and then prompt action is taken
- Maintain legal compliance
What Must It Include?
Below given things that must be included when you write a JV:
- The location of the business, and the type of joint venture ( mentioned below)
- Name, address, and purpose of beginning the joint venture
- Name of the members and their obligations for the betterment of the joint venture
- Important dates of the JV.
- Meeting and voting details
- Management, duties to manage, delegation, dissolution
- Confidentiality, dispute resolution
Therefore while writing the joint venture document, these details must avoid any legal dispute or potentially reduce it.
The Registration Requirements
The company forming the JV has to establish the JV (joint venture) company in the chosen state and has to register a new entity which is expected to appear on the “Secretary of State” official website of the state. The JV (joint venture) entity is governed by state-level rules and is flexible to operate otherwise.
There are no specific requirements related to the capital required for the formation and therefore the parties can decide the price matters in other currencies according to the preference of Joint venture owners. However, forming a joint venture in the US requires the parties to form in the English language and the organizational forms are filled out in English as well.
Types:
- Contractual: this type of joint venture combines two or more organizations into a business project, where the agreement sets the terms under which they had to work. However, these members manage their business processes separately yet work towards their shared goals. The parties are expected to maintain their account records separately and there are no registration requirements as well.
- General partnership: the partners agree to share in the profits and losses from the project and each party is jointly and severally liable for the obligations of the partnership.
Why Joint Ventures Needed?
Two or more businesses form a joint venture when they wanted to join forces for a common purpose where they will each share in the risk and rewards. Therefore the businesses grow without the requirement of seeking funding externally.
Also, they can potentially build intellectual property through this JV Agreement. This Intellectual property can either be acquired by the joint venture as a contribution or developed through the course of the JV. Therefore the intellectual property becomes the asset and is generally sold at the dissolution of the joint ventures along with other properties. Otherwise, the decision could be to keep the property and license it to the joint venture itself, so that the loss could be avoided.
The entity formed by the joint venture gets liability protection and thereby enables them to conduct businesses in its name.
Since these are not permanent commitments, they are dissolved after the project or after the specified date mentioned in the agreement. This factor enhances the flexibility of the organizations and doesn’t mandate creating an entity or having to give up on other business operations.
Risks Involved in a JV (Joint Ventures)
The compatibility with other parties might get difficult over time and consume time for managing tasks or disputes with the other partners. The joint venture has the possibility of getting dissolved over a period incurring loss and thereby wastage of time, and effort. Similarly, the project taken could fail miserably and you had to end up with a JV.
The legal risks involved are higher if you are beginning to work with other businesses in which you have lesser experience or expertise.
Financial Matters
The JV (joint venture) companies begin their business processes with the nominal capital investment made after getting the JV from all the business partners, and after discussing how the business will receive the funding. However, the JV (joint venture) entities are funded by the equity and the loans taken by the owners themselves after acquiring the approval for the same. Therefore the shares and the units are allocated based on the percentage of capital invested by the party. However the parties might agree to allocate the assets in different proportions, therefore the agreement is flexible that way. Such practices might end up in legal disputes.
The formation documents, therefore, include the details related to the initial capital required for the joint venture business to run and don’t demand any owner to invest more during the JV (joint venture) , similarly, the agreement clearly states the financing details and the particular periods when the parties are expected to extend their support and their respective obligations.
Conclusion
The JV (joint venture) distributes the profits by paying the parties, as dividends based on the ownership. The agreement is written about the mandatory distributions expected by the parties in the case of surplus profits or has come to the eligibility of paying the dividends. Therefore the agreement includes the details about the shares, the transfer ability of the shares, and tax compliance procedures. Considering the overwhelming procedures, taking legal help from a renowned firm like Vakilsearch helps a long way in minimizing the paperwork and eliminating tax inefficiencies during the joint venture period.
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