The Legal Benefits and Pitfalls of a Joint Venture
Advice for establishing a business agreement in MassachusettsBy S.M. Oliva | Last updated on January 11, 2023
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Why Form a Joint Venture?Joint ventures allow individual companies to pool their resources. This can be especially helpful when one firm is seeking to enter a new market or distribution channel. For example, many joint ventures include a Massachusetts business partnering with a foreign company looking to access the U.S. market, or vice versa. Other joint ventures are primarily focused on combining financing or expertise to complete a specific project.
Legal Considerations in Forming Joint VenturesAs discussed above, joint ventures tend to fall into one of two categories: Agreements between the existing businesses and establishing a separate legal entity. Each has its relative strengths and weaknesses. The latter type is obviously more labor-intensive, as it requires not only setting up a new entity but determining a number of issues related to its ownership and operations. These issues include:
- The type of entity, e.g., a corporation, limited liability company, limited liability partnership, et al.
- Each party’s respective capital contribution and ownership stake in the entity.
- How profits and losses will be apportioned for purposes of state and federal income taxes.
- How long will the new entity last? Is it a temporary arrangement? What are the procedures for the participants to exit the joint venture, or to admit additional members?
- How will the joint venture address any professional licensing or regulatory requirements? This is a special concern when dealing with joint ventures involving non-U.S. companies, which may be subject to different rules than Massachusetts-based firms.
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