The Legal Benefits and Pitfalls of a Joint Venture

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• Why Form a Joint Venture?
• Legal Considerations in Forming Joint Ventures

There are many situations where two or more existing small businesses may wish to collaborate on a project. It may be something as simple Company A selling Company B’s product. Or it may be something more complex, requiring the two firms to create a separate Company C to carry on as a separate operation. These kinds of arrangements are commonly referred to as “joint ventures.” Massachusetts law does not expressly provide for a joint venture agreement as a legal entity. Rather, it is a catch-all phrase that describes any kind of working relationship between firms. It is up to the parties to a given joint venture to determine the precise nature of the relationship and the appropriate legal structure to carry out their common objectives.

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 Ventures

As 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.

Even where the joint venture takes the form of a business agreement rather than forming a new entity, the parties must still carefully review all of the relevant terms to avoid potential legal disputes down the road. For example, if Company A agrees to sell Company B’s products, what does that mean for Company B’s intellectual property rights? Joint venture partners who currently compete in the same market and industry must also be careful that their activities do not run afoul of state or federal antitrust laws. Some joint ventures may be viewed as an illegal “cartel” by the Massachusetts attorney general or the U.S. Department of Justice. This is why it is always critical to contact a law firm and seek legal advice from a qualified Massachusetts business lawyer before proceeding with any kind of joint venture. For more information on this area of law, see our overviews of S corporations, closely held business, business organizations and business and corporate law.