The days of winning the war with a ‘One Man Army’ are long behind us. Today, to succeed in any field building an army of connections is a must. Even business entities are taking the help of collaborations to expand. Joint Ventures are created when two individuals or business entities enter into a mutual agreement for a specific purpose and a specific timeline. A joint venture agreement is the primary legal document that defines and governs a business collaboration relationship. The concept of joint ventures and co-venturers is gaining popularity to give businesses a competitive edge in this heaving economy. You can get the joint venture agreement format from online legal drafting services providers. However, first you need to understand its important aspects. Through this blog post, let’s understand what a joint venture agreement is, its format, scope, and purpose.
Defining Joint Ventures
As the name suggests, a joint venture is formed when two separate business entities/individuals get together and pool their resources to reach a common goal and share profits. The creation of a joint venture can be done in two modes:
Contractual joint venture
Here, the two existing entities do not form a separate entity for their collaboration but enter into a joint venture agreement and commence their co-venturer business relationship.
Separate entity for the joint venture
In this scenario, the parties get together and incorporate a separate business entity for their joint venture business. In India, joint venturers mostly opt to incorporate a joint venture company (Pvt / public limited company). Here, even though the parties will enter into an appropriate shareholder’s agreement, they will still need to have a separate joint venture agreement to define the terms of this joint venture company.
Also read: What is a shareholders agreement?
What is the scope of a Joint Venture Agreement?
The joint venture agreement is a legal document that covers the entire relationship between the co-venturers. The following key features of a joint venture agreement will help in defining its scope:
- The joint venture agreement is entered into for a specific project for a specific timeline;
- An effective joint venture agreement is accommodating to the needs of both parties;
- It includes the rights, responsibilities, and limitations of both parties; and
- Generally, it is created to serve a single business activity.
Did you know? Now-a-days, people create a joint venture and then open Franchise Business. In such cases, the franchise agreement plays as much of an important role as the Joint Venture Agreement.
What is the Joint Venture Agreement Format?
The ideal joint venture agreement format is drafted in a customized manner for the specific requirements. However, there are key components that are a must if you want an effective agreement. Let’s take a look at this:
A joint venture agreement is created between two or more parties. Hence, the most basic thing to include in the agreement will be to define these two parties. Name, address, age of representative, etc. is to be mentioned in this section of the joint venture agreement format.
Purpose of the Agreement
Here the parties need to define the specific goal for creating the joint venture agreement and also state the measures that both can and will take to meet its goal. Having a defined purpose of the joint venture agreement allows the parties to protect their interest in case of any future disputes.
Roles and Responsibilities
When two separate entities are pooling their resources to reach a mutually profitable goal, they also need to define their roles and responsibilities in reaching that end – goal. This will help in understanding the duty of each party and allow the other a recourse in case of any issues.
When two businesses enter a joint venture, it is a safe practice to discuss and frame the terms of management of the venture upfront. This will help in avoiding clashes between the management departments of both entities. Moreover, in this section, you also need to mention the requirements for meetings and the voting rights of each party.
Key Note: Sometimes before drafting the final Joint Venture Agreement Format, the co-venturers first enter into a mutually discussed memorandum of understanding (MOU) that helps in defining the final terms of the proposed venture.
The ownership rights in a joint venture are based on the mutual discussion of the party. The general practice is 50-50 ownership. However, this is largely based on the amount of resources the parties bring in.
Profit and loss sharing ratio
When the co-venturers achieve their goal, they’ll either gain profits or face losses. Having this defined as a part of the joint venture agreement is extremely important to mitigate future risks.
As stated above, a joint venture is a fixed-term entity. Hence, once the purpose of the joint venture agreement is served, it dissolves. To make the agreement even more effective, it is necessary to define all additional terms of dissolution as well.
Competition and Confidentiality
Even though the two parties have a common goal they still might be competing entities apart from the object of the joint venture. Keeping this in mind, both parties need to protect their trade secrets. Hence, having a confidentiality clause in the joint venture agreement protects the sensitive information of both parties.
Apart from this, when two entities are working together, both need to ensure that neither one of them starts direct competition with the other. Hence, an anti-competition clause helps in ensuring that neither party takes undue advantage of the other.
What is the difference between Joint Venture Agreement and Partnership Agreement?
At first glance, you might think that both are the same. However, there are many differences between the two. Let’s see the points of difference:
- A partnership firm is a single entity run by multiple partners. Whereas, the joint venture is a collaboration of two different business entities; and
- Joint Ventures are created for the short term. While partnership firms are long-lasting.
Pro tips by LegalWiz.in experts!
Before you create a joint venture agreement with your co-venturer, going through these pointers will help you safeguard your best interests!
- Mutually decide all terms of the joint venture;
- Both parties must get their copy of the agreement reviewed by a lawyer;
- All terms must be clear and precise; and
- Lastly, the accuracy of information is a must.
Entrepreneurs enter into joint ventures to expand, pool resources, and enter a new market. Having a joint venture agreement then helps them in protecting their interests and allows them to continue their venture without any worries. You can easily get a custom joint venture agreement format for your specific needs in just a few clicks!