Creating a Joint Venture While Minimizing Financial Exposure

Joint ventures are distinct in several ways from business partnerships. Establishing a joint venture involves committing to the completion of a specific project with one or more outside parties. It is typically not meant to be an indefinite arrangement as a partnership might be. Instead, it is a collaborative effort to combine resources, knowledge and funding to achieve a specific goal.

The parties committing to a joint venture remain legally separate from one another, typically forming a distinct business entity. However, they do often have duties to each other. Business leaders and others contemplating a joint venture must prepare carefully to minimize their legal and financial exposure. When launching a joint venture, these three steps are critical:

• Sufficient due diligence —Joint ventures are created to generate profit and strengthen the position of businesses and professionals within the marketplace. Validating that these goals can be achieved is a key component of the process. The research that occurs during the due diligence process must fully disclose relevant information about partner businesses. Warning signs could include prior allegations of fraud, pending bankruptcy cases and other business controversies.
• Creation of a legal entity — Frequently, parties entering a joint venture choose to establish a separate entity formed specifically for the purposes of managing the combined operation. A limited liability company (LLC) is often the ideal structure for a joint venture. The process of forming an LLC is relatively straightforward with the support of an experienced business lawyer. Dissolving the entity later, after the completion of the joint venture, is a similarly straightforward process with appropriate legal support. Creating a separate entity reduces exposure individual owners and parent companies. The eventual dissolution of the LLC also helps reduce future complications and entanglements.
• Drafting a thorough agreement — Contracts are key for any successful business enterprise, including joint ventures. Determining the scope of the venture, clarifying the investments each party must make and outlining how to share any profits derived from the project are key steps to a successful joint venture. Additionally, the agreement should clarify when the joint venture ends, and what happens in the event of failure. 

Nothing can guarantee success, but proper due diligence, written agreements and the creation of a separate legal entity can protect your interests regardless of how the joint venture works out.

The Law Offices of Donald W. Hudspeth, P.C. in Phoenix assists Arizona clients with a wide range of legal matters pertaining to joint ventures. Those in the planning stages of a joint venture here in Maricopa County or elsewhere in the state can schedule an initial consultation by contacting us online or calling 866-696-2033.