A joint venture is a business enterprise undertaken by two or more persons or organizations to share the expense and (hopefully) profit of a particular business project. A joint venture is not a business organization in the sense of a proprietorship, partnership, or corporation. It is an agreement between parties for a particular purpose and usually a defined timeframe. Joint ventures may be very informal, such as a handshake and an agreement for two firms to share a booth at a trade show. Other arrangements may be extremely complex, such as a consortium of major electronics firms joining to develop new microchips. The key factor in a joint venture partnership is its single, definable objective. Joint ventures have grown in popularity in recent years, despite the relatively high failure rate of such efforts for one reason or another. Creative small business owners have been able to use this business strategy to good advantage over the years, although the practice remains one primarily associated with larger corporations.
Most joint ventures are formed for the ultimate purpose of saving money. This is as true of small neighborhood stores that agree to advertise jointly in the weekly paper as it is of international oil companies that agree to work together for purposes of oil and gas exploration or extraction. Joint ventures are attractive because they enable companies to share both risks and costs.
LEGAL STRUCTURE OF JOINT VENTURES
Joint ventures are governed entirely by the legal agreements that brought them into existence.
Some joint venture partners may wish to formalize the venture by creating a new joint venture company. Joint venture companies can be very flexible entities in which partners each own shares and agree on how they will be managed. More common are joint venture agreements that do not include the formation of a new entity. Instead, the venture is operated through the existing legal status of the venture partners, or co-venturers. Since the joint venture is not a legal entity, it does not enter into contracts, hire employees, or have its own tax liabilities. These activities and obligations are handled through the co-venturers directly and are governed by contract law. Corporate law, partnership law, and the law of sole proprietorship do not govern joint ventures. Finally, since the venture ends at the conclusion of a specific project, there is no need to address issues of continuity of life and free transferability, unless a joint venture company has been created.
WHY JOINT VENTURES FAIL
Many small business consultants counsel clients to approach joint ventures cautiously. They acknowledge that such partnerships can be most valuable in nourishing a company's growth and stability, but also point out that smaller businesses usually have far less margin for error than do multinational corporations, or even mid-sized companies. Some experts recommend that business owners considering a joint venture with another establishment (or establishments) launch a small joint venture first. Such small projects allow companies to test the relationship without committing large amounts of money. This is especially true when companies with different structures, corporate cultures, and strategic plans work together. These sorts of differences often make it difficult to work together smoothly. So, going through a period of "courtship" before committing to the marriage is usually a wise move.
In addition to a period of courtship, a small business should investigate the prospective partner thoroughly including interviews with prior joint venture partners, suppliers, and customers. This is especially true for a small company considering a joint venture agreement with a larger firm. Joint ventures can benefit all parties to the agreement greatly, and often do. But when they go wrong, the pattern is often a familiar one, explains Gabriel Berg, a partner in the New York City Law firm of Berg & Androphy, a firm that handles many claims of idea theft. Ms. Berg is quoted in an Entrepreneur article that highlights difficulties that often arise when a small firm wishing to market or advance a new product idea enters or attempts to enter a joint venture agreement with a large corporation.
Berg outlines the pattern she has seen in countless lawsuits arising from failed joint ventures this way. Early on, the small company will try to protect itself through the use of nondisclosure agreements and by withholding key information. Over time it may feel pressure to share proprietary information too early in the process because it needs the larger company's resources—capital or market distribution network. By divulging this information too early and before contracts exist to strictly define the terms under which the parties will develop the joint venture project, the small firm puts itself in a vulnerable position. "It's easy to think nondisclosure agreements are enough, but most leave room for either party to claim that not