BUSINESS ENTITIES (JOINT VENTURE)

Business Entities (Joint Venture)

A joint venture (JV) occurs when there is an agreement (whether verbal or written) between two or more business entities of any combination (whether corporations, individuals, limited liability companies – LLCs, partnerships, sole proprietorships, or the like), which each may have differing areas of expertise (such as administration, construction, intellectual property, logistics, manufacturing, marketing, media, or the like), and resources that would be collectively complimentary to furthering some mutually-agreeable arrangement to work together to achieve a common business goal (such as co-sponsoring events, construction of a large-scale infrastructure project, expansion into new markets, endorsing or promoting the products and/or services of a particular JV member, new product development, shared marketing efforts, or the like), in which each JV member retains its own legal identity, although all the JV members may agree to create a separate legal entity of any type (such as a corporation, general partnership, LLC, limited partnership, or the like) to administer the furtherance of the JV business intent, with the ownership shares in such separate legal entity divided either equally among the JV members, or in different percentages, perhaps based on a mutual agreement regarding the value of the tasks assigned to each or the amount of the financial contribution of each.

Some advantages of forming a JV may be: diversification (in the business cultures of the various JV members, their locations and their resources); economies of scale (cost savings for the JV through the use of efficient production methods resulting from simultaneous access to multiple financing scenarios, manufacturing facilities, procurement and sourcing opportunities, supply chains); fiduciary relationship (regardless of how the JV members may actually treat each other during the term of the JV, theoretically each JV member has a fiduciary relationship – in which each JV member owes the highest duty of fair dealing, good faith and responsibility – to each other JV member, for the expressed and implicit purpose of making the JV a success for all other JV members); risk management (all JV members may be able to mitigate or share any risk proportionately, or disproportionately, as specified in their JV operating agreement); symbiotic resources (some JV members may be able to contribute physical resources or capital, while other JV members may be able to contribute certain expertise); time efficiency (the use of various resources by JV members simultaneously may allow the business goal to be achieved much faster than if only one JV member was working independently).

Some disadvantages of forming a JV may be: data privacy and security (depending on the respective technology infrastructures of the JV members, cracking by nefarious outside third-party groups into one JV member’s technology infrastructure may allow easy access for such groups into the technology infrastructures of the other JV members); diversity (different business cultures may be incompatible); egos (various executives of the various JV members may all want to be the ultimate decision-makers); lack of consistency (despite a written agreement, one or more JV members may not always consistently pull their weight, thus creating a strain of the resources of the other JV members, without any way for such other members to force the non-performing members to perform as promised).

In spirit, the JV most-closely resembles a partnership (either general or limited), with the main differences being that: a JV may consist of any mutually-agreeable combination of business entities and/or individuals, whereas generally only individuals are members of a partnership; a JV is generally formed to achieve one common business goal and then generally dissolves once such goal is achieved, whereas a partnership is generally formed with the idea of doing continuous business of some particular type, and is not dissolved without the mutual consent of at least the minimum number of partners required in the partnership agreement; a JV may be formed for any specific purpose (whether for profit or not), whereas a partnership is generally formed for a for-profit purpose; a JV may use any amount of the capital cost allowance for tax purposes as the JV members may mutually-agree at any particular time, whereas the partners in a partnership are generally constrained by the partnership rules regarding claiming allocations of the capital cost allowance.

Negotiating and drafting JV agreements, whether domestic or international, large-scale to small-scale, long-term to short term, with few members or many members, across many diverse industries.

Negotiating and drafting all agreements, contracts, documents, forms and templates that may be ancillary to a JV, such as: acquisitions; advertising; construction; consumer products; corporate governance; corporate policies; customs; cyber; data privacy; data security; distribution; divestitures; employment; environmental; export; financing; franchising; human resources (HR); import; industrial; insurance; intellectual property (IP); labor; letter of intent (LOI); logistics; manufacturing; marketing; material transfer; merchandising; mergers; memorandum of understanding (MOU); operating agreement; outsourcing; procurement; real estate; retail; risk management; sourcing; supply chain; transportation.

There may be many types of joint ventures, such as: co-investment (the contribution of financial and other resources from all JV members to capitalize on the economies of scale in various new markets); functional (formed to take advantage of some potential symbiotic relationship between the JV members, generally of longer duration than project-specific); horizontal (generally between two entities producing similar goods, but in different global markets, to allow the products of each to enter into the market of the other); investment (generally financing-intensive, through which the JV members form a legal entity for the purpose of obtaining outside financing to develop some invention, product or resource over a long time period); project-specific (the most-common type, formed for a specific purpose, perhaps with some general limitation on the duration); strategic alliance (use of a JV to formalize a domestic or international strategic alliance initiative, or to avoid the necessity for a formal merger or acquisition between multiple entities); vertical (generally in the areas of manufacturing and supply chain, similar to a requirements contract, in which one JV member may require particular raw materials or resources from another).

The minimum requirements to establish the existence of a JV through a minimal written agreement may be: an expressed or implicit intent of all JV members to form a JV for some particular purpose and perhaps for some particular time duration; joint ownership among the all JV members of all JV assets; and, active and joint operation of the JV by all JV members, based on the risk and task allocations established in the JV agreement.

Depending on how the JV is structured, a JV entity may not necessarily recognized legally in all US jurisdictions or for income tax purposes by the Internal Revenue Service (IRS), in which case the US jurisdiction or the IRS will only legally recognize and tax the individual legal entity of each JV member, so it is imperative that if there is a written JV agreement, such agreement must address how contributions, distributions, losses, profits and taxes are allocated between the various JV members internally, to adjust internally how federal and state taxes are paid externally by each JV member, depending on the location of each.

Regarding criminal liability, if the JV legal entity commits a criminal act, governmental entities and outside third parties may hold all JV members jointly and severally liable, and it would then be up to the JV members to sort out the respective liabilities amongst themselves (as with a partnership).

As for civil liability generally, unless a JV agreement specifies explicitly that only the JV legal entity is liable to pay any monetary damages resulting from any JV operations after dissolution of the JV, then each JV member will be jointly and severally liable for such monetary damages (and each will also be jointly and severally liable in the event that the JV legal entity does not have enough assets to pay for any such damages).

In order for a JV to be recognized as a potential Federal contractor for bidding on Federal Acquisition Regulation (FAR), Defense Federal Acquisition Regulation (DFAR) and Defense Federal Acquisition Regulation Supplement (DFARS) contracts, the JV must, at a minimum have a: dedicated Dun & Bradstreet D-U-N-S Number (a/k/a “DUNS”, a proprietary Data Universal Numbering System created by the Dun & Bradstreet corporate reporting company as part of their DUNSRight methodology for identifying individual companies); and, a Commercial And Government Entity (CAGE) Code (a five-character ID number used extensively within the U.S. federal government, assigned by the Department of Defense's Defense Logistics Agency – DLA) for use with the System for Award Management (SAM) procurement system; also, if the validity of a JV to be a government contractor is challenged after a government contract is awarded to a winning JV bidder (for example by a losing bidder), the government may have the right to review the operating agreement of the winning JV bidder, to determine if such operating agreement is valid; experience with the 3-over-2 Rule – 13 C.F.R.§121.103(h) – under which the same JV may not be awarded more than three (3) government contracts over a period of two (2) continuous years, unless such JV is a participant in the Small Business Administration (SBA) Section 8(a) program.

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