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Updated August 21, 2023

A joint venture agreement is a legal contract that unites two or more parties, whether individuals or companies, in the pursuit of a common goal. The contract stipulates that the parties will combine their resources in order to achieve mutually beneficial ends.

Reasons to Form a Joint Venture

Often, the reason two parties decide to enter into a joint venture is to complete a specific project. Two companies might, for example, acknowledge that individually they lack the resources to access a particular technology that would enable a business venture to succeed. By joining together, they could share the burden of startup costs, gain access to the technology, then share in any profits generated as a result.

Sometimes, the reason for forming a joint venture is more related to strategy than capital. An alliance could, for example, enable two companies that specialize in two different fields to access or dominate a new market.

Another reason two companies might form a joint venture is to increase their likelihood of winning a tender or bid for a contract.

Benefits of a Joint Venture

The central question to ask before forming a joint venture is this: will sharing capacity and/or resources help us to achieve something we couldn’t achieve individually and separately? Will this arrangement be mutually beneficial? Consider the possibility of such benefits as:

• Increased access to resources
• Sharing of risk and startup costs, including marketing and operating costs
• Increased efficiency
• Ease of access to economies of scale
• Increased competitive advantage
• Expanded customer reach

Joint Venture vs. Limited-Liability Partnership

While a joint venture appears similar to a partnership, the two legal entities are in fact distinct and separate. The main difference relates to breadth; whereas a joint venture is generally contracted in order to enable two separate entities to jointly achieve a specific, fixed-term goal, a limited-liability partnership allows parties to jointly own and operate a company until such time as the company is dissolved.

Famous Examples (3)

• Mercedes-Benz + Airstream
• McDonald’s + Coca-Cola
• American Airlines + Qantas

Mercedes-Benz + Airstream

Since 2004, both companies have built RVs together. Mercedes-Benz provides the chassis and engineering while Airstream constructs the rest of the vehicle.

McDonald’s + Coca-Cola

Since 1955, Coca-Cola has provided soft drinks to McDonald’s to accompany their meals. Coca-Cola provided signage and other incentives as part of this venture.

American Airlines + Qantas

Since 2019, American Airlines and Qantas allows travelers to book trips using each other’s networks. This means a traveler looking to book a trip from Sydney to New York can do so on either airline’s website.

Previously, a traveler would have to book Qantas to get to the United States and then another airline to get to their final destination. The joint venture expands each airline’s customer base.

How to Form a Joint Venture (4 Steps)

• Find a Business Ally
• Discuss Benefits
• Establish an Agreement
• Begin the Joint Venture

1. Find a Business Ally

First, identify whether the organization under consideration would be a good match. Is there a product or service the ally could offer that would help to further a specific business goal?

2. Discuss Benefits

After identifying a candidate, it’s time for both parties to discuss how each might benefit from a joint venture agreement.

3. Establish an Agreement

A joint venture agreement should reflect strategic thinking in six areas:

1. Contribution – What contributions of money, property, effort, knowledge, skill, or other assets will each party contribute?
2. Joint interest – What is/are the parties’ joint interest(s)?
3. Mutual control – Will the parties mutually control or manage the enterprise?
4. Profit – Is there an expectation of profits?
5. Profit rights – How will the parties share in any profits generated?
6. Single objective – Is the objective limited to a specific timeframe or activity?

Source: City University of New York Law Review

4. Begin the Joint Venture

The signing of an agreement establishes a joint venture. The parties involved will be legally obligated to meet the terms of the agreement until the agreement is terminated.

Terminating a Joint Venture

A joint venture agreement might allow for termination once the common goal has been achieved, once a certain date has been reached, or once the parties agree jointly to terminate.

Options for termination include:

• Consensus
• A court-ordered winding-up
• Sale of interests

A joint venture agreement should spell out what happens in the event one party or both parties wish to terminate the venture. Most agreements allow for termination with 30 days’ notice. The agreement should also outline what happens in the event of a breach, insolvency of one party, or an irreconcilable dispute.

Key Features of a Joint Venture Agreement

A joint venture agreement should include the names and contact information of all parties involved, the purpose of the venture, the roles and responsibilities of each party, the duration of the agreement, and the terms of the agreement. The agreement should also outline the venture’s ownership and management structure, the rights and obligations of each party, and the dispute resolution process.

A joint venture agreement should, in addition, contain provisions for the protection of intellectual property, confidentiality, and non-compete clauses, as well as provisions for the distribution of profits and losses, the taxation of the venture, and the indemnification of the parties.

Should an Agreement Address Confidentiality?

A confidentiality or non-disclosure agreement is a means of making sure that anyone who becomes privy to trade secrets or commercially sensitive information by virtue of being part of a joint venture won’t share or sell it to competitors when the agreement ends. This is important to include because while the joint venture will expire, the capacity to benefit from commercially valuable information won’t.

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