Whether taking on a sizeable contract, entering into a new territory, or satisfying specific requirements under governmental contracts, joint ventures continue to present opportunities for contractors to work together. Joint ventures provide opportunities for participating companies to share resources and lean on each other’s specialties and knowledge; however, there are also risks that come along with such arrangements. In order to minimize risks and appropriately set companies up for success, there are several considerations that need to be made before entering into a joint venture relationship:
Type of organization – Typically, it is in the best interest of a company to legally protect itself from the work performed by the joint ventures. In this case, an organization structure such as a limited liability corporation (LLC) might be most appropriate. Other organizational considerations might include tax considerations on how earnings from the joint venture are taxed, either directly or through distributions up to the participating companies and owners.
Majority and controlling ownership – Negotiating terms with participating companies can be difficult, but this is not a step to be taken lightly. The majority and controlling owner ultimately holds more of the risk of the joint venture, and the roll-up accounting of the joint venture into the participating companies’ financial statements is different depending on the level of ownership and control.
Contractor licensing and registration – In many jurisdictions, the joint venture either directly or through one or all of its participating companies will need to be licensed or registered in order to perform contracting or subcontracting work. Proper research and discussions will need to be conducted between all participating companies to ensure no issues during the licensing and registration process.
Contributions and distributions – Agreements need to be established between the participating parties before the start of any projects on how much will be initially contributed to the joint venture, when additional contributions, if any, will be made and how these additional contributions will be calculated, and when distributions will be taken from the joint venture.
What alternative options might exist – After further research on the project and discussion with the participating companies, it could be determined that a joint venture is not be the best option, but another type of working relationship might be a better choice. For example, it might make more sense for one company to serve as the prime contractor on the job and for another company to serve as a significant subcontractor without entering into a joint venture agreement.
Joint ventures can present opportunities otherwise not available to an individual contractor, but the details of the agreement need to be carefully determined before making such a significant commitment. It is also important to include any attorneys and accountants in the discussion to help mitigate any risk and to set the joint venture up for success from the beginning.
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