Punzalan Law advises clients who seek to enter into joint ventures with other persons or business entities. Generally, a joint venture is a business relationship between two or more parties with a specific shared goal. This shared goal may be to win a single construction bid, to share research and development costs, or to jointly secure a distribution deal in a foreign market. Even with sound financial plans and strategy mapped out, parties should consider a range of legal issues before entering into a joint venture.
Protecting the Venturer from Unlimited Liability
In the absence of a separate formal business entity for a joint venture, California and federal laws generally treat joint ventures as partnerships. While this has a number of implications for the joint venture, the most important is that the parties will have unlimited liability for the joint venture’s obligations. Thus, an ill-timed lawsuit or unpaid debt could pose significant financial hardships on both companies.
Consider forming a separate business entity, such as a corporation or a limited liability company, which protects members from liabilities as long as they comply with certain procedural requirements. However, before forming an entity, the venturer should carefully consider the appropriate form of the entity, location for formation, and business structure. Moreover, the venturer will also want to weigh other legal issues in forming this entity, including the joint venture’s risk profile, the expected revenue, their own assets, and their tolerance for administrative tasks.
Draft a Clear Written Agreement
Before forming a joint venture, the venturers should reach an agreement outlining their responsibilities and obligations to the joint venture and to each other. At the very least, this agreement should cover the intended purpose and scope of the joint venture, what each party contributes to the joint venture (such as money, equipment, personnel, or intellectual property), distribution of expenses and profits, voting and final decision-making procedures, and termination procedures. These are only a few of many issues parties will need to address.
Although joint venture agreements do not need to be written under California law, the venturers should always commit their joint venture agreement to writing. While drafting the agreement may require some time and costs at the outset, a strictly verbal or vague email agreement will cost more time and money if a dispute later arises.
Intellectual Property Issues in the Joint Venture
Intellectual property considerations should always be a concern for companies entering into joint ventures, particularly in Silicon Valley. Parties may contribute existing intellectual property to joint ventures, or the joint venture may develop new intellectual property after its formation. These intellectual property matters are best handled before the parties sign an agreement rather than when a dispute arises.
An individual venturer may contribute existing intellectual property to the joint venture by assignment or license. A contributing venturer should also consider steps to protect itself, either through limiting contributions to the joint venture or restricting its co-venturers’ access to contributed intellectual property such as patents, copyrights, trademarks, or trade secrets. Because confusion about intellectual property ownership often arises, technology companies should be particularly vigilant about their patent rights for hardware and object code, copyrights for programming source code, and trademarks for established products.
Additionally, if new intellectual property is created, it is important for the involved parties to discuss ownership rights. Where multiple parties contribute to newly formed Intellectual Property, different default rules apply to different types of intellectual property, but the venturers may want to consider altering these rules by agreement.
Conclusion
These are but a small sample of the issues that may arise in forming a joint venture, and the parties should address these issues early on. Too many times, Punzalan Law encounters clients that only discuss these issues when they are in the middle of a protracted dispute. Preliminary effective planning can help the venture save a great deal of time, headache, and money in the end so that the venturer can focus on fostering a productive and profitable joint venture. Contact Punzalan Law for a consultation so we can help you enter into a joint venture armed with the tools to make the right business decisions and contracts.