Joint Ventures for Business Owners
Most business owners know that to obtain contracts from major corporations or government entities that they must come together with other businesses. The idea of using strategy when conquering a certain market is not new. Large corporations have been forming strategic alliances for years. Now, it seems that it is time for smaller companies to do the same. This article is a two-part series on the legal issues involved with forming strategic alliances. One of the major issues involved with strategic alliances is what form should it take. There are several ways to form strategic alliances here are a few:
Limited Liability Company (LLC): When forming a strategic alliance, one must determine the purpose. If the strategic alliance has long term goals (five or more years) an LLC may be a good option. However, it may put a lot of responsibility on the individual companies. For example, each company would be required to make some type of financial contribution. There may also be difficulty in determining how profits will be split. Annual meetings are required, as well as keeping minutes. Units (similar to shares) will be issued and can be freely sold to others. The LLC can survive the original members and dissolving the company can be difficult.
General Partnership (GP): A GP does not provide liability protection to its partners. However, if both companies are already incorporated or an LLC, it may not matter. GPs are easier to form than LLCs and have less regulation. Management of a GP is relatively simple, and GPs can exist for long or short periods of time. A partnership agreement should be written and signed before any business takes place. Like LLCs, GPs are going to require some type of contribution to be made by its partners.
Joint Venture (JV): A JV is a partnership for a specific purpose. Two or more companies may agree to act as one when acquiring a bid or a contract. Unlike an LLC or GP, no contribution is required. JVs can be done on a per project basis so that profits can be determined accordingly. The JV will end when the project ends. Unless the companies agree, each can go its separate way when the project ends.
Contract: The simplest (not always the best) of all the previous examples would be to create a contract between the parties. This would be similar to a subcontracting situation where there is a primary business that will bid for contracts and agrees through a sub-contract to utilize certain businesses. The companies would then agree upon a price for their particular services and would then be paid according to the contract. There would be no profit splitting of overall profits. Each company would be responsible for its own portion. This method does not give the appearance of a strategic alliance to larger corporations but can be useful if the small companies are coming together for the first time.
After reading Part 1, you know which business entity to form regarding your Strategic Alliance (Alliance). Therefore, Part 2 of this series is dedicated to the ins and outs of the agreement. Whether the agreement takes on the form of Bylaws, Regulations, or a contract, the document will be sure to serve as the crux of relationship.
Take two companies for instance, that have complimentary businesses and decide that they want to advertise together to bring in more revenue. As with any Alliance, each company has its strength and weaknesses. One has better cash flow but the other has more visibility. They must determine how the marketing venture is going to work. Will the Alliance cover any and all marketing or just the publications that they choose one by one? Will the Alliance be allowed to grow into other areas or just stay with Marketing? In addition, how will they advertise? Together, they must decide if they will use one name or both. If they are in two separate and distinct locations, whose phone number will they use? What about location? How will they distribute the phone calls? How will the profits from the advertising be split? What if one’s services are needed more than the others?
Trust and communication are the only way to construct a good Alliance contract. Understanding this answers the legal question of consideration and helps to define the nature of the agreement. If the first business has more cash flow, it can certainly advertise by itself. However, the second business’ services are requested more often, and the first company does not provide such a service. But because the second company does not have the money to do the type of advertisement needed, and the first company wants to increase revenues, they choose to join in advertisement. Knowing this, one company will be doing most of the work, but it would not have the work if it were not for the other’s financial capabilities.
Alliances are difficult creatures. Most businesses have formed only one Alliance and if they are lucky two. An honest discussion regarding expectations and desires can save you from entering a contract that would ultimately hurt your company. If you do not feel that you can trust the company that you are working with, then you are sure to have legal disputes down the road. Businesses choose Alliances to improve the company or the product but rarely recognized that Alliances are not designed just to benefit one company but the other as well. Hopefully, this will get you moving in the right direction when it comes to forming Strategic Alliances. Many decisions are both management and legal and you must seek help when making formal arrangements.
This article provides general information.
This article does not provide legal advice about specific legal problems.
Consult an attorney about your particular situation.
