Question: What is a Joint Venture & How Do You Form One?
Jim S. – Pensacola, Florida
The legal definition of a joint venture is, “a commercial enterprise undertaken jointly by two or more parties that otherwise retain their distinct identities.” In real estate terms, it’s simply when two or more investors pool their resources on a specific project, whether financial or otherwise, and divide the profits based on the investment of each party.
It’s important not to confuse a joint venture arrangement with a partnership. Partnerships are when two or more people go into business together, and split the profits for the life of the business. This arrangement is much more like a marriage, and I typically discourage them whenever my opinion is asked. As Dave Ramsey always says, “the only ship that doesn’t sail is a partner-ship”, and my experience in business and real estate has been the same.
Partnerships are wrought with complications and eventually you and your business partner(s) will be faced with difficult questions and situations. What do you do when one partner feels as if the other one is not carrying his or her load, or not working hard enough? What responsibility does each partner have and/or how quickly are they expected to get it done? How often will you be paid, and how much will each person be paid? And the list goes on and on.
The solution to this dilemma is simply to form a joint venture agreement on each investment deal. Each investor maintains their own individual corporation of LLC, in which they are the only owner and can thus decide how much money they want to be paid, how much they want to invest in advertising, when and how often they want to work, etc. The terms of the joint venture for each individual project would be spelled out in writing, and you would operate as partners on that specific house.
However, if in the future you have a falling out, or decide you no longer want to do business together, you simply stop doing deals together. In a partnership, much of your business and financial affairs are entangled, and it’s very difficult to extract yourself from the arrangement if you so desire. In contrast, the joint venture gives you the freedom to do what you want with your own company, while at the same time allowing you to do business with other companies in order to leverage your time, energy, and other resources.
To form a joint venture, you simply need to create and sign a basic joint venture agreement, which spells out the responsibilities and profit split for each partner. This form can be drafted by your attorney, or you can find a simplified version available on the internet. The critical component of the JV agreement is to make sure there are no unanswered questions, and that everything is spelled out clearly on the form in case of a disagreement in the future.
In summary, a joint venture is an agreement between two parties on a specific commercial enterprise, and more specifically a house or development project when it comes to real estate investing. These arrangements are preferable over partnerships because they are limited to a specific project, and don’t entangle the business affairs of the two parties.
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