Is a Joint Venture a Good Idea?
If a joint venture is in your future, you should be asking yourself, what is the objective?
What are you trying to achieve by this joint venture? Are you trying to obtain a specific contract for work you can’t do yourself? Do you need more capital or a higher bonding capacity? Maybe you need folks with more experience or is this a qualification issue?
A true joint venture is a separate entity created by two or more parties or entities. It could be two individuals; it could be two or three or four companies, all coming together to create a new entity. That new entity populates itself with employees; it has its own license, insurance and bonding; has its own management; and has its own bank accounts, profits and losses. One of the benefits of a joint venture is that it spreads the risk among multiple parties. Another is that it allows the joint venture to present more experience as a group than anyone of the joint venture partners might be able to do individually.
One disadvantage, of course, is that you now have to split yourself between your own business and the joint venture. Can you deal with both at the same time?
As you proceed with a true joint venture, you will need to create a separate entity. Will that be an LLC, a limited partnership or a corporation? You’ll need to determine, from a tax perspective, which of these structures is most beneficial to the joint venture as well as its partners.
Often there is a majority and minority joint venture member. The majority member uses its bonding capacity, backed up by the credit of the minority member. As well it is the insurance of the majority member that is used – an additional insured entity under the majority member’s insurance. Keep in mind that this additional exposure will erode potential limits on the majority member’s policy if a claim is made. Members need to be sure they have enough coverage to address the joint venture’s potential liabilities as well as their own.
The single most significant issue for any joint venture may be licensing. The fact that one or more of the joint venture members may be licensed contractors will not automatically cause the joint venture as a separate entity to be licensed. Every entity needs a license, its own license, to perform a service. There is a process that the Department of Business and Professional Regulation follows to qualify the joint venture, and the joint venture needs to be licensed before it ever submits its first bid.
Finally, don’t create a joint venture without a written agreement. You should have detailed provisions addressing all of the critical elements, such as management, job costing, loss allocation, profit split, termination, and dispute resolution.
Entering a new market or bidding that great project may require a joint venture, but don’t jump in too quickly – explore what it will take and what will be gained.