What a Joint Venture Agreement really is.
In the investment world, so many opportunities, so little time to build a relationship. Yet you know it is important to have that relationship. Do you find yourself _lookin' for lenders in all the wrong places_, _lookin' for lenders in so many places_, and the next thing you know you run into the right one, the right Partner, or it feels right anyway. What do you do? How do you build the relationship so that they will believe in you and work with you and be your Partner for the Opportunity?
The very worst happens, you begin to not have the confidence you felt. You have a fear creeping in. There are so many unknowns. You want to do this right but you are not sure. You begin to think that this person who could be your potential Partner may not like you while you know that you really want a relationship with this person. You have the jitters, you even go to bed at night getting yourself in a rise just to be able to make it work. You wonder if it will work. You think that if it does work you go into the _what if_ phase. What if you do something really stupid and then ruin it all. You even go as far as to think if you buy something nice for this person you might earn a point or two. You think about things you should not be thinking about, like going to dinner at a nice restaurant to discuss the Opportunity.
On the flip side, the prospective Partner sees talent in you. You may not know it but they have been watching you for a while. They have been noticing the successes of you, and they have been talking with others who share the same knowledge on how well you are organized. They like the systems you have in place; they see you play smart. They also know with their skills they can complement you in a relationship. They have spoken about the idea of Partnering with you, with others. Yet, because of a failed Partner'ship in the past, they are a little shy at making any moves directly with you. They are curious to know if you have any interest in them as a perspective Partner in this Opportunity that they are aware of that you have, which was presented to them in some past conversation you were privy to. In fact, they have high hopes that they can join forces with you and utilize their skills and your skills and talents together to form a relationship that could be very monetarily fruitful for both of you, in the end. They know it is a win/win.
What now? You both find yourselves asking yourselves how you can meet to discuss the Opportunity. What do you do? You both know this can work, and you both are interested in each other. Yet at the same time you both know that you need to get to know each other a little better. Become a bit more intimate. That is it. That is where you start. So you kiss.
So now you have kissed. In otherwords, in the Business world, you begin the journey to know each other intimately. You have shared ideas, and you now know that this is a good fit. You both have great ideas and you both are optimistic that this relationship will work and you are ready to take this relationship to the next level. So now you need a mutual Agreement to make clear each other's roles in the new relationship. You need a contract. You are ready to join forces. You are ready to take each entity, and join them together for this Opportunity. Think of a JV Agreement like a Pre-Nuptial Agreement. It is a document that sets down the rules within the relationship prior to marriage. In a Business case, the marriage is the Opportunity.
As in all marriages, there are Agreements that have to be discussed including the roles and responsibilities within that relationship. If you have been in an intimate relationship you know that people argue and disagree to some extent on matters that may or may not be conducive to the task or Opportunity presented. In all relationships there is always a potential for conflicts and disputes. So it is important that all factors within the relationship are looked at, discussed and agreed upon by the Partner's. A good JV Agreement will close the door for any number of disputes and conflicts which could happen between Partner's. And that will be the success of the Partner'ship.
Now you are at the next level to discuss a Joint Venture Agreement, it is important that you both understand and agree upon each Partner's responsibilities and rights. It is important because this JV Agreement gives you both equal and joint ownership and control to the Partner's involved. This Agreement lists the details of how profits will be shared, and it also lists the details of how the losses will be shared. It lists the contributions of money by the Partner's, and it also lists the expertise that each Partner will contribute.
In a JV Agreement, the Partner's together have unlimited liability for company debts and obligations. Is this beginning to sound familiar? Think about the pre-nuptial or marriage concept. It is important to understand that the JV Agreement is not a separate legal entity as in a Business structure such as an S Corp or an LLC, from the Partner's, within or of the Business. This is very important to understand when forming the JV Agreement and identify this within it. Why? Because any Business creditor can and may pursue a Partner's home, bank account, car and any personal assets if the Company's assets do not cover the respective obligation. Which is why it is important that the Partner's Business entities are set up correctly to protect the Assets within its own structure. Conversely, it is also important to understand that a Partner's personal creditors can pursue Business assets as compensation for a Partner's personal debts. In a JV Agreement, Partners are liable for any negligent acts of the other Partner.
Joint Venture Agreements do not pay taxes as an entity. Each Partner pays tax on profits on their individual tax return. However, the venture Agreement may deduct Business expenses before passing profits to the Partner's, thus reducing each Partner's tax burden.
Partner's in a joint venture Agreement have unlimited liability for company debts and obligations. The venture Agreement is not a separate legal entity from the Partners of the Business. This means a Business creditor may pursue a Partner's home, automobile, bank account and other personal assets if the company's assets do not cover the obligation. Likewise, a Partner's personal creditor may pursue Business assets as compensations for a Partner's personal debts. In addition, Partners are liable for the negligent acts of the other Partner's within the JV Agreement. This fact forces the accountability to each of the Partner's within the JV Agreement.
Another great strategy to think about when forming a JV Agreement is the taxation. Since JV Agreements are not required to file taxes as a Business Entity, taxation is an advantage for Partner's within the JV Agreement. A joint venture Agreement are not required to file taxes as a Business entity. The beauty of JV Agreements is that the Partners are allowed to pass their portion of their company profits and losses directly to their personal income tax return. In the long run, of the short haul, what this means is that the Partner's pay taxes on company profits according to their personal income tax rate. In addition, the Business losses reported on a Partner's tax return can be used to offset income gained from other sources.
When you also find yourself asking yourself how you are supposed to structure your JV Agreement, sit down with your power team, your Tax Attorney and your CPA and have that discussion. Your power team will be able to tell you if you should put it in your Business entity name and or in your Personal name. All of which need to be discussed when forming your JV Agreement.
And to keep the Romance in your relationship remember that all questions you have are important. They are real to you and your situation in Business. They come up because they are important to you to consider when you are forming your JV Agreement. You want the beginning structure to set up the foundation for the means to the end with positive results because you want the Romance to continue
So now that you have kissed [figuratively], and you have gotten intimate [in knowledge], you are now ready to sleep together [in business]. In otherwords, you and your Partner are now ready to sign the JV Agreement because you know that this relationship is going to work because you are serious and so is your Partner.
This is why it is so important that before you sleep together, you better kiss first. It is all about the kiss.
Jinean Florom is a Nationally recognized real estate investment consultant who works with private money investors, hard money lenders and gap funding sources, and assists borrowers in buy and holds and buy and flips and tax liens and deed purchases.