Pros and cons on joint ventures

Joint ventures offer several potential advantages. They enable smaller construction companies to take on large projects while dividing the contractual and financial risks of such projects. Further, those projects could be in geographic locations that you otherwise would not be able to access. A joint venture can also enable you to increase your bonding capacity, provide an opportunity to learn about more sophisticated technologies, and access other contractors’ relationships.

On the other hand, joint ventures come with some risks. Working with a new partner can lead to unexpected conflicts which could make your new partner a legal adversary. You may not be used to working with a partner and communication problems can result in confusion, delays, and redundancies that undermine profitability. Choosing a partner whose culture, technology, and communication style are compatible with yours can reduce these risks, but that is easier said than done.

Due Diligence

When considering a prospective joint venture partner, ask your accountant to perform an extensive review of its financial statements. He or she can look for red flags regarding how the company manages its money. Also, have your attorney check into the prospect’s legal standing, such as whether the company is involved in any outstanding lawsuits or unsatisfied judgments.

Lastly, ask for references, and do some media research to ensure a prospective partner does not have a history of questionable practices. One of the major risks of joint ventures is participating in a project that suddenly goes wrong and causes bad publicity, or even criminal liability even if you do nothing wrong.

Structuring

Have a clear objective when forming a joint venture. These arrangements are usually for one specific purpose or project, and have a defined endpoint. You will need to negotiate how to split profits and expenses based on the time, money, and labor each party plans to invest.

Joint ventures can be structured in a variety of ways. For tax purposes and personal liability protection, many joint ventures form a separate business entity such as a partnership, corporation, or limited liability company. Generally known as “equity” joint ventures, it is important to carefully examine the tax implications of these structures for your company, even if the other party is comfortable with a particular structure.

Alternatively, you could enter into a “contractual” joint venture whereby the parties enter a contract outlining the joint venture and its objectives. The advantage to this approach is its simplicity, but its main downside is that the contractual language may expose you to liabilities from third parties.


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Topics: Real Estate, Accounting Tips, Tax, Construction