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Posted by: Charles P Myrick CPA Posted on: Jan 13 2015 Posted in: bookkeeping services

Does Your Company Need a Short Term Business Operating Contract?

When your company joins forces with another party on a joint project or business activity, you may need a business operating contract for a limited time period.  In this situation, the joint venture agreement is vital for protecting your company's rights.

What is a Joint Venture Agreement?

A Joint Venture Agreement is a business operating contract between two or more parties--that can be made up of individuals, sole proprietors, corporations or other types of businesses--to assume a project or business activity together. Unlike a business partnership where the parties join long-term on all business activities, a Joint Venture Agreement is ideal when the parties are only joined together for an individual activity or project, or for a specified period.

When do you need a Joint Venture Agreement?

Any business or person, who intends to join with another party or parties for a common business activity, needs a Joint Venture Agreement. This agreement protects each party's interests and specifies the responsibilities of each party:

  • Rights of each party to control the project or activity
  • Responsibilities each party is expected to assume
  • The money and time each party is to invest
  • The duty to share losses
  • The share of royalties each party will receive

Key Terms of a Joint Venture Agreement

Every Joint Venture Agreement should have certain words to identify the purpose of the agreement and the rights and duties of each party. Some of the key terms to look for include:

Purpose of Joint Venture:  Specifies the project or activity the parties are joining together.

Non-Compete Provision: Specifies that each party cannot compete individually with the joint venture. For example, if the joint venture is manufacturing a shelf-stable juice box product, a party could not make a competing product on its own outside the venture.

Contributions: List of tangible and intangible contributions to be made by each party.

Division of Profits: Specifies how the profits will be divided.

Share of Loss: Specifies what cut of losses each party is expected to take.

Joint Venture Bank Accounts: The type of bank account in which money from the joint venture will be held and who is authorized to withdraw money from these accounts.

Accounting and Auditing: Specifies who will do the accounting and what rights each party has to audit the books, as well as which procedures to take to perform an audit.

Withdrawals, Assignments, and Transfers: Specifies the process for a party withdrawing from the joint venture and stipulates how, when and to who assignments and transfers of the joint venture interest can be assigned.

Mandatory Arbitration: Sometimes, during the practice of business, the parties in a joint venture cannot come to an agreement on issues involving the joint venture. The Joint Venture Agreement specifies how to handle a disagreement. Most agreements call for mandatory arbitration to reduce legal expenses.

Charles P Myrick CPA, Washington DC tax preparation firm, provides accounting and bookkeeping services to clients throughout the District of Columbia area. We are dedicated to providing our clients with professional, personalized services and guidance in a wide range of financial and business needs.

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