Expand Your Comfort Zone: Use A Joint Venture to Mitigate the Risks

As the economy continues to struggle in some parts of the United States, many contractors are looking for ways to gain a competitive edge. One effective strategy is to branch out into new types of work, new geographical areas and larger, more complex projects.

Although venturing into unfamiliar territory can help you compete, doing so may also expose you to additional dangers. One way to mitigate the risks is to enter into a joint venture with another construction business.

CONSIDER THE BENEFITS

Joint ventures provide potential benefits, including:

Broader geographical reach. Partnering with businesses in other locations gives you access to markets that would be hard to enter on your own. Your partners' relationships with suppliers and other businesses, access to equipment, and knowledge about local market conditions can provide huge advantages in bidding, labor relations, and other areas.

Pooled resources. A joint venture instantly boosts the partners' working capital, manpower, equipment, specialized expertise or skills, and other resources, enabling them to bid on larger, more complex projects than an individual contractor would be able to handle alone. This is advantageous given current economic conditions, in which raising capital and attracting qualified personnel can be a challenge.

Reduced risk. By spreading the risk associated with a job among two or more joint venture partners, each partner risk is reduced.

Enhanced bonding capacity. Joint ventures often have an easier time qualifying for bonding at reasonable rates. Surety underwriters view a well-structured joint venture as presenting less risk of default than does one of the partners alone.

CHOOSE THE RIGHT STRUCTURE

There are many ways to structure a joint venture, including partnerships, corporations and limited liability companies (LLCs). Corporations offer the most liability protection, but present some tax disadvantages, including potential double taxation of the joint venture profits. And there little or no flexibility in allocating profits, losses and liabilities among the joint venture partners.

Partnerships provide little liability protection, but they offer pass- through tax treatment. In other words, there no entity-level tax. Instead, the joint venture income, deductions and credits are passed through to the partners and then reported on their personal tax returns. In addition, partnerships offer the greatest flexibility in allocating profits, losses and liabilities among the partners according to their specific contributions to the venture rather than their percentage of ownership interests.

For many joint ventures, an LLC is the ideal structure because it combines corporate liability protection with many of the tax and financial advantages of a partnership.

DO YOUR DUE DILIGENCE

Before entering into a joint venture, conduct thorough due diligence on a prospective partner or partners. If a partner business fails, you may be responsible for completing the project.

Examine the prospective partner financial strengths, bonding capacity, banking arrangements and relationships, quality and safety records, and company culture. Ask for owner references, focusing on jobs that are similar to the project for which the joint venture is formed or that involve related and relevant special skills or expertise.

Review a prospective partner history of litigation and legal claims, too. It can provide insights into how the company does business and where it stands financially.

PUT IT IN WRITING

To avoid surprises and disputes, create a joint venture agreement that defines the venture objectives and ensures that rewards and risks are fairly allocated. The agreement should spell out the parties' respective responsibilities for:

• Running day-to-day operations
• Accounting and billing
• Handling cash
• Procuring supplies and materials
• Obtaining permits and licenses
• Ensuring safety
• Managing change orders and other matters

The agreement should also address insurance, bonding and tax issues. Even with a well-drafted agreement, there may be disputes or misunderstandings. So provide for streamlined dispute resolution procedures, such as mediation or arbitration.

GET COMFORTABLE

Even if a joint venture looks great on paper, it important to consider the intangibles. So, before you join forces with another firm, make sure your companies' cultures are compatible and that you'll be comfortable with the people you'll be working with.