Protecting the Rights of Chicago Real Estate Joint Venture Shareholders in Developing Property
A joint venture (sometimes referred to as JV) is a business agreement in which the parties agree to develop, for a specified, limited time, a new entity and new assets by contributing equity. The parties have control over the enterprise and they share revenues, expenses and assets. It is a strategic alliance where two or more parties, typically businesses, form a partnership to share markets, intellectual property, assets, knowledge, and, of course, profits.
Whenever you deal with business entities and the division of expenses and profits, it is important to have a clear understanding of how the relationship will proceed and the provisions that will be included in the agreement to protect all Chicago real estate joint venture shareholders. Here are some of the key things to remember when setting up a joint venture.
Operate under a legal entity
It is always wise to set up a legal entity, whether it be a corporation or an LLC. This sets legal boundaries in the business relationship. Without a formal legal entity, the businesses involved are considered in a general partnership, and that makes all partners personally liable for the partnership’s debts. Setting up the joint venture inside of a legal entity reduces risk for all shareholders involved.
Set up a clear and concise system for making decisions for the project
In general, decision making in joint ventures requires assigning people control over the project. This can be done by setting up a board of directors and member voting, with clear veto rights established. If you have a board of directors, it is important to make informed decisions about who is placed or elected to the board. For major decisions that will have a huge impact on the success of the project (budgets, affiliate transactions, hiring contractors, distributions, loans, etc.), set a clear percentage of the vote is required to make those decisions. Setting these guidelines protects the rights of minority shareholders, giving them the ability to dissent from an idea or project plan while not holding the majority of shareholder rights.
When profits are generated from the joint venture, it is important to have a plan set on how those profits will be divided among all real estate joint venture shareholders. Depending on the way that this is negotiated, managing owners have the potential to siphon off considerable salaries and perks. Without mandatory distributions, passive owners might get no return on their investment. Make sure that when setting up the distribution, the interests of all real estate joint venture shareholders are considered.
Set up a concise exit strategy
There are many circumstances that will require shareholders to dissolve their relationship with the joint venture. They could range from unresolvable disputes to death of a shareholder. Having a process for distributing the fair value of that shareholder’s portion of the venture is essential in keeping the joint venture fluid.
You don’t want to run into a situation where you don’t have a clear exit strategy in place and one shareholder’s exit requires the whole venture to dissolve. Set buyout options that are fair and protect the interests of the shareholder exiting the venture and those that are staying. In the instance of the death of a shareholder, provide the estate with the fair worth of that shareholder’s share. When disputes arise, setting up a buyout process that will end the dispute, but protect the continuing interests of the investment. i.e. one member purchasing out the other, etc.
This list gives you a brief idea of things to keep in mind when setting up a joint venture, but the process can be very complex. All Chicago real estate joint venture shareholders should have an understanding that when you work with different individuals or business entities, the objectives of those parties might conflict with your objectives. Hiring competent counsel to assist in setting up a joint venture can be the key to the venture’s success. Experienced counsel can provide the insight and the legal knowledge to ensure that the interests of all parties are protected. When considering hiring an attorney, www.www.chicagorealestatelawfirm.com is an excellent choice. We have the expertise to set up a shareholder’s agreement that is fair and provides protection for all parties involved. Contact us today so that we can put our expertise to work for you and your business.