In many joint ventures, one party contributes funding and perhaps investment experience, while the other party contributes specialized or unique skills or a specific asset or property. In other joint ventures, the parties make more equal contributions but may be seeking to achieve greater scale, enter complementary markets, or leverage the relative strengths of the parties.
Whatever the scenario, the parties to a joint venture frequently receive specific economic and governance rights. For example, the funders receive a preferred return of capital, while the “sweat equity” gets a percentage of the profits. The parties typically carefully negotiate exit rights.
The different ways that parties to a joint venture make contributions and divide economic rights create tax opportunities and risks that require careful attention.