Mark Pestronk
Mark Pestronk

Q: A very large foreign travel agency has proposed a joint venture with our agency to handle travel for its corporate clients' U.S.-based employees. It sounds like it could turn out to be a very lucrative deal, but I have some questions. First, what exactly is a joint venture? Second, if we decide to set up a new company, are there any restrictions on the ability of a foreign travel agency to own part of a U.S. travel agency? Third, what should each party's duties be? Fourth, how should we split revenue or profits?

A: The term "joint venture" can mean either a contractual relationship for a common business purpose or a new legal entity owned by both parties. If a joint venture is going to sell travel services, it probably needs to be a new legal entity in order to contract in its own name with clients and suppliers.

The new legal entity can be a corporation or limited liability company (LLC). Most joint ventures are LLCs these days, as they provide the parties with more flexibility than corporations do.

For example, corporation law generally requires that profits be shared in proportion to ownership, but LLC law lets the owners split profits as they wish. Further, a corporation's directors generally have a duty of loyalty to the corporation, which would prevent them from competing with it, whereas an LLC's directors have no such duty.

In the travel agency business, there are no restrictions whatsoever on a foreign company or foreign individual's ownership of all or part of the agency. Further, the identity of the owners does not need to be disclosed in any public filing.

If the parties want the joint venture to have its own ARC and Iatan appointments, the ARC and Iatan applications will require ownership disclosure.

However, as long as both parties meet the relevant qualifications and as long as the personnel qualifiers are U.S. citizens or have work visas, there should be no problem with foreign ownership.

The parties' duties are entirely negotiable. Most typically, the U.S. joint venture partner would be in charge of recruiting employees and operating the agency, and the foreign owner would be in charge of client liaison. Both parties would typically invest money to start up the company.

In an LLC, the parties' rights and duties would be detailed in the LLC operating agreement, which serves the functions of both the bylaws and the shareholders agreement. The operating agreement would cover all governance issues as well as the sharing of profits and losses.

The profit split would also be entirely negotiable. Most typically, the parties would share 50-50 in both profits and losses, although one or both parties may prefer to be paid in the form of a management fee for tax reasons.

If the parties are 50-50 owners, the operating agreement needs to provide what happens when there is a deadlock. For example, the agreement can specify that the parties will appoint a mediator or arbitrator under the rules of the American Arbitration Association.

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