Many businesses enter into cooperative endeavors with other companies. For example, two small companies might pool their financial resources for a project, either because the endeavor is too large for either to pursue alone or so that each business can overcome its weaknesses by tapping into the strengths of the other.
If you are considering such a cooperative project, you need to know your options in forming a joint venture.
Joint venture basics
A joint venture is a business arrangement between two or more business entities to cooperate in a particular business enterprise, either for a limited time or ongoing. Each entity may continue to engage in other business activities that are not part of the joint venture. The arrangement is not the same as a merger, in which one or both of the companies cease to exist as a separate entity.
A business entity that enters into a joint venture is referred to as an original entity, which may be organized as a limited liability company (LLC), a sole proprietorship, some form of partnership, or a corporation.
It is also possible for two or more original business entities to enter into a less formal cooperative agreement known as a strategic alliance, in which the companies collaborate in some manner that is expected to be mutually beneficial but without contributing resources or forming a separate entity.
For example, the three separate companies Disney, NBC Universal, and News Corp formed a joint venture by creating a new entity called Hulu. Ford Motor Company and Eddie Bauer entered into a strategic alliance whereby they used each other's brand recognition to gain new customers but without creating a separate entity or pooling their financial resources: Ford placed the Eddie Bauer logo on its upscale SUVs, while Eddie Bauer placed the Ford logo on a set of luggage.
However, there is no legal definition of strategic alliance, and there is no distinct line separating a strategic alliance from a joint venture. The exact nature of cooperation varies with the nature of the businesses involved and their venture.
Forming a joint venture
Just as an original entity can be organized in one of several ways, a joint venture can be set up as a partnership, LLC, or corporation. Or, rather than form a separate entity, a joint venture can be created as a contractual relationship.
For example, if ABC Enterprises LLC and XYZ Corporation wish to cooperate in a joint venture, there are two ways in which they can do so:
- Form a new entity. ABC and XYZ could choose to form A&X Corporation, in which some shares of stock are owned by ABC and some shares owned by XYZ. However, the new entity may just as easily be an LLC or some form of partnership, in which case ABC and XYZ are each members of the joint venture LLC or have a partnership agreement between them.
- Remain separate, but enter into a contract for the joint venture. This is commonly called a joint venture agreement or joint venture contract. If this option is chosen, appropriate representatives of ABC and XYZ sign a contract outlining the nature and goals of the joint venture, the contributions to be made by each entity, how the entities will share in the profits or losses, how the project will be managed, and other details.
Choosing the form of a joint venture
A joint venture that is organized as a separate entity is almost always organized as either a corporation or an LLC due to the limited personal liability offered for the owners. This is especially important if any of the original business entities are organized as a sole proprietorship or as some form of partnership that does not give all partners limited liability. Any original business entity that is an LLC already has limited liability for its members, while any original entity that is a corporation already has limited liability for its shareholders.
However, even if an original entity is set up as an LLC or a corporation, it can still be a good idea to organize the joint venture as an LLC or a corporation. Doing so may offer the original entity some protection for its assets that are not contributed to the joint venture.
For taxation purposes, a joint venture formed as a corporation is taxed as a corporation. Similarly, a joint venture formed as an LLC is taxed as a partnership, unless it elects to be taxed as a corporation.
Determining whether a joint venture is best created by an agreement or by forming some type of separate entity requires consideration of various factors, including the nature of the joint venture, management structure, limitation of liability, and taxation. If you need further help deciding which options is best for you, consider seeking professional advice from a business attorney or tax consultant.
Joint venture FAQs
What is a joint venture and how is it different from a regular partnership?
A joint venture is when two or more businesses team up to work on a specific project or goal while continuing to run their separate companies independently. The main difference from a regular partnership is that joint ventures are usually temporary and focused on one specific thing. Joint ventures also let companies test working together without fully merging their businesses.
For example, if a pizza restaurant and a delivery company create a joint venture to offer food delivery, they're only working together on that delivery service. The pizza place still runs its restaurant, and the delivery company still handles other deliveries.
What are the two main ways to set up a joint venture?
You can set up a joint venture in two main ways: through a contract agreement or by creating a new separate business entity. With a contract agreement, the companies stay completely separate but sign a detailed contract that explains how they'll work together. This is simpler and cheaper.
The second way is creating a new separate business entity, like forming a new LLC or corporation that both companies own together. This option gives better protection if something goes wrong, but it requires more paperwork and costs more money to set up. Most businesses choose the contract method for short-term projects and the separate entity method for longer-term ventures or when they want extra legal protection.
What should be included in a joint venture agreement?
A good joint venture agreement needs to define the specific purpose and scope of the venture. You also need to detail what each partner contributes—money, equipment, employees, or expertise. The agreement should explain how profits and losses will be split between the partners. It's important to include how decisions will be made, who's in charge of what, and what happens if the partners disagree on something important. Finally, the agreement should explain how and when the joint venture will end, and what happens to any assets or intellectual property when it's over.
How does forming a joint venture affect taxes?
The tax impact depends on how you structure your joint venture, and it can get pretty complicated, so you'll definitely want to talk to a tax professional. If you use a contract-based joint venture where companies stay separate, each company pays taxes on their share of the profits through their regular business tax returns.
If you create a separate entity like an LLC, the taxes work differently. LLCs usually have "pass-through" taxation, meaning the LLC itself doesn't pay taxes, but the profits and losses pass through to the owners who pay taxes on their personal returns. If you form a corporation for the joint venture, it gets more complicated because corporations pay their own taxes, and then the owners might pay taxes again on any money they receive.
What are the main benefits and risks of joint ventures?
The biggest benefits are sharing costs and combining different strengths. Instead of one company paying for everything, partners can split expenses like research, marketing, or equipment costs. You also get access to your partner's expertise, customers, or resources that you might not have on your own. If the venture doesn't work out, your main business is still safe.
However, there are some serious risks to watch out for. Partners might have different goals or work styles that create conflicts. The key to success is choosing the right partner, having a detailed agreement, and maintaining good communication throughout the partnership.
Can married couples form a special type of joint venture?
Yes, married couples can form something called a qualified joint venture, which gets special tax treatment that makes things much simpler. This special arrangement is only available to married couples who live in community property states (like California, Texas, and a few others) and who file their taxes together. Both spouses must own and participate equally in the business, and they can't choose to be taxed like a corporation. If you live in a state that's not a community property state, or if you don't participate equally in the business, you'd need to follow the regular joint venture rules instead. If you're married and thinking about starting a business together, it's worth talking to a tax professional to see if this option makes sense for your situation.
Do I need a lawyer to set up a joint venture?
While you're not legally required to hire a lawyer, it's strongly recommended, especially for anything more complex than a simple, short-term project. Joint venture agreements involve many legal and financial details that can have big consequences if they're done wrong, and a lawyer can help you. Even if you start with a template or online form, having a lawyer review it is usually worth the cost because they can spot potential problems and customize the agreement for your specific situation. This is especially important if you're contributing valuable assets, intellectual property, or if the venture involves significant money.
'%20/%3e%3c/svg%3e)
'%3e%3cpath%20fill-rule='evenodd'%20clip-rule='evenodd'%20d='M9.31239%2025.5316H13.0679V14.1032H9.31239V25.5316ZM11.1913%208.46875C9.93945%208.46875%209%209.25086%209%2010.505C9%2011.5995%209.78211%2012.5389%2011.1913%2012.5389C12.6005%2012.5389%2013.3826%2011.5995%2013.3826%2010.505C13.3826%209.4082%2012.6005%208.46875%2011.1913%208.46875ZM27%2018.9577V25.5316H23.2445V19.4275C23.2445%2017.8609%2022.6174%2016.7664%2021.3679%2016.7664C20.2711%2016.7664%2019.644%2017.5463%2019.3316%2018.1756C19.1743%2018.488%2019.1743%2018.8004%2019.1743%2019.1128V25.5316H15.4165V13.9458H19.1743V15.5123C19.644%2014.7302%2020.5835%2013.6357%2022.6174%2013.6357C25.1234%2013.7908%2027%2015.3573%2027%2018.9577Z'%20fill='white'/%3e%3c/g%3e%3cdefs%3e%3cclipPath%20id='clip0_952_9489'%3e%3crect%20width='18'%20height='18'%20fill='white'%20transform='translate(9%208)'/%3e%3c/clipPath%3e%3c/defs%3e%3c/svg%3e)
