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A joint venture is an agreement by two or more people or companies to accomplish a specific business goal together. A joint venture can be structured as a separate business entity or simply grow out of a contract between the parties. Unlike a partnership, a joint venture is typically temporary, dissolving after the task is complete.
As a small business owner, you need a collaborative mindset to succeed. You need to develop solutions with employees, business partners, and investors on a regular basis. Sometimes, you might have a great business idea that requires expertise or resources from another individual or company.
A joint venture allows you to come together with one or more other individuals or businesses to carry out a specific project. Joint ventures are particularly common in the real estate, media, and technology sectors. We’ll explain how a joint venture works, how it compares to a partnership and other types of business entities, and how to start a joint venture when the opportunity presents itself.
Business owners enter into joint ventures to access new markets, tap into complementary skill sets, or combine resources. The concept of a joint venture can be confusing because there’s a degree of collaboration and independence. Two or more people or companies come together in a joint venture for a specific purpose. However, the parties don’t have any legal responsibilities to each other beyond the scope of the joint venture.
In order to have a joint venture, each of the following must be true:
The key to a joint venture is that both parties contribute to it and share in the opportunities and risks. However, the contributions don’t need to be equal. For instance, one party might manufacture the product, and the other party might offer a distribution channel. One party might offer 70% of the money, while the other might bring just 30%.
No matter how you split contributions and profits, each party is fully liable for anything that might go wrong with the joint venture. For instance, let’s say two real estate developers launch a joint venture to build an apartment building. A bystander gets injured by construction debris that one of the developers leaves behind. Under the law of every state, both developers will share fully in the liability if the bystander sues, even though only one was responsible for the accident. The only way to eliminate this shared liability is to form a legally separate entity for the joint venture, which we’ll explain more in the section on How to Form a Joint Venture.
The terms of a joint venture should be documented in a written joint venture agreement. A written contract isn’t legally required to establish a joint venture, but it is the best way to ensure that each party is committed to the shared effort and knows what is expected of them. The contract should specify what each party will contribute to the joint venture, each party’s rights and duties, and how much each party will profit from the venture.
Without a written agreement, joint ventures can fall apart due to disagreement between the parties. We’ll explain more in a bit about how to launch a joint venture and what should go into your contract.
A joint venture might seem similar to other types of business arrangements, and sometimes these terms are used interchangeably, but joint ventures are unique.
Here’s how joint ventures different from other business arrangements:
A general partnership is a specific type of business structure where two or more people govern a company together. They share in the profits and losses of the business. Unlike a joint venture, a partnership is typically designed to last indefinitely. Joint ventures are usually temporary and initiated for a specific project, though they have more permanence than a simple licensing or distribution agreement, particularly when larger companies are involved.
However, there are some similarities between joint ventures and partnerships, the main one being liability. “A joint venture is similar to a partnership, but courts typically distinguish between them by finding that joint ventures are usually for one single project or transaction, whereas partnerships typically are longer-lived,” explains Professor Michael Molitor of Cooley Law School at Western Michigan University. “But in any event, whether it is a partnership or a joint venture, the partners or joint venturers will be personally liable for the business’s debts.”
In a franchise, the parent company grants a license to run a business using the parent company’s name, brand, and operating methods. Examples include McDonald’s, Subway, UPS, and other low-cost franchises. Usually, a franchise is a long-term arrangement, and the franchisee pays an initial fee to the franchisor for the rights to operate the business. The franchisor exerts a certain degree of control over the franchisee’s business decisions. In a joint venture, neither party is in “control,” and both contribute toward a shared goal.
Licensing is similar to franchising because the licensor permits the licensee to use the company’s name and logo. The licensee manufactures products and pays a royalty fee to the licensor for the rights to use the brand. A joint venture is different because both parties work together to reach a common goal and assume equal liability should something go wrong with the project.
In a merger, two companies combine to become a single business entity. Sometimes, two companies of a similar size come together, like Exxon-Mobil. Alternatively, a large company could acquire the assets of a smaller company. The purpose of a merger is usually to capture new market share, and an acquisition is often used to buy out a smaller competitor. In contrast, the purpose of a joint venture is to achieve a common goal, and each party maintains their independence.
A qualified joint venture is a partnership that’s run by spouses, each of whom participates in managing the business. For tax purposes, the IRS allows each spouse to file a Schedule C for their portion of the business income and losses, in the same way that sole proprietors do.
Joint ventures can be useful in any situation where distinct companies have complementary resources and a shared goal. The examples of joint ventures you’ve read about might have been two mega corporations coming together, but small business owners can benefit from joint ventures, as well.
According to Washington, D.C.-based business attorney Joy R. Butler, “If you think a joint venture is the exclusive territory of Fortune 500 companies, think again. Joint ventures offer the option of pooling resources with others, so you don’t have to go it alone. Your joint venture might be as straightforward as sharing a customer list for a combined marketing campaign… or providing original content for a website.”
Here are some joint venture examples:
These examples are all inspired by real-life joint ventures. For example, BMW and Toyota formed a joint venture in 2015 to develop a vehicle powered by hydrogen fuel cells. And back in 2009, Vodafone and Telefónica joined hands to share their mobile network infrastructure across parts of Europe, a deal that allowed both companies to save millions.
Companies or business owners commonly form a joint venture to access new markets, gain an edge over competitors, or tap into complementary resources. Some things are simply better done as a team than alone.
If you spot a good opportunity, here are the steps you’ll need to take to form a joint venture:
Finding a joint venture partner (or more than one partner for larger joint ventures) starts with clearly defining your objective. For instance, perhaps you’ve developed a new product but lack wide distribution channels to get it into stores. You can ask fellow business owners what distributors they use and do some independent market research. Then, reach out to different distributors to gauge their interest in a joint venture.
You should evaluate the people who will be working on the joint venture both in terms of their skills or knowledge and cultural fit. Obviously, they must be able to prove the reach of their distribution channels. However, you should also assess how committed they are to the final goal. Can you trust the people in charge? What’s the financial condition of the company, and what are their financial expectations from the joint venture? Does the firm have any other commitments or conflicts of interest that would hurt this joint venture?
Be prepared for a lot of negotiation and back and forth in the process of forming a joint venture. You might need to exchange production schedules, customer lists, and other proprietary details with your would-be partner, and they’ll need to share their own information. To protect the confidential information of everyone involved, it’s a good idea to prepare and sign a mutual nondisclosure agreement.
There are two main ways to structure your joint venture:
Forming a separate legal entity for your joint venture is the more expensive and complex option. If you form a corporate joint venture, for example, the joint venture will be responsible for filing and paying its own business taxes. However, having a separate legal entity also provides more legal protection if something goes wrong with your joint venture.
The faster, less expensive option is to get started with a simple contractual arrangement. In this case, the joint venture doesn’t report any profits of its own and doesn’t pay taxes on its own. The profits flow through to the respective parties’ tax returns. If you’re exploring a joint venture for a narrowly defined purpose where liability isn’t much of a concern, it might be fine to get started this way. For a more complicated joint venture, it’s safest to establish a separate legal entity for the joint venture.
No matter what type of joint venture you create, you should draft a joint venture agreement that contains all the details of how it will be run. Here’s a sample joint venture agreement from Rocket Lawyer to help you get started.
A joint venture agreement helps keep the parties focused on the shared goal and minimizes disagreements that could derail the project. At a minimum, the joint venture agreement should contain the following information:
It’s a good idea for both parties to have legal representation when drafting the joint venture agreement.
As with any profit-seeking enterprise, you must pay taxes when you’re part of a joint venture. Taxation of a joint venture depends on how the joint venture is structured.
If you form a separate legal entity, any profits of the joint venture will be taxed based on the entity type. For example, C-corporations pay a 21% flat income tax rate on business profits, and shareholders pay taxes again on dividends. LLCs are taxed as pass-through entities, which means the business income and losses are reflected on each owner’s tax return.
Unincorporated joint ventures are similar to LLCs in terms of tax treatment. The profits of the joint venture flow through to the parties to report on their individual tax returns, in line with their respective share of the profits as outlined in the joint venture agreement. If the parties to the joint venture are corporations, then each corporation reports the joint venture income on their corporate tax return. An unincorporated joint venture doesn’t itself complete a business tax return.
Finally, make sure you follow any other regulations that might apply to your joint venture at the local, state, or federal level. For instance, if you’re “borrowing” employees from either company that is a party to the joint venture, you’ll need an employer identification number (EIN), and you’ll need to follow other labor laws. Depending on which industry your joint venture belongs to, you might need a business license to operate. And if you’re considering a cross-border joint venture, a host of international regulations come into play that might limit your ability to operate in other countries.
Joint ventures can be beneficial, even critical, to making a business idea a reality when you need someone else’s resources, market knowledge, or skill set to accomplish a specific project. But a joint venture also opens you up to risks and liability, particularly if you don’t form a separate legal entity for it.
A joint venture brings two or more individuals or companies together, and that inevitably can cause a clash of personalities and priorities. The best way to mitigate your risk is to write an agreement which sets out each party’s role in the joint venture and share of the profits.