Understanding Joint Ventures and How They Work

A joint venture is a business arrangement where two or more people or organizations work together for a particular purpose, such as putting on an event or creating a product. A joint venture, commonly referred to as a "JV," is not a business entity type, like a partnership or an LLC. It's just a way of describing how two or more businesses will work together to accomplish a specific task. Each party maintains its separate business identity, which means, for example, that when two corporations form a joint venture, each party continues to operate as a separate corporation while collaborating on the joint enterprise.

Advantages and Disadvantages of Joint Ventures

By combining resources and expertise, companies or individuals who form a JV enjoy an opportunity to expand their business, reach new customers, and reduce risk. For instance, if you own a record label and you want to organize a festival but do not have experience in event logistics, you could team up with an event planning company that does not have connections in the music industry. Ideally, you will both make money, but if not, you will also share the losses, which will put less financial strain on both businesses. Similarly, your business could team up with another company in a different geographical market, allowing both businesses to benefit by reaching new customers.

Joint ventures have potential disadvantages, particularly when the parties are not contributing equally or the expectations are unclear. If the other company does not perform as expected, your company might spend time and money with no benefit, and you could expose your business to liability for the other party's actions. If the services or products are below the standards of your business, the joint venture might tarnish your reputation and credibility with your current customers.

How to Structure Your Joint Venture

The first step in any JV is finding a partner that is a good fit for the project. When discussing the enterprise, be clear about your own goals for the project and the resources you need from the other party. Consider whether your companies have different management or communication methods (such as preferring email to phone calls), and how each party might adjust to effectively work together. Once you select a partner, you have a choice as to how to structure your joint venture.

Joint Venture Through Contract

A popular option for structuring your JV is simply to enter into a contract outlining the terms of the enterprise, which is particularly suitable for short-term projects like organizing a single event. When the parties use a contract, any monetary liabilities the JV incurs will be paid for by the parties, according to their JV agreement (see below). Importantly, if the business owners themselves have personal liability protection by virtue of their own business structures (because they've formed LLCs or corporations), the owners will not be personally responsible. However, the assets of each party's business will be on the line to satisfy the debts of the JV.

Joint Venture Through a Separate Business Entity

Another option for structuring your JV is to form a separate business entity for the enterprise, such as an LLC or a corporation. This route might provide limited liability protection for the owners (depending on the business entity selected), which means that individual parties will not be responsible for debts the enterprise owes. The amount a debt collector can collect from the JV will be limited to the assets of the JV. However, creating a separate entity is more time-consuming and expensive than creating a contract. But when the enterprise is a long-term or complex venture, like a multi-year research project, forming a separate business entity might be better than using a contract.

Drafting a Joint Venture Agreement

Whether you structure your JV with a contract or create a stand-alone business entity, you should write a separate joint venture agreement (although it's not legally required), which will describe each party's expectations and help avoid conflict. Either party may draft the document, or you can work together to create it. While you must use particular forms and file them with the state when you form a business entity, when you write a joint venture agreement you won't deal with any state or federal agencies or file any forms with them. The agreement is simply a road map for JV, where you can include as much or as little information as you want. A few of the essential terms to include are:

• the names of the parties to the agreement (businesses or individuals)
• the purpose for the joint venture (such as completing a project or holding an event)
• each party's financial contributions
• other resources each party will contribute (including location, property, and workforce)
• each party's percentage of ownership
• profit and loss allocations
• the name of the project manager (the person who will oversee the day-to-day operations)
• bank information, and
• the location and maintenance of administrative records and financial statements.

Joint Venture Taxation

The way a joint venture pays taxes will depend on how the parties organized the enterprise. If you create a separate business entity, that entity will pay taxes on the income earned by the JV, on a tax return specific to the JV. If you create a joint venture using a contract, the enterprise will distribute the profits and losses to the parties as provided in the joint venture agreement. When each party prepares its taxes, each will include the income or loss from the joint venture on their tax returns.