But what exactly is a joint venture? How do you form one? Do you need matching outfits? We’ll go over the basics, and help you decide whether forming a joint venture is the right move for you.
Joint venture definition
A joint venture is formed when two or more businesses agree to work together, sharing resources—and profits.
Typically, businesses form a joint venture in order to pursue a specific project. When they do, they keep doing their own things on the side.
Example: Let’s say you’re a florist, and your friend runs a bike courier company. You form a joint venture—Petals on Pedals, a bicycle-powered flower cart.
While Petals on Pedals is out on the street, serving fresh blooms, you’re still running your storefront. And your friend is still running her bike courier company. But you each devote some of your resources to Petals on Pedals, and share the profits.
What a joint venture isn’t
Just to be clear—there are a couple things a joint venture shouldn’t be mistaken for:
- A joint venture is not a partnership. While you may choose a partnership as a business structure for your joint venture (more on that below), the two are not one and the same.
- The other is a qualified joint venture. That’s the tax status name for a married couple who run a business together. Maybe you’ll fall in love with your joint venture partner and tie the knot. But unless you do, a joint venture and a qualified joint venture are two different concepts entirely.
Reasons to form a joint venture
There are three (sometimes overlapping reasons) businesses form joint ventures.
1. To offer complimentary services
This is the case with Petals on Pedals. Without your friend’s bike courier business, you couldn’t take your bouquets on the road. And without your floristry, they couldn’t sell flowers.
2. To break into a competitive market.
You may have the right idea, expertise, or business structure for a new market—but you need more resources. That’s when a joint venture can help.
Let’s say you run a gelato shop, and you’re on good terms with the gelato shop on the other side of town. You both realize that the neighboring town, Shelbyville, doesn’t have any gelato shops at all. But neither of you can afford to open a second location—so you team up, and open one together, splitting the profits.
3. To save money
Two or more businesses can save money by forming a joint venture to make a purchase.
For instance, you might sell custom tote bags online, and your friend sells custom shot glasses. You both think there’s a lot of potential to make money with a holiday pop-up shop, but you can’t individually afford to rent the space. By forming a joint venture for the holidays, you can rent the space and reap the rewards.
How to form a joint venture
Technically, all you need to form a joint venture is a handshake. But for the sake of avoiding misunderstandings between you and your partner down the road, you’re better off with a more robust approach.
Here, you have two options: form a separate business entity, or draw up and sign a joint venture agreement.
Form a separate business entity
Many joint ventures take the form of a separate business. The members of the joint venture share control of the business entity, as well as profits.
The benefit of this approach is that it makes filing taxes relatively easy. You only need to fill out one tax return.
Forming a partnership for your joint venture
If you form a partnership, you’ll each be partners in the company. How the money is handled—who gets what, who makes what kinds of contributions, and how one member buy the other out in case they wish to leave—will be outlined in a partnership agreement.
The benefit of this approach is that it’s easier and cheaper to form a partnership than a corporation. The drawback is that you may need a lawyer to draw up your partnership agreement—depending on how complicated it is. A partnership also gives you less liability protection than a corporation.
Form a corporation for your joint venture
If you form a corporation, you’ll each get equal shares in the company, and an equal number of representatives on the board of directors.
The benefit of a corporation is that it reduces your personal liability. The downside is that corporations can be complicated—and pricey—to set up.
Form an LLC for your joint venture
Like a corporation, an LLC reduces your liability. Your share in the LLC is expressed either as a partnership percentage, or in ownership units (similar to corporate stocks).
The benefit of an LLC is that it can file taxes as either a corporation or a partnership. It can also distribute ownership units to its members more flexibly than a corporation can distribute shares.
Sign a joint venture agreement
If you decide not to form a separate business entity for your joint venture, you still need to make sure you set up some legal protections for members of the venture. Enter the joint venture agreement (JVA).
The JVA puts in writing exactly how the venture is is going to work. This is important in case there’s a dispute between members in the future.
Your JVA should clearly explain:
- What each member is expected to contribute to the joint venture
- What each member’s duties are, in terms of day-to-day operations
- If or when the joint venture will come to a predetermined end
- Who owns what—in terms of shares, client lists, or intellectual property
- How intellectual property and branding can be used independently by each member outside of the joint venture
- What happens if one person has to leave the venture
- How conflicts will be resolved
There are plenty of free templates online to help you get started planning your JVA.
Should you form a joint venture?
Even though they can offer lots of benefits, and the idea of combining forces may sound exciting, you shouldn’t enter into joint ventures lightly. Before you float your idea with a new partner, consider the following.
- Is it possible to achieve your business goals without forming a joint venture? If extending your line of credit or bringing on a new employee will do the trick, you may want to take that route instead.
- Do you have the resources—time, energy, money—to form a joint venture right now? For instance, if you’re already working eight days a week, trying to keep your head above water during the toughest time of year in your industry, you may want to postpone partnering up. It can get surprisingly complicated partnering with other entrepreneurs.
- Is the venture likely to be a success? This may seem like a no-brainer. But remember: Just because your joint venture may be a “side hustle” doesn’t mean you can cut your losses if it goes under. Consider talking to someone else in your industry, or hiring a consultant, to get a second opinion.
- Can you afford a worst-case scenario? Do some financial forecasting and sketch out three scenarios: best, worst, and most likely. What impact will each have on your current business? Can you afford a worst case scenario?
- How will different personalities affect the venture? This is especially worth considering if you’re used to working on your own. Your potential partner or partners may be easy to get along with at the moment. But you need to seriously consider what impact your different personalities and ways of doing business will have on your joint venture together. Who’s the Monica in this situation? Who’s the Rachel?
Signing a joint venture is a great way to test the waters. But once you’re confident in your business idea—and your partner—it’s time to take the next step. Learn how you and your new business buddy can form a partnership.