A business may decide that it wants to partner with another business for a variety of reasons. By pooling their resources, they may be able to reach a wider audience and increase their revenue.
The formal name for this type of arrangement is a joint venture and it can be formed with any legal business structure, including a corporation, partnership and limited liability company.
There are several advantages to forming a joint venture, including sharing resources and responsibilities. One entity may have extensive manufacturing capabilities, for example, and the other may be very skilled at distribution. Each entity can benefit from the other’s experience and knowledge without spending a large amount of money.
They can also each share the risk. If each entity provides a portion of the resources needed for the project and it is ultimately not successful, it has less impact on their profitability.
The parties should execute a joint venture agreement which specifies each entity’s rights and obligations. It may include an outline of the day-to-day operations, detail their contributions, address the right to any profits generated by the joint venture and how they will manage losses. It should fully reflect each entity’s expectations of the arrangement.
Ending the joint venture
Because joint ventures are often created for a specific project or purpose, it is equally important for the parties to agree on how to dissolve the joint venture. This includes accounting for potential customer impact and how to distribute profits.
It’s important that a joint venture is formed properly and there is guidance available to do so.