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What you need to consider before forming a joint venture

2-minute read

In a very broad sense, joint venture formation should consider legal, tax, business and cultural issues. Joint ventures may take the form of different legal structures. Companies wishing to form a joint venture often create a new joint venture corporation (as opposed to a partnership) in order to limit their liability in the new company venture, as opposed to forming a partnership directly between two corporations, or two individuals.

The different legal implications may be significant depending on your situation, so needless to say, consult your legal counsel in this regard. Next, you should consider tax issues and potential liabilities. Depending on your situation, you may find important concerns surrounding how your assets are contributed to the new joint venture, the amount of tax you will pay on income, and depending on your jurisdiction, may also affect your access to tax incentive programs and possibly government support programs.

Now beyond legal and tax considerations are a large number of broad business and cultural issues. As a start, you should carefully consider and/or define:

  • The purpose of the joint venture (and why it may be more appropriate form than an informal alliance)
  • Whether the venture is for a specific period of time or indefinite
  • The resources and value to be dedicated to the venture by the participants 
  • The goodness of fit between the participating companies 
  • The control mechanisms of the company 
  • The specific responsibilities of the participants 
  • Specific goals for the venture 
  • Potential impact to your present business reputation 
  • How you will handle cash calls and personal guarantees if required, etc.

Many of these business considerations may be handled with a good partnership agreement or unanimous shareholders agreement (if a corporate joint venture). But regardless of the length or breadth of the legal agreements you may use, if there is not a high degree of consensus and willingness to work through upcoming problems with your new joint venture partners, you may find yourself bogged down in unpleasant and costly disputes. Try to make sure your new partners are a good fit with you and define the business as much as possible ahead of time. One method to consider would be "managing by plan," where you and your potential partners first prepare a detailed strategic and business plan for your joint venture, sort through your anticipated problems as much as possible, and then regularly update your plan once or twice a year. If the plan is prepared properly you should avoid many problems before you begin. An experienced management consultant should be able to guide you.

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