When does a joint venture make good business sense for a California company? What is a joint venture and how is this different than simply forming a new company?
A joint venture is a separate business entity which is created by two or more external companies in order to join forces for a business venture here in California, or around the world. The purpose of a joint venture is to create an entity to pursue a business purpose as part of a “team”, while protecting the integrity of your own company (and that of your joint venture partner).
A joint venture makes good business sense because it separates the entities who form it from any liability that might arise out of the business conducted within the joint venture. Each partner of a joint venture contributes something of value to the joint venture to the benefit of both, while retaining their external identities and separate businesses. The entity of the joint venture is very basic and therefore cost-effective. Many joint venture partners choose to leave the details to an informal agreement, but it is wise to ensure a proper entity is formed in order to limit the exposure of individuals and other corporate entities.
One example would be an international manufacturer who wishes to do business here in San Diego and throughout the United States. Your company provides the customer base, sales force and distribution in the United States, while the offshore manufacturer provides the product.
It would be much more expensive for each of you to independently develop the product(s) and resources of the other. A joint venture allows the business partners to form an entity to conduct specific business, and to create and distribute profits without changing or affecting the nature of your original companies.
When does a joint venture make good business sense for a California company? A joint venture is potentially a good option when corporations or businesses entities have interests that are partially aligned for a specific purpose or timeframe, or to separate resources and profits (and the associated accounting) from the flow of each individual partner when undertaking a new venture.
Pro-Tip: “A joint venture is the wild west! The concept of a Joint venture covers almost everything. You form a corporation, you have to comply with the corporation’s code, you form a LLC, you’ve got to comply with the Limited Liability Act. But when you have a joint venture, it’s between you, your lawyer, and the other party and their lawyers to draft it up any way you want and be as creative as you want. And sometimes that’s the only way people want to get their feet wet on a real estate venture, a restaurant, partnering with another company to go after a new market, all kinds of things. You can write it up as a simple joint venture with an eye toward profitability and risk, almost a way of trying it before you make it a more formal relationship. Or sometimes you have such good friends or such good trust, all you need is a joint venture and all the other stuff would just get in the way.
Pro-Tip: “A joint venture is the wild west! The concept of a Joint venture covers almost everything. You form a corporation, you have to comply with the corporation’s code, you form a LLC, you’ve got to comply with the Limited Liability Act. But when you have a joint venture, it’s between you, your lawyer, and the other party and their lawyers to draft it up any way you want and be as creative as you want. And sometimes that’s the only way people want to get their feet wet on a real estate venture, a restaurant, partnering with another company to go after a new market, all kinds of things. You can write it up as a simple joint venture with an eye toward profitability and risk, almost a way of trying it before you make it a more formal relationship. Or sometimes you have such good friends or such good trust, all you need is a joint venture and all the other stuff would just get in the way.The corporate veil is a big issue in joint ventures. This is especially true if you’re going to be conducting some big business, you’re going to have big potential liability or you could personally not have big liability. You can have an entity that can be sold in whole or bring in investors. If you do everything right, you get to do all these things. If you get a big opportunity and you didn’t set your venture up correctly, then you can’t have your friend with an extra million dollars invest in the business. You’ve got to rewrite everything and you’ve got to restructure everything and you’ve got to hope you didn’t make any mistakes. And all of a sudden that opportunity doesn’t look like such a good deal. And that person who’s got the investment money will say, well, these people are not professional. These people are not really serious about doing business. And you’ll miss it all because you didn’t pay attention in the beginning when you formed the joint venture.” – Dan Watkins, Founding Partner
We invite you to review our podcast Episode 34 – Business Formation as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.
