If you want to mix up what you do, expand the scope of your marketing, or improve your business in other areas, it may be time to consider a joint venture. Wondering what that phrase means exactly? To put it simply, a joint venture is when two or more people or businesses get together to work for a common goal. These ventures can take a variety of forms depending on who’s involved and the objectives at hand.
Examples of Joint Ventures
A joint venture can be a one-time event, such as planning a job fair with other businesses in your area, but it can also be part of a sustained relationship, such as sharing mailing lists or doing collaborative marketing with a few complementary businesses. In other cases, businesses may share intellectual property to develop a new product or service, or they may collaborate together for a single client. In still other cases, businesses may share more tangible resources, such as a group of farmers sharing a large piece of equipment.
Benefits of Joint Ventures
Pooling ideas and resources with other individuals or businesses offers a myriad of benefits. Regardless of your ultimate goals, any joint venture should increase the potential of your business by leveraging another person’s resources, tools, knowledge, or experience, and at the same time, you should be using your skills and resources to help benefit the other parties involved. In particular, you may expand your marketing reach, gain new clients, boost your profits, or generate new ideas for your business. To illustrate some of the potential benefits, imagine you run a party planning business and you know someone who rents out bouncy castles. You want to advertise at a local kid’s expo, but you can’t afford to buy a booth on your own. To make it more affordable, you decide to split a booth. That works well, so you decide to continue with more joint advertising ventures, and you take out an ad in the local newspaper together. In this case, you’re working toward a common goal of reaching more clients, but you’re splitting the costs with other business to make it easier.
A joint venture is not a business entity for taxation purposes. As explained above, a joint venture is more of a relationship between two entities than a business structure. As a result, you report earnings and profits that arise from the joint venture just as you normally report earnings. To continue with the example of the event planner and the bouncy house entrepreneur, pretend these two individuals meet a client at the children’s expo. The client wants to hire both the event planner and the bouncy house company, but to make things easier, the two professionals let the client write a single cheque for the services. Based on their agreement, the party planner takes 60% of the money, and she reports it as self employment income, because that’s the structure of her business. The bouncy house company, on the other hand, is incorporated, so the owner of that company puts his 40% of the earnings on his corporate income tax return.
Joint Ventures Versus Partnerships
Partnerships and joint ventures overlap in some key ways namely, both of these organizations consist of people or businesses working together for the same cause. That said, from a legal standpoint, these are markedly different entities, and it’s important to ensure that your joint venture is not a partnership, or you may have additional tax reporting obligations. With a partnership, you share risk and the propensity for profit and loss. You also run the partnership collectively, and in most cases, partnerships represent a sustained business relationship. Joint ventures can be sustained over several years, but all parties retain their independent business structures. At tax time, partnerships are required to file an informational return, while joint ventures are not. It is important to note that in some cases, joint ventures can become their own business entities. If the party planner and the bouncy house renter enjoy working together, they may decide to turn their joint venture into a formal operation and form a partnership, a corporation, or whatever other business structure suits their needs. At that point, the relationship is formally a partnership or corporation, but one can still refer to it as a joint venture in a colloquial sense.
Contracts for Joint Ventures
To ensure everyone involved is on the same page, you should set up a contract to outline the terms of your joint venture. Ideally, the contract should outline expectations about what everyone needs to contribute financially and time wise. It should also detail profit sharing plans, the chain of command, if relevant, and decision-making procedures. Being clear upfront can help you avoid issues in the future. As a small business owner, you need to be creative, and in some cases, that means working with other businesses. If you want to reap the benefits of a joint venture but you don’t know where to start, consider setting up a meeting with some business peers online or in person. Get together for a brain storming session, and think of ways you can work together. That may lead you to the type of joint venture that your company needs to move forward.