Joint Ventures Explained: How They Work

As a business owner, you may come across a great opportunity that you can’t fund or manage alone. Maybe you want to develop a new product. Maybe you’ve spotted a government tender that could bring in real money.

Your expertise or your budget might not stretch far enough to go after it alone. When that happens, you can team up with a business or individual who brings what you’re missing. That kind of partnership is called a joint venture.

All About Joint Ventures

This article covers what a joint venture is, how it works, and its pros and cons. We’ll also show you how to structure one and compare it to similar business arrangements.

What Is a Joint Venture and How Does It Work?

A joint venture happens when two or more parties pool their resources and expertise to reach a shared goal. They share the risks, the rewards, and the costs of getting there.

You can structure a joint venture using several legal forms, including a partnership, a corporation, or an LLC. What sets it apart from an ordinary partnership is that it’s temporary. Once the parties reach their goal, they dissolve the joint venture.

Businesses form joint ventures for many reasons. They might want to enter a new market, develop a product, or fund a large project together. In most cases, they’re combining resources and expertise they don’t have enough of on their own.

The parties can split costs, profits, and losses equally. Or they can spell out each side’s share in a written agreement, based on what each party contributes.

Key Points and Facts About Joint Ventures

A joint venture is a temporary business arrangement where two or more parties combine resources to reach a shared goal.
Joint ventures can be structured as a contract between the parties, or as a separate legal entity like an LLC or corporation.
Only joint ventures formed as a separate legal entity need to be registered with the state — a purely contractual joint venture does not.
The IRS can treat a joint venture as a partnership for tax purposes, even if the parties never formally registered anything.
Joint ventures typically dissolve once the shared goal is reached, unlike partnerships, which can continue indefinitely.
Poor structuring is one of the most common reasons joint ventures underperform or fail.

What Are the Benefits?

Forming a joint venture comes with several advantages. Here are the main ones.

Access to More Resources
A joint venture lets both parties combine resources, like finances and equipment, to reach a shared goal. This makes success easier than going it alone. It can also give you access to resources you couldn’t get on your own, like specialized software or technology.

Increased Expertise
A joint venture also gives you access to new insights and skilled staff. Both parties bring their expertise to the table to solve problems together. More ideas on the table make it easier to reach the shared goal.

This arrangement can also let each party cover the other’s weak spots. Say you’re a contractor bidding on a government tender for a bridge. You could team up with a company that specializes in road construction so your combined bid covers more ground.

Increased Market Capacity
With more financial resources behind you, a joint venture can help you reach more customers. You can split advertising and marketing costs with your partner and reach a wider audience together.

Temporary Commitment
A joint venture isn’t permanent. It exists only until the parties reach their shared goal, then it dissolves. You’re not committing to your partner for the long term.

Examples

Here are a few hypothetical examples of joint ventures:

Real estate developers join forces to develop a mall or skyscraper
Two airplane manufacturers work together to build a space rocket
Pharmaceutical companies form a joint venture to research a new vaccine
Three car companies team up to manufacture self-driving cars
An architect and contractor work together to construct a shopping mall

And here are a few real examples from recent business history:

In 2009, Telefonica and Vodafone formed a joint venture to share mobile network infrastructure across parts of Europe, including Germany, Spain, Ireland, and the UK.
In 2003, BMW and Brilliance Auto Group formed a joint venture to manufacture BMW-branded cars in China. BMW increased its ownership stake to a controlling 75% in 2022, and the two companies extended the joint venture through 2040.
In 2011, Ford and Toyota signed an agreement to jointly develop a hybrid system for trucks and SUVs. The two companies called off the collaboration in 2013, before either side brought a vehicle to market — a reminder that not every joint effort reaches its goal.
Hulu launched as a joint venture among several media companies, including Disney and Comcast’s NBCUniversal. Disney later bought out the remaining stake, ending Hulu’s run as a joint venture and making it a wholly owned subsidiary.

What Are Some Disadvantages of Forming a Joint Venture?

Like any business structure, a joint venture has its downsides. Here’s what to watch for.

Poor Integration
Company cultures and leadership styles can clash, leading to poor integration between the two teams. One party might support flexible schedules while the other sticks to a strict 9-to-5. That mismatch can slow cooperation and keep teams from working well together.

Unreliable Partners
Not every partner gives full effort. One side may fail to do its part, or not do it well enough, which makes the arrangement unreliable.

Unequal Involvement
Because different parties bring different resources, involvement can end up lopsided. One side’s skill set might require more time and effort than the other’s, so that party ends up carrying more of the load.

Higher Failure Risk Than You’d Expect
Joint ventures fail more often than many business owners expect. Industry estimates put the failure or underperformance rate at 40% to 60%, with poor legal structuring cited as a leading cause. Getting the structure and agreement right from the start goes a long way toward avoiding this outcome.

Look at the Partners’ Benefits

When choosing a joint venture partner, weigh what each side brings to the table. The arrangement should benefit both parties — if only one side gains, the joint venture becomes one-sided and harder to sustain. Focus on the mutual benefit before you commit.

How to Structure a Deal

If you think a joint venture fits your business goal, here’s how to set one up.

1. Decide on the Type of Joint Venture You Want

You can set up a joint venture two ways. You can form it as a separate legal entity, like a partnership, corporation, or LLC, where each party holds an ownership stake. Or you can set it up through a contractual agreement, which only requires a signed contract and costs less.

Consider these factors when choosing between the two:

Size and financial strength of both parties
Whether you want liability protection
How complex the joint venture will be
Your budget for structuring the joint venture

2. Look for a Joint Venture Partner

Start by identifying your business needs, then look for a partner who can help you meet them. Take time to learn about their team before signing anything. Ask questions like these:

Are they collaborative?
Do they have the same level of commitment as you?
What is their management style?

3. Draft Your Joint Venture Agreement

Once you’ve picked a partner and a structure, draft your agreement. Its length and complexity depend on your relationship with the other party and your business goals.

Include the following in your joint venture agreement:

Purpose behind forming the joint venture
How it’s structured (separate legal entity or not)
Each party’s duties and responsibilities
Each party’s investment or contribution
How profits and losses will be split
Exit strategy
When the joint venture will end

4. Talk to a Lawyer

Work with an attorney to draft the agreement. They protect your rights and interests throughout the process, and they can help you spot and avoid pitfalls in the terms.

Alternatives

A joint venture can look similar to other business arrangements, like partnerships and strategic alliances. Here’s how they differ.

Joint Venture vs. Licensing

Licensing lets one party use another’s branding, like its name or logo, in exchange for a royalty fee. The licensor issues the license; the licensee pays for it.

In a joint venture, both parties work toward one shared goal. They also share the costs, profits, and losses.

Joint Venture vs. Strategic Alliance

A strategic alliance is an agreement between two or more parties to reach a shared goal while staying independent. Unlike a joint venture, the parties in a strategic alliance work separately on their piece of the task. A strategic alliance may or may not involve a contract, and it isn’t a separate legal entity. A joint venture can be.

Joint Venture vs. Partnerships

A joint venture is temporary and may or may not form a separate legal entity. A partnership is permanent, even after it reaches its original goal. Partnerships dissolve only with the consent of all members.

Action Steps for Joint Ventures

Choose Your Structure

Decide whether to form a separate legal entity or use a contractual agreement.
Weigh liability protection against cost and complexity.
Match the structure to your budget and the size of both parties involved.

Find the Right Partner

List your business needs before you start looking for a partner.
Vet a potential partner’s management style, financial stability, and goals.
Confirm both sides bring genuine value to the arrangement.

Put the Agreement in Writing

Spell out each party’s duties, contributions, and share of profits and losses.
Include an exit strategy and an end date for the joint venture.
Work with a lawyer to review the agreement before signing.

Checklist for Joint Ventures

Confirm the goal.
- Define the specific project or outcome the joint venture is meant to achieve.
Pick a structure.
- Decide between a contractual agreement or a separate legal entity.
Vet your partner.
- Check financial stability, management style, and shared goals.
Draft the agreement.
- Cover duties, contributions, profit and loss split, and exit terms.
Register if needed.
- File with the state only if you formed a separate legal entity like an LLC or corporation.
Loop in a lawyer.
- Have an attorney review the agreement before you sign.

FAQ: Joint Ventures

Why do firms enter into joint ventures?

Firms form joint ventures to enter new markets, develop products, or take on large projects they couldn’t manage alone. The goal is to combine resources and expertise to reach a shared outcome.

Do joint ventures need an exit strategy?

Yes. An exit strategy reduces conflict if one partner wants out or fails to hold up their end. Business needs change over time, so it’s worth spelling out the exit terms in the agreement before you launch.

Do joint ventures need to be registered?

It depends on the structure. A purely contractual joint venture doesn’t need to be registered with the state. But if you form the joint venture as a separate legal entity, like an LLC or corporation, that entity does need to be registered, the same as any other business of that type.

Are all joint ventures 50-50?

No. Ownership can split 50-50, but it doesn’t have to. Parties can agree to a 70-30 split or any other ratio, usually based on who contributes more resources or expertise. Profits and losses can be divided the same way, based on the agreement.

How is a joint venture taxed?

It depends on the business structure. A joint venture can be taxed as a partnership or a corporation, based on the agreement between the parties. Note that the IRS can treat an unregistered joint venture as a partnership for tax purposes too, which can trigger filing requirements the parties didn’t plan for.

How does one set up a bank account for a joint venture?

Visit your bank of choice to open the account. You’ll need to submit both parties’ EIN and identification for the signatories, along with a copy of the joint venture agreement and the business name if one exists.

Conclusion

A joint venture is an agreement between two or more parties to reach a shared goal. It’s temporary — once the parties reach that goal, the joint venture ends.

Forming one lets both sides share the cost, risk, and reward of getting there, while combining resources and expertise. The tradeoff is the risk of a culture clash between two organizations trying to work as one.

To structure a joint venture, start by deciding on its legal form. Then find the right partner and draft a clear agreement. Working with a lawyer through the process helps you avoid costly mistakes.

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