When parties come together to pursue a shared business objective, whether launching a new product, developing technology, or entering a new market, the first major decision is how to structure the joint venture.
Forming a separate entity
Liability protection is often the starting point for companies that form a separate entity. Either a limited liability company (LLC) or corporation structure generally provide a liability shield, meaning owners are typically not personally responsible for the entity’s obligations solely by virtue of ownership.
Because liability protection is available either way, the real differentiators tend to be:
- Tax efficiency
- How the parties want decision-making authority and oversight to work
A corporate structure generally comes with a built-in governance framework and can be attractive where the parties want a familiar, standardized management model. An LLC is the more flexible option, allowing you to tailor management and control through the operating agreement and allowing the venture to function more like a partnership.
Liability protection is only one of the benefits of forming a separate entity. The business you want to pursue can also be an important consideration. Some business goals like pursuing government contracts may require your venture to follow a specific structure. Capital raising plans, long-term ventures with employees, contracts and ongoing operations may also benefit from a dedicated LLC or corporation.
Using contractual agreements
Not every joint venture requires a new entity. In some cases, especially where the goal is limited in scope and duration, a using a contract can be more efficient. For example, if two parties are collaborating to develop a specific technology intended solely for their own use, they may prefer a contract-only joint venture.
This approach can reduce administrative complexity and focus the arrangement on clearly defined rights and obligations. A thorough and clear contract is the foundation to success if your company chooses this approach, addressing development responsibilities, ownership of resulting intellectual property, confidentiality and permitted use.
The right choice depends on your goals
The way you structure your business venture should ultimately be defined by what you want to achieve with that venture. Where flexibility and tailored control arrangements are priorities, an LLC is often attractive. Where a standardized oversight model is preferred, a corporation may fit better. Where your collaboration is self-contained, a contract-only joint venture may be the simplest path. Carefully considering these options with the help of an experienced attorney and financial professionals can help you make informed decisions as you begin your venture.