It happens all the time. Two people come up with the idea of a lifetime and decide to risk it all to start up a business. Or, a few friends decide to join forces and start a more conventional business like a restaurant or coffee shop. Starting a joint venture is one of the most popular ways to start a new business. Maybe it’s because going it alone is too frightening for some people to consider, and the comfort of having a partner or two makes it easier to take one of the biggest risks of a person’s life. Or perhaps it’s the notion that drawing upon the different strengths of more than one person gives the fledgling company a greater chance for success. Regardless of the circumstances, starting a joint venture is not something to be taken lightly.
One of the first things the group should do is decide exactly what type of company they are going to form. There are several different kinds of arrangement, and each has different accounting and tax consequences.
A Sole Partnership is the simplest form of joint venture, and it is basically a sole proprietorship with more than one person. Each person is personally responsible for any debts incurred by the partnership, in accordance with the percentage owned by that person. Profits are distributed in proportion to each person’s stake in the business as well. As the profits of the company are passed through to its owners, the only taxes incurred are on the income of each owner.
A Limited Liability Company, or LLC, can be formed to take some of the liability burden off of the owners. The personal assets of the owners of this form of company are protected from seizure in the event the business goes under or from some other catastrophic event such as a lawsuit.
A third option is the corporation, which is a separate legal entity from its shareholders. As such, the owners are not liable personally for any legal liabilities or debts that the company incurs. There are two types of corporation, and the difference between them resides largely in the way they are taxed. An S-Corporation is taxed much like a partnership or LLC, where only the income of the owners is taxed. So, the income or loss each year is passed through to each shareholder’s personal tax returns. This tax applies whether or not the company’s profit is distributed. With a C-Corporation, the profits are taxed when the business makes money, and then each shareholder’s income is taxed as well.
Once the form of company is decided on, it is a good idea to come up with a business plan. This plan lays out the business’s operations and goals, forecasts sales, and creates operating and marketing plans. Not only is a business plan a great way to get everyone on the same page, but it will also come in very handy if the business needs to go to the bank or any other source for some startup capital.
Finally, a good lawyer should be consulted to make sure all of the paperwork is in place for the new company. Not only does paperwork have to be filed with the state, but there may need to be a contract between each member of the joint venture. Other things to think about are what will happen in the event of a partner’s death, what sort of liability insurance will the company need, and if the company will have any employees there are a multitude of other issues go along with that. Forming a joint venture can be a complicated process, but if the new company turns out to be a success, the rewards can be immeasurable.