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Understanding a joint venture and if it is a wise strategy

On behalf of Brewer, Pritchard & Buckley, P.C. posted in business formations on Friday, July 27, 2018.

It takes a certain amount of fortitude to start a business in Texas along with significant risk. However, when the business start-up becomes a success, it can be rewarding in many ways including financially and personally. A persistent sticking point for many when they consider starting their own business is how it should be structured. One strategy that is often used and has benefits and drawbacks is a joint venture. Understanding what a joint venture is, how it works and if it is the wisest course of action can make or break a business. When moving forward, it is always advisable to have legal help.

A joint venture is a partnership. There are various advantages and disadvantages to using this business formation. It is important to know how this type of agreement will affect aspects of the business. Liability is one. With liability, those in a joint venture will have an unlimited amount of liability when it comes to the company’s debts and obligations. There is no separation between the partners. If, for example, a debt is owed and the creditor is seeking to take a car, a property or bank account, it can do so. A personal creditor can also seek business assets to cover a personal debt.

With a joint venture, it is important to know about taxes. The structure of a joint venture is beneficial for tax purposes. There is no requirement that taxes be filed as a business entity. There is a “pass through” in that the profits and losses can go directly to the personal tax return meaning it will be at a personal income tax rate. If there are conflicts and disagreements in the partnership, it can be a negative with a joint venture. Should there be dispute regarding the business, it is wise to have a written agreement beforehand. Some choose not to do that and it can cause challenges.

Collaboration is a key with a joint venture and entities of different expertise and skill sets can join to help everyone. It can also be financially useful to share the burden. Before agreeing to a joint venture, it is wise to understand all the alternatives available and discuss the situation in depth with a law firm that specializes in business formations. This can help to make an informed decision and put the pieces in place to make it successful.

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