The obvious use for a joint venture is when a company does not have all the necessary resources or expertise to enter a market by itself. Additionally, a company might form a joint venture with another company in order to enter a specific market that they are unestablished in. For example, an American company might form a joint venture with a Chinese company in order to sell products in China.

A joint venture might also be formed to give two less competitive companies in the same market the ability to compete with other companies at a higher level.

A famous real-life example of this is when Lockheed Martin and Boeing, previously two competitors in the aerospace market, came together to form ULA (United Launch Alliance) after the rising competitor SpaceX started undercutting their prices for providing launch services to the United States government. It is important to note that the extent of the cooperation between the aerospace titans only covers launch services, and they are still competitors in other areas.

There are two ways in which two or more parties can come together to form a joint venture. It can take the form of a contractual agreement or a separate legal entity. Each has its own uses and requirements. The type of joint venture agreement that you would like to enter into will mostly be influenced by the endeavor you are looking to undertake and the length of the business relationship.

The first type of JV agreement is a contractual agreement. The contract should be in writing and will detail the rights, responsibilities, and division of profits. Here, the companies each maintain their own identities and simply work together on a defined goal. This type of agreement is ideal when the joint venture has been created for the purpose of completing a particular business project together, but not an ongoing relationship.

The second type of joint venture agreement is when two or more parties create a separate entity through which they will pursue their common endeavor. An example of this is in the section above, where Lockheed Marting and Boeing came together to form ULA, a separate legal entity. This type of agreement is for longer-term business relationships where businesses are looking to work together in a limited capacity for an extended length of time.

The first step in the joint venture process is to choose your business partner. This is arguably the most important step in the whole process, as having an unsavory business partner can destroy any chances you have of a successful ongoing business relationship.

There are many questions that need to be asked when choosing a partner, including “How can this business help me accomplish my goals?” “What is their attitude toward collaboration?” “Do I trust the people running this business?” “Do they have the resources and financial stability to be useful to the endeavor?”

Next, you will decide on the type of joint venture you are looking to engage in. We already discussed the types in the previous section, but to recap, a contractual agreement is best for endeavors that are limited in time and scope. Forming separate legal entities are better if the joint venture project is going to be an ongoing collaboration. A corporate lawyer will be able to advise you on the best type of joint venture for your particular situation.

Finally, it’s time to draft the actual joint venture agreement. Having a business lawyer with a solid understanding of commercial law in your corner while putting together legal documents is essential to this stage. This is where the details of the business undertaking will be hammered out, and all the terms will be agreed upon. Each party should have a separate corporate lawyer on their side so that there are no biases in place.

It may take more than one iteration of the agreement before all parties are satisfied and ready to be legally bound by the agreement. Remember, companies are considering obligations, liabilities, debts, assets, expenses, and exit strategies at this stage. When everyone is satisfied with the agreement, it is time to sign and begin the venture.