How to Minimize Risk in a Joint Venture

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Consider all risks before entering into a joint venture.
Consider all risks before entering into a joint venture. (Image: Jupiterimages/Photos.com/Getty Images)

Joint ventures can prove to be profitable partnerships, but minimizing personal risk is important to partners involved in the venture. The best time to evaluate risk or determine how a business relationship and venture will end is at the conception of the venture. Proper precautions are made at the initiation of the partnership, so all partners have the same understanding about their personal interest and risk involved in the joint venture.

Advance Planning is Key

Hold a special meeting for partners of the venture. Before beginning a joint venture, a special meeting is held to address the terms of the partnership and the risk involved in the venture. All partners need to address the personal liability and financial responsibility involved in the venture. The worst case scenarios are considered at the meeting, as well as the method of handling the ultimate demise of the venture, should it occur.

Arrive at a consensus amongst all partners. As the partners meet they will start to define boundaries and set goals and objectives for success. The partners have to arrive at terms they can agree with. If the partners are not in total agreement they must compromise until an agreement is met. If there is no consensus amongst partners at this stage, the issue will only escalate, likely resulting in future discrepancies.

Draft a partnership agreement. A partnership agreement is a legally binding contract that defines the terms of a partnership and gives clear and definitive guidelines and details regarding the way partnerships are established, governed, and also include the regulations surrounding the dissolution or termination of the partnership.

Incorporate or start an LLC. Another good way to reduce and eliminate the risk involved in a joint venture is to create a separate corporate entity that will bear the responsibility. Corporations and limited liability corporations are legal entities that partners can create, to incur tax and legal liability for the venture, rather than causing the partners to personally incur the expense of a failed venture.

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