Joint venture: growing together without merging

Do we need a formal structure to work with another company?

Two ambitious businesses spot the same opportunity. One has the product. The other has the customers, the licence, or the capacity. A merger would be too slow, too expensive, and more permanent than either side wants. A joint venture lets you grow together and stay separate.

The question we hear most often is whether that needs a formal structure. The short answer is that you always need a clear agreement. You do not always need a new company. The right choice depends on how long you are working together, what each side is putting in, and who should carry the risk if it does not work.

A joint venture is not a merger

A merger, or a share or asset sale, combines businesses. Control moves. One brand, one cap table and one set of liabilities usually follow. A joint venture is narrower. Two or more businesses agree to pursue a defined project or market, while each keeps its own company, customers and future.

That is why JVs suit growing SMEs. You can test a new territory, bid for a contract neither of you could win alone, combine intellectual property, or share the cost of a product neither side wants to fund outright. If it works, you can deepen it. If it does not, you unwind the venture rather than the businesses behind it.

“Partnership” is the word people reach for. In English law it is also a technical term, and using it casually is one of the easier ways to create a problem you did not intend.

Does as joint venture need a formal structure?

You need formality in proportion to the risk. A coffee and a handshake is not a structure. It is an argument waiting for a successful project, because that is when people disagree about who owns the customer, the code, or the margin.

There are three workable routes. A contractual collaboration, with no new entity. A company that you own together. Or, less often for operating ventures, a limited liability partnership. Informal trading as “partners” is a fourth route, and it is the one to avoid.

The accidental partnership

Under the Partnership Act 1890, a partnership is the relationship between persons carrying on a business in common with a view of profit. Companies and LLPs are carved out. Two limited companies trading together are not. If the reality looks like a partnership, a court can find one even where a side letter says “this is not a partnership”.

That matters because partners are jointly liable for the debts of the business, and jointly and severally liable for certain wrongful acts. There is no automatic limited liability, no neat exit, and the default profit split is equal. A label in an email will not save you. Substance does.

If you are already invoicing a shared customer, using a joint trading name, or holding yourself out as partners, pause and document the relationship before the next order lands.

When a contract is enough

Stay contractual where the venture is a project, not a business. Typical signs: a single customer or tender, a defined end date, each party keeping its own staff and assets, and money flowing to each party rather than into a shared pot.

A collaboration or consortium agreement should still be proper. At a minimum it needs the purpose and what sits outside it, who does what, how you are paid, who owns existing IP and who owns what you create, confidentiality, data protection, liability caps, and how you leave. Heads of terms are useful to flush out the deal-breakers, but they are not a substitute. Most heads are non-binding apart from confidentiality, exclusivity, costs and governing law. Do not start performing on the back of them.

Our earlier note on collaboration agreements covers the project checklist. A joint venture is that conversation continued, once the relationship is bigger than one piece of work.

When you should incorporate

Form a company when the venture will trade in its own right. Shared employees, a joint brand, a bank account, premises, stock, or a plan to raise money into the venture itself are all signals. So is any arrangement you expect to last more than a single contract cycle.

The company owns the venture assets. Each parent owns shares. Liability sits in the company unless a parent has guaranteed a lease, a customer contract or a loan, which is common and should be priced in. Day-to-day control sits with the board. The decisions that can change the deal sit in a list of reserved matters that need both shareholders: further funding, new share issues, related-party contracts, hiring or firing key people, borrowing above a threshold, changing the business, and winding up.

Agree the exit while you still like each other. Pre-emption on a transfer, what happens if one parent is sold, a right to buy the other out after a deadlock or a breach, and a valuation method that a growing business can actually operate. Dramatic mechanisms copied from private equity documents are rarely what an SME needs. A clear escalation, then a buy-out at an agreed formula, usually is.

Funding deserves the same honesty. If only one side can write the next cheque, decide now whether the other is diluted, lends the money, or has its share funded another way. Silence on future funding is how 50:50 ventures become disputes.

Four issues that sit outside the structure

• Intellectual property. Background IP should be licensed into the venture, not assigned, unless you mean to give it away. Foreground IP needs an owner, and each parent needs a licence back for its own business. A joint brand needs rules on quality and what happens to the name when you stop.
• People. Secondment keeps employment with the parent, but you still need to say who directs the work and who owns IP the secondee creates. Moving a team can trigger TUPE. A joint employer in all but name is an employment claim waiting to happen.
• Competition law. Working with a supplier or a customer is lower risk than working with a rival. Agreements between competitors that fix prices, share markets or rig bids are serious infringements under the Competition Act 1998, whatever you call the document. Genuine R&D or specialisation collaborations can benefit from block exemptions, but they need designing, not hoping. UK merger control is voluntary, but the CMA can call a deal in. Since January 2025 it has jurisdiction where the acquired enterprise has UK turnover over £100 million, where there is a 25 per cent share of supply and a party has UK turnover over £10 million, or where a large party (33 per cent share and £350 million UK turnover) acquires a business with a UK nexus. A full-function venture can be caught. Most SME collaborations will not be. Overlapping competitors should check before they sign.
• Tax and regulatory notifications. A company pays corporation tax on its own profits. An LLP or a true partnership is generally transparent, so profits are taxed in the parents. VAT registration, transfer pricing on services you sell each other, and the substantial shareholding exemption on a later exit all need a tax view before the structure is chosen. In 17 sensitive sectors, the National Security and Investment Act 2021 can require notification before you acquire control, including certain shareholdings in a joint venture vehicle.

A sensible sequence for a joint venture

1. Sign a mutual NDA before you exchange numbers, customer names or unpatented know-how. Define the permitted purpose tightly. You can widen it later. You cannot narrow it once the information is out.
2. Write short heads of terms: purpose, contributions, ownership, economics, exclusivity, term and the fact that the rest is subject to contract.
3. Choose the structure with your accountant or tax adviser in the room. Legal form and tax result are not the same decision.
4. Document it properly, then trade. Not the other way round. Do not hire, brand, or invoice in the joint name until the agreement, and any new company, is in place.
5. Revisit the deal when the venture succeeds. The agreement that launched a pilot is rarely the agreement that should govern a business.

The practical answer

You do not need to merge to grow with another company. You do need to decide, on purpose, whether you are running a project or building a business. A project can live in a contract. A business needs a vehicle, a shareholders’ or members’ agreement, and an exit. Either way, put it in writing before the opportunity, or the argument, gets ahead of you.

Farringford Legal advises ambitious SMEs on collaborations, joint ventures, shareholder arrangements and the corporate steps around them, alongside employment, data protection and IP. If you are about to share a customer, a product or a bid with another business, we can help you choose the lightest structure that still protects you.