Small business owners and entrepreneurs who want to compete for a bigger piece of the pie should consider coming together. Larger companies do it all the time, why shouldn’t you? Through “strategic alliances”, entrepreneurs can leverage their skills, talents, and resources to achieve greater success. Not familiar with the term “strategic alliance”? Here’s a quick rundown.
A strategic alliance is basically when entrepreneurs or businesses come together usually as a new and separate legal entity. The new entity can exist for an indefinite or definite time for a specific or general purpose. When I think of strategic alliances, two types come to mind:
1. Strategic Partnerships
“A Strategic Partnership is when two or more businesses come together with the goal of growing more successfully together than they could separately. Imagine a beer making company teaming up with a bottle making and distribution company. … Strategic Partnerships may last for an indefinite time with a broad focus.”
2. Joint Ventures
“A Joint Venture … is a partnership-type relationship usually designed to last for a definite time or particular project. An example of a Joint Venture would be two small cellular phone companies coming together and creating a new company to compete with larger cellular phone companies. In fact, Verizon Wireless started out as a Joint Venture.”
Businesses can also join through mergers, acquisitions, or contracts only as well.
Now, you shouldn’t just jump into a strategic alliance. There are many things to consider. First is what I call the “relationship test.” Are you and your potential partners a good fit? Have you worked with them before? Do you all get along? Could you work well together? Do you even like him or her? What are his or her (business) habits? Are your goals aligned with theirs? What if there’s a disagreement? Could you all amicably work it out? Who’s contributing what? Money? Time? Sweat equity? The list goes on. You know, it’s almost like marriage or dating. Well … not quite, but you get the point.
Once you pass the relationship test, then comes the legal considerations. How are you going to structure the alliance? Does it make sense to create a separate legal entity or would contractual agreements alone suffice? If you do choose to form a new business entity, what’s the best structure and form. (e.g. partnership, corporation, limited liability company, etc.)
The new business structure and form should fit your business needs, and your business needs should take into account liability–tortious, contractual and tax liability. The way you structure, form and operate the new business will determine who is liable for what. For instance, the type of business entity you choose, (s-corporation versus c-corporation versus limited liability company versus partnership) determines your (company and individual) tax liability, including liability in the event of business disputes (internally or from third parties) or injuries (personal or business related).
Another thing to consider is your potential duties owed to members of both the new entity and your separate, original company if you have one. (e.g. duties owed to shareholders, members, etc.) Conflicts of interest definitely come into play.
In all, if you think that a strategic alliance might be right for you, talk to a business attorney and tax professional. Among other things, an attorney can help you navigate the maze of liability and conflict issues. A tax professional, accountant or tax attorney can advise you on the tax implications.