I recently wrote a blog that examined whether you should give up equity for expertise or hire in order to get it. Another either/or scenario entrepreneurs often face is whether to incorporate a new entity when partnering with an outside company or to set up a joint venture (JV).
When I first started out I regularly contemplated parterning with other companies, and I would always gravitate toward the incorporating option. I now realize this was more out of insecurity than business intelligence because I wanted to "own" everything, I was uncomfortable with my value add, and I was concerned about getting cut out of future deals.
Here's a closer look at each one.
- It's cheap.
- It's simple. All you require is a bank account and a short document outlining your agreement.
- It's a great way to way to start a new business relationship.
- If the partnership fails, there are very few costs related to parting ways.
- It's expensive. There are incorporation fees, the need for a shareholders' agreement, and reporting fees at year end.
- There may be tax savings.
- Agreements are typically tighter than JVs. It's ideal if the partnership is forecasting significant revenue.
I've actually started to consider a third option: charge a management fee for expertise. It's the least risky of the three options. It's the best one for cash flow and I need to be selective about equity opportunities I invest in.