<p>If a company often requires users to be created in a partner's active directory, and vice versa, does it make sense to set up a federated / trusted relationship between the AD instances? If so, what should be considered? Does the ACL for users in the partner AD still work the same way? What security risks does this expose?</p>

<p>Thanks!</p>

<p>KA</p>

<p><strong>Update:</strong> </p>

<p>I've learned that there's a better way to do this by having the application itself check user stores. The best way to do this is by moving the application into a domain trusted by both user stores. I've provided more detail in my answer below.</p>

I've been researching this a bit more, and I've found a good solution. Since both companies both need to use the same system, the system itself just needs to verify if a user exists in either of the user stores(authentication), and then to the authorization at the system level.
The idea behind giving both companies access is solid - If we are working together and didn't have a way to do this, we'd need to re-create all the users from the company without access in the connected user store. Obviously, this would be a total mess and a maintenance nightmare.
I found out that in my case, even though both ADs are on the same WAN, it's necessary to have a formal federation or trust. Thankfully, we already have a domain that's trusted between both companies, so I just have to move the applications used by the partners into this domain. After that, it's simply a matter of fully-qualifying the DNS suffix to indicate the AD being used. Application-specific ACLs then reference the desired user store.