What Is a Joint Venture?
A joint venture, or JV, is a cooperative agreement that two or more business entities enter together. Frequently, the purpose of a joint venture is to begin a new business activity or accomplish a specific task. Each entity that is part of a joint venture must contribute assets to it and agree on how to divide expenses and income.
The joint venture often acts as its own entity, so it keeps a separate legal status from the participants and their other business interests. Entities in a joint venture may include:
- Groups of individuals
A contract sets up a joint venture by outlining how the participants will manage the joint venture, divide control, and divide profits and losses. The contract must also outline the resources each entity will bring to the venture, including:
- Other assets
Some joint ventures involve two companies with different areas of expertise coming together to provide a new service or create a new product. Other joint ventures involve a company that wants to break into a foreign market forming a venture with another company that already has an established presence in that region.
Advantages of a Joint Venture
Some advantages of forming a joint venture include:
- Gain expertise and insights: Each party can build on the other's knowledge of their market and processes.
- Better resources: Parties can gain access to specialized technology and staff as well as capital and equipment for a project.
- It can be temporary: Depending on the parties' needs, the agreement can be formed as a temporary venture.
- Shared costs and risks: Should a project fail, the parties will share the costs.
- Flexibility: Parties can create a joint venture with a limited lifespan. Additionally, agreements can be created to cover just a fraction of what each party does, limiting commitment and business exposure when necessary.
- Selling potential: Many joint ventures end in sales from one party to another.
- Increased chance of success: When partnerships involve well-established brands or companies, the project's chances for success increase.
- Building networks: Even if a joint venture works toward one set goal, it's possible to create long-lasting relationships and networks.
Types of Joint Ventures
Two main types of joint ventures exist. Two or more companies can participate in either type of joint venture, and either type can affect one specific product or a full product or service line.
Personnel-Based Joint Venture
A personnel-based joint venture is a partnership that covers the people participating in the agreement and the experience these individuals bring to the project. Staff members for each participating company are placed to work on a project. Examples of this type of joint venture include architects from different firms working together to refurbish an outdated building or programmers from different companies working together to upgrade or design an app.
Equipment-Based Joint Venture
An equipment-based joint venture is a partnership that involves machinery or technology. For example, two furniture companies could form an equipment-based joint venture if one company does not have the correct manufacturing technology to produce a new furniture line and another company does not have designers to complete the project. The collaboration would allow the first company to develop its desired product without a large outlay of capital, while the second company gains a portion of the profits without taking on development costs.
How Does a Joint Venture Work?
If a joint venture operates based on an agreement between the existing companies and does not involve forming a new legal entity, it is called an unincorporated joint venture. A joint venture can also create a new and separate business entity. In the latter case, the new entity can be structured as:
- A corporation
- A limited liability company
- A partnership
Businesses and individuals create joint ventures for a variety of reasons , including:
- To combine expertise: If one business has a key patent, another has great marketing acumen, and another has a great team of designers, for example, these companies may come together to form a joint venture.
- To leverage resources: A joint venture entity may offer more resources or more industry clout to bolster the venture's success than either business would have on its own.
- To save money: Smaller companies may come together to share costs for advertising and marketing, perhaps for a trade publication or show. Likewise, companies involved in expensive endeavors such as mining for precious metals could form a joint venture to expand into a new area.
- To enter global markets: A business that wants to expand its distribution to a new country can partner with a local business from that location. Additionally, some countries put restrictions on overseas entities entering their market, so a joint venture with a local business can provide a much easier way to do business in that region.
Joint Venture Agreements
Theoretically, a joint venture could be arranged by a simple handshake, but most business entities that form a joint venture outline the venture's terms in a signed contract created with legal assistance.
Most joint venture agreements will include the following information:
- Parties involved in the agreement
- Management members and management structure
- Each party's percentage of ownership
- Bank account the joint venture uses
- Distributive share (or the percentage of loss or profit) each party is allocated
- Employers and/or independent contractors working on the joint venture
- List of resources
- How the parties will produce and retain financial statements and administrative records
- Which state laws apply to the joint venture
Taxation for Joint Ventures
Taxation will vary depending on the type of joint venture created. If the venture is an unincorporated joint venture, the entities who sign the joint venture agreement will need to account for any profits made when it comes to taxes.
The most common scenario for a joint venture is that the parties entering an agreement create a new entity. If the joint venture is created as its own separate business entity, the venture will pay its own income taxes based on its specific form of business, such as a partnership. A joint venture itself is not recognized by the IRS (Internal Revenue Service), so its business form helps the participants determine how to pay taxes.
The joint venture agreement may detail how profits and losses are taxed. However, if the agreement created is just a contractual relationship between the parties, then the agreement will need to specify how taxes are divided.
Examples of Joint Ventures
Examples of joint ventures between well-known companies can help shed light on the possibilities that joint ventures provide. Here are some examples:
- Sony and Ericsson formed a joint venture in the early 2000s to become a leader in mobile phones. Eventually, Sony acquired Ericsson.
- NBC Universal and News Corp formed a joint venture in 2007 to create Hulu, a video streaming application. Disney is now the majority owner, while NBC Universal (now owned by Comcast) is an equity stakeholder.
- Uber and Volvo formed a joint venture in 2016 with the goal of creating driverless cars.
A successful joint venture starts with an agreement that clearly details each party's role and responsibilities in the new entity, so it's important to work with an experienced contract lawyer to create a strong agreement.