What is Joint Venture
Joint Venture can be described as a business arrangement, wherein two or more independent firms come together to form a legally independent undertaking, for a stipulated period, to fulfill a specific purpose such as accomplishing a task, activity or project. In other words, it is a temporary partnership, established for a definite purpose, which may or may not uses a specific firm name
Salient Features:
- Agreement: Two or more firms come to an agreement, to undertake a business, for a definite purpose and are bound by it.
- Joint Control: There exist a joint control of the co-venturers over business assets, operations, administration and even the venture.
- Pooling of resources and expertise: Firms pool their resources like capital, manpower, technical know-how, and expertise, which helps in large-scale production.
- Sharing of profit and loss: The co-ventures agree to share the profits and losses of the business in an agreed ratio. The computation of the profit and loss is usually done at the end of the venture, however, when it continues for the long duration, the profit and loss is calculated annually.
- Access to advanced technology: By entering into joint venture firms get access to various techniques of production, marketing and doing business, which decreases the overall cost and also improves quality.
- Dissolution: Once the term or purpose of the joint venture is complete, the agreement comes to an end, and the accounts of the co-venturers, are settled, as and when it is dissolved.
The co-venturers are free to carry on their own business, unless otherwise provided in the joint venture agreement, during the life of the venture.
Objectives of Joint Venture
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- To enter foreign market and even new or emerging market.
- To reduce the risk factor for heavy investment.
- To make optimum utilization of resources.
- To gain economies of scale.
- To achieve synergy.
Joint ventures are primarily formed for construction of dams and roads, film production, buying and selling of goods etc.
The type of joint venture is based on the various factors like, the purpose for which it is formed, number of firms involved and the term for which it is formed.
Why Form a Joint Venture?
Businesses form joint ventures for several reasons:
- To combine resources. A bigger entity may have more clout in an industry or more resources to ensure the success of a venture.
- To combine expertise. In technical businesses, one company might have expertise in one part of a venture while the second company might have expertise in another part. For example, Company A might be good at creating software, while Company B has experience creating the hardware that’s needed for a venture.
- To save money. Two companies might consider a joint venture to save money on advertising, maybe at a trade show or in a trade publication.
ECB Frequently asked questions (FAQ)
The term joint venture is most commonly used to describe an arrangement where two (or more) businesses create a separate joint venture business. But any kind of collaboration with another company could be described as a joint venture.
A common and flexible solution is to form a separate limited company for the joint venture. Among other advantages, this allows you to insulate yourself from liability should the joint venture become insolvent, because your liability as a shareholder is limited to the amount you have agreed to pay for your shares. However, this is not always the best solution.
If you will be transferring significant assets into the joint venture, forming a separate company can have unwanted tax consequences. An alternative can be to form a partnership or a limited liability partnership. An appropriate partnership structure may minimize potential tax liabilities.
If you do not require management involvement in the joint venture, it may be best to use contractual arrangements rather than to create a separate joint venture entity. For example, an inventor could simply license their intellectual property rights in their invention to another business to exploit.
A common and flexible solution is to form a separate limited company for the joint venture. Among other advantages, this allows you to insulate yourself from liability should the joint venture become insolvent, because your liability as a shareholder is limited to the amount you have agreed to pay for your shares. However, this is not always the best solution.
If you will be transferring significant assets into the joint venture, forming a separate company can have unwanted tax consequences. An alternative can be to form a partnership or a limited liability partnership. An appropriate partnership structure may minimize potential tax liabilities.
If you do not require management involvement in the joint venture, it may be best to use contractual arrangements rather than to create a separate joint venture entity. For example, an inventor could simply license their intellectual property rights in their invention to another business to exploit.
Issues to be considered include:
- the structure of the joint venture
- what the joint venture’s objectives are
- how it will be managed
- how it will be financed and what will happen if further funding is needed in the future
- what assets, including intellectual property, you will each contribute
- who will work for the new venture
- what information will be reported to you
- how profits will be shared
- who will own any intellectual property created by the joint venture
- how any disputes between the joint venture partners will be handled
- what exit routes will be available if you want to realise your investment in the joint venture
Due diligence will include checking your joint venture partner’s legal status, that they have the right to enter the joint venture, that they own assets they will be putting into the joint venture and so on.
More broadly, due diligence aims to ensure any agreements you enter into are valid and to minimize risk of future legal problems.
Due diligence will include checking your joint venture partner’s legal status, that they have the right to enter the joint venture, that they own assets they will be putting into the joint venture and so on.
More broadly, due diligence aims to ensure any agreements (see 10) you enter into are valid and to minimise risk of future legal problems.
