A joint venture, or a JV, is an agreement between several parties established to accomplish a specific task together by compounding their resources. It could be a new project or other activity that is a point of interest for all parties. In such an arrangement each participant is accountable for losses, costs, and profits coming from the project. Nevertheless, other business interests of each party are separated from the task as the venture is an independent entity.
Joint venture basics
Joint ventures can have any possible legal structures: partnerships, corporations, limited liability companies, and others. Typically, JVs are formed temporarily for production or research purposes, yet they can be built on a continuous basis.
Mainly, joint ventures are created for the following reasons:
- Combined resources – putting their resources together allows the parties to achieve their goal. Each company’s specialized resources complement one another. For example, one party has exceptional distribution channels, and the other exceeds in manufacturing.
- Joint expertise – by combining expertise and unique skillsets companies benefit from each other in joint ventures.
- Cost savings – usually economies of scale are implemented with expensive technology advances. A JV can also save costs by allowing the firms to share labor or advertising costs.
The crucial aspect of joint ventures is the JV agreement. It is vitally important because it serves to establish the rights and obligations of partners. The JV agreement contains the goals of the joint venture, the contributions made by partners, the operation order, the obligations for losses, and the right for profits. A well-drafted JV agreement is to help prevent litigation in the future.
It is common to use joint ventures to enter a foreign market by partnering with a local business there. A foreign company that wants to expand its distribution to a new market can form a JV with a local business, supply products to them, and benefit from the existence of a distribution network a foreign company did not have to build. In certain countries setting a joint venture with a local company is the only way of entering that market because foreigners are restricted to do business in some states.
Most often when two parties create a JV they set up a new entity. The taxes then are paid depending on the legal form of the JV. In case it is a separate entity, the taxes are paid just like by any other business. The JV agreement that defines the way profits and losses are taxed also determines how the taxes are divided between the partners.
Pros and cons of joint ventures
Primarily, it is important to note the main advantage of joint ventures: they allow each party to use the collective resources of other parties without the need to spend excessive funds. At the same time, the companies have the opportunity to keep their identity and go on with regular business operations once the task of a JV is finished. Moreover, JVs allow sharing the risks.
On the other hand, while the task is in process, JV contracts can limit the partners’ outside activities and by doing so affect other business contracts. Besides, even though control, work activities, use of resources are to be shared within a joint venture, the division between companies is sometimes uneven.
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