Joint Ventures

What is a Joint Venture and How Does It Help Your Business?

7 mins read

This article provides the reader with an understanding of what a joint venture is and how it could benefit your business.

Joint Ventures (JV) are common relationships in the business world, which are defined as a commercial enterprise undertaken jointly by two or more business entities which retain their distinct identities. A JV is generally set up by a contract that outlines the resources, financials, assets, or knowledge each entity will bring to the venture. The contract will often outline how the venture is managed, and how profit and losses are divided.

It is important to note that a JV is not a partnership, even though they share similar characteristics. The major difference is that a JV is limited to one specific venture, while a partnership is not.

When business entities enter a venture together, it is generally done to accomplish a specific goal, typically for projects, production, or research. The interesting part is that they can be formed for a continuous purpose to save money for any length of time. A JV may last for a short period of time or for an extended period without a specific end date. Businesses may enter into a JV for a variety of reasons like combining expertise, leveraging resources, saving money, or entering global markets.

In some cases, a JV agreement can form a new legal business entity that can be structured as a Corporation, Limited Liability Company, or a Partnership.

When business entities enter into a JV contract, it generally operates under its own distinct identity and keeps its own separate legal status maintained with experienced legal assistance. The JV agreement often outlines the purpose of the arrangement, who is involved, what each party is responsible for, and how the venture is controlled, managed, and staffed.

The contract will further define how profits and losses are distributed, what percentage of the ownership is allocated, how the financial statements and records are produced and retained, and the conditions in which the contract is terminated.

There are various types of JV’s, which are:

    • Project-Based: where the JV is done with the motive of completing a specific task
    • Functional Based: where the JV is done with the motive of getting mutual benefit on synergies
    • Vertical Based: where the JV takes place between buyers and the suppliers
    • Horizontal Based: where the JV takes place between companies that share the same line of business

The style of JV that is entered depends on the circumstances of each case. It doesn’t matter which type of JV is opted for as it acts as a steppingstone in which companies can analyze how well they work together and open networks for future collaboration.

There are numerous advantages in participating in a JV business relationship, the most noticeable is sharing resources without an excessive amount of capital expenditure. Plus, the sharing of resources allows the companies to grow with less risk.

Some other advantages include:

    • Further expertise and insights, building on shared knowledge of the market and processes
    • Access to technology, resources, staff, and/or equipment for a project
    • With no time length requirement, short-Term (Temporary) venture JV agreements can be formed, depending on the project’s needs, and then discontinued once the intended results are achieved
    • If the projects fail, the parties involved will share those costs instead of being held fully liable
    • When JV’s involve well-established companies, the project’s chance of success increases
    • A JV makes it possible to expand business networks

Some other advantages include:

    • Further expertise and insights, building on shared knowledge of the market and processes
    • Access to technology, resources, staff, and/or equipment for a project
    • With no time length requirement, short-Term (Temporary) venture JV agreements can be formed, depending on the project’s needs, and then discontinued once the intended results are achieved
    • If the projects fail, the parties involved will share those costs instead of being held fully liable
    • When JV’s involve well-established companies, the project’s chance of success increases
    • A JV makes it possible to expand business networks

With any business relationship, there are always going to be some risks and potential disadvantages. The most common disadvantage is that a JV may limit a company’s opportunities to interact with other businesses, especially if the contract agreement contains a non-competition or non-disclosure clause or limits non-specific vendors.

Some other disadvantages include:

    • Limiting the innovation process of your company to continue producing valuable products
    • The businesses who are participating in the JV are equally responsible for legal claims
    • Participants may contribute resources unevenly by design, depending on the terms and conditions
    • The quality of your company’s products or services may decline if you choose a company that does not align with your company’s common values and standards

If you are considering setting up a joint venture between your business and another entity, be sure that you and the other participants involved review the agreement carefully, and ensure the arrangement is well documented. It is also important to consider how the venture might work, especially in the terms of how it is controlled, managed, staffed, and how the sharing of resources, profit, and losses are allocated. It is strongly recommended paying outside counsel to vet the agreement as well.

Despite these risks opening up a joint venture can be one of the most advantageous decisions you make for your business. With careful study and an honest relationship, it offers more opportunities for the growth and success of your business than just you could imagine.

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