What is a Joint Venture (JV)?

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Definition:

A joint venture is an agreement between two or more people or companies to combine their resources and expertise in order to accomplish a specific business goal.

🤔 Understanding joint ventures

Sometimes, an individual or business recognizes an opportunity but lacks the resources or expertise to take full advantage of it. When that happens, two or more parties can come together to create a joint venture. They agree to combine their resources and skills to embark on a specific enterprise. Each participant benefits from the venture’s profits and takes on its losses, but remains a separate entity. Joint ventures can take a variety of forms, such as corporations, partnerships, or limited liability companies.

Example

Imagine US-based company XYZ sells household storage containers and organization tools. It recognizes an opportunity to expand into Mexico, but lacks experience operating in that market and cash reserves to fund the expansion.

To take advantage of the opportunity, XYZ partners with company ABC, a Mexican home goods producer. They form a joint venture, with XYZ providing intellectual property and manufacturing expertise and ABC offering financial resources and knowledge of the Mexican market. XYZ and ABC remain separate companies, but each has responsibility for the joint venture and can share in its profits.

Takeaway

A joint venture is like a group project in school…

Each partner brings different knowledge and skills to the table. One might be good at research, while the other excels at writing. Members of the group are all responsible for the project’s outcome and receive a joint grade. But outside of this one assignment, the students are still individuals who work for their own grades.

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What is a joint venture?

A joint venture is a legal entity that two or more people, businesses, or organizations form to work together toward a common goal. For example, two firms that recognize a market opportunity can form a joint venture to exploit it. Unlike an acquisition, each business remains separate from the other, but they fund and run the joint venture together. If the joint venture succeeds, all parties benefit and share the revenue; if not, all share in the losses. They don’t necessarily have to contribute equally, but each participant brings something to the table.

Joint ventures remain separate from the groups that form them. Two businesses that create a joint venture remain independent and can even compete in other markets. Their partnership does not necessarily involve the transfer of other rights and responsibilities between the companies.

What are some examples of successful joint ventures?

Businesses often use joint ventures to take advantage of market opportunities when they lack specific technologies, expertise, or networks. For example, a business may want to form a joint venture with a local company when it expands into a different country.

One example of this is the collaboration between Starbucks and the Indian company Tata Global Beverages. The joint venture, formed in 2012, gave Starbucks greater access to coffee and tea from India and helped it launch stores in the country. Within four years, Starbucks had opened 83 stores in India.

Businesses in the same industry and market can also form joint ventures to pool resources. In 2017, rival car makers Mazda and Toyota announced plans to partner to build a $1.6B factory in Alabama. When the plant opens in 2021, the companies will own and operate it jointly. The announcement came at a time when Toyota’s US sales had dropped and Mazda reportedly lacked the funds and technology to build its own electric cars.

What is a joint venture agreement?

A joint venture agreement is a legal contract that outlines the terms of a joint venture, including each party’s rights and responsibilities. For example, a joint venture agreement may cover:

  • The name, members, and purpose of the joint venture
  • Where the joint venture plans to do business
  • What each member of the joint venture will contribute and receive, including how the joint venture will distribute profits
  • How the partners will manage the joint venture
  • How the partners will assign liability for the joint venture’s debts or legal judgments against it

How does a joint venture work?

How a joint venture operates depends on how the businesses involved organize it. Some joint ventures are simple handshake agreements or contracts that outline how two companies will work together. Others involve the creation of an entirely separate business entity that the partner companies jointly own.

Some common features of joint ventures include:

  • The parties involved share in the venture’s profits and losses.
  • Each party has some level of control over the venture’s property and assets.
  • The parties involved sign a contract or joint venture agreement that outlines the goals of the venture and how (and how long) it will operate.

If the parties create a separate entity, the joint venture operates as its own company. Members of the joint venture can contribute capital and provide guidance and staffing, but otherwise it works like any newly founded business.

What are the advantages and disadvantages of a joint venture?

Pros:

The biggest benefit of a joint venture is that it lets two organizations pool knowledge, technology, and resources, even if they are usually competitors. For example, a manufacturing business could start a joint venture with a distributor. The manufacturer provides production expertise, while the distributor is skilled at moving products to market.

Joint ventures can also help businesses combine financial resources. This is helpful when the companies involved can’t afford expensive equipment, specialized technology, or labor or advertising expenses on their own.

Joint ventures also spread out risk. Each member of the enterprise shares in the potential risks and rewards of the enterprise. If it fails, each company stands to lose less than if it had started the venture alone.

In a joint venture, both businesses may be able to take advantage of economies of scale, producing goods at a lower cost per unit than they would if they worked separately.

Cons:

One of the downsides of a joint venture is that it requires input from multiple parties. Sometimes, that can lead to culture clash. If the companies involved in the venture have different management styles or organizational cultures, it can be difficult for them to work together effectively. Dealing with these differences can take a lot of time and reduce the benefits of the partnership.

Joint ventures may also reduce flexibility for their members. For example, a joint venture contract may specify precise terms for how one member can leave the venture. It may also place restrictions on each party’s activities to ensure it doesn’t cannibalize the venture’s business.

Joint ventures with competitors can also lead to concerns about rivals gaining access to information they shouldn’t. For example, if two car manufacturers open a factory together, one might accidentally get its hands on the blueprints for the other’s new vehicle models.

How is a joint venture taxed?

How a joint venture is taxed depends on its structure and the text of the joint venture agreement. Typically, the agreement spells out how the businesses involved plan to handle the taxes.

If the joint venture is an independent entity, which is common for large businesses forming joint ventures, the venture is taxed as its own entity. That means it must file its own tax return. The upside of this is that it simplifies reporting for the parties involved. The disadvantage is that the joint venture bears the administrative costs of dealing with tax preparation and filing.

If the joint venture is less formal, then it is typically treated as a partnership, which is a “pass-through” entity for tax purposes. That means the partnership does not need to prepare and file taxes. Instead, each partner reports a portion of the profits or losses from the venture.

What is the difference between a joint venture, partnership, and consortium?

Joint ventures and partnerships are similar in that they both involve two or more parties cooperating to accomplish a common goal. Typically, businesses engage in joint ventures, while individuals form partnerships. That said, some joint ventures operate as partnerships.

Some of the difference between a joint venture and a partnership can include:

  • Joint ventures are typically temporary (5-7 years)and end when the venture accomplishes a specific goal, while partnerships are more long-term.
  • Members of a partnership work as a single entity. Companies involved in a joint venture retain their own identities.
  • Partnerships are usually profit-driven. Joint ventures need not be driven by profit. For example, they can form with another goal, such as researching and developing a new technology.

A consortium is like a less formal joint venture. Companies that join a consortium can share resources and work together toward a goal that benefits all members, but they do not become joint owners of another, independent entity. Each member of a consortium remains free to operate as it wishes, the only restrictions being those outlined in the consortium agreement.

Organizations may choose to form consortia to pool resources, reduce costs, develop new technologies, or set standards for an industry as a whole. For example, the Big Ten Academic Alliance is an academic consortium made up of 14 universities that participate in the Big Ten athletic conference. Members share library resources, distance-learning courses, professional development programs, and more.

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