When two or more parties
enter into an agreement to combine their capabilities in order to complete a
certain project, this type of business arrangement is known as a joint venture agreement.
This includes anything from a brand-new venture involving new markets, to one
party venturing into the market space(s) of the other party.
Even though the joint venture
stands on its own and is distinct from other business interests of the parties.
The expenses, losses, and profits accrued as a result of the venture are the
property of each party solely.
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A joint venture (JV) can be
formed using any legal structure such as partnerships, limited liability
companies (LLCs), corporations, and any other type of proprietorship, however,
it is a common perception for it to viewed only in the sense of a partnership.
Companies that combine their
expertise by way of a joint venture are able to utilize these combined
resources to accomplish the venture's objective. Leveraging resources in this
manner is one of the primary motivations for forming joint ventures. A joint
venture collaboration between a company with a well-established manufacturing
process and one that has superior distribution channels might capture a large
segment of the market while offering a more superior product to the end user.
A joint venture agreement is
usually drawn up for short-term projects, but they can also be formed for a
longer-term objective. Joint ventures can, through the combination of large and
small operations take on multiple projects and deals simultaneously.
A joint venture can also
result in cost savings where both businesses in the joint venture can consolidate
their production at a lower per-unit rate than they would individually. This is
especially advantageous in instances when technological advancements and their implementation
can become too costly for the companies to achieve if pursued outside of the
joint venture.
Say your company wants to
expand its service or product offering to new countries, it can sign a joint
venture agreement to supply products to said country’s regional corporation and
take advantage of the already existent ecosystem. Companies that want to enter
foreign markets frequently employ joint ventures, in which they collaborate
with the regional market leader to do so. A joint venture with a local entity
is sometimes almost the only way to conduct business in some regions, this
especially true for those countries with policies preventing foreign entities
from entering their market.
The joint venture agreement
details each party's rights and responsibilities and is a crucial document in
this regard, this is regardless of the joint venture type or structure. It is
therefore essential that your joint venture agreement be meticulously written
to avoid unnecessary court battles at a later stage. The agreement clearly articulates
the various aspects of the joint venture: the goals, the venturer’s initial
investments, how the daily operations of the venture will be handled, accounting
for the profits and losses.
Establishing new proprietorship
is a route most commonly followed when entering into a joint venture agreement.
This, and due to the business type will in turn determine how the taxes are
paid. If the joint venture is set up as an LLC, its profits and losses will
reflect on the owner’s individual tax returns. The joint venture is a separate
legal entity and will pay taxes in accordance as a separate business.
The joint venture agreement
will detail if it is merely a contractual relationship. The agreement will
stipulate the taxation on the profits and losses and how they will be divided
hereto.
The term partnership is
reserved for the incorporation of an entity owned by two or more people. Joint
ventures however, bring together two or more distinct businesses into a new one.
Safe to say, the partnership agreement is not a joint venture agreement.
An association of two or more
companies known formally as a consortium, bears the similarities of a joint
venture although it is not one, in that, companies can form a consortium
without having legally incorporated a separate business entity. For instance, a
group of companies can work together to offer their customers better prices and
special rates without formalizing the process, whereas everybody continues to
operate their businesses independently and pursuant to their own objectives,
with each party being responsible for its risks, profits, losses, and
governance within the consortium.
During the lifespan of the
joint venture, the risks and benefits are shared among the joint venturers,
this allows each venturer access and use to the resources of the other
venturers, without the financial obligation that would be attached if they were
not involved in such a venture, this is one of the main advantages of a joint
venture. Once the venture is retired the parties hereto are able to resume
their identity and continue with their operations.
When a joint venture agreement
is in place, it will typically be accompanied by non-disclosure and exclusivity
agreements. These might prohibit participating companies from partaking in
certain activities outside of the venture during the course of the project.
When a joint venture reaches
the end of its lifespan, a definite plan detailing how the venture will be
dissolved in order to avoid lengthy discussions, costly legal battles, biased
practices, and the effects of the dissolution on customers; while taking into
account any potential financial loss, such a plan -in practice- is known as an
exit strategy. Exit strategies provides to the joint venturers certain
advantages especially in terms of conflict avoidance or resolution. The exit stagey
will stipulate the rights of the ventures regarding the selling of the new
business, operational spinoffs, and or employee ownership and retention.
Joint venture agreements are
only ideal when the mission and success of the venture is being equally
committed to by all parties hereto.
Joint ventures enable the
business entities involved to be able to enter into new markets at a relatively
low cost. Although this seems like the perfect situation, bear in mind that in
a joint venture each company contributes its own expertise, and the venture’s
costs are shared.
**Note: Also remember that a
joint venture for which a separate business entity has not been established may
expose the venturers to liabilities like those attributed to a partnership. And
that, even though the joint venturers share control, the work load and resources,
these are not always divided equally.
This article the joint venture agreement has been written for your benefit in understanding the importance behind this agreement, write and download more documents at the Business Own Corporation's - MIND Repository.
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joint
/dʒɔɪnt/
noun
noun: joint; plural noun: joints
1.
a place at which two or more components
are joined.
"The valve of a car is joined with a
seal to prevent unauthorized valve operation"
2.
The points of partition at which the body
of person or animal’s skeletal are fitted together.
"Her stiff joints make bending for
any reason quite difficult"
3.
INFORMAL
A specific place where people meeting for
drinks, or entertainment.
"the arcade joint"
adjective
adjective: joint
1.
An
activity or thing which is shared, held, or made by two or more people
together.
"a joint response was given by the
opposing teams"
o sharing in a position,
achievement, or activity.
"a joint winner"
o LAW
When two or more parties are viewed as
one - regarded together.
verb
verb: joint; 3rd person present: joints; past tense: jointed; past participle: jointed; gerund or present
participle: jointing
2.
Make something available or fasten with
joints.
o Weld together the
joints of the chain.
venture
/ˈvɛn(t)ʃə/
noun
noun: venture; plural noun: ventures
1.
An
undertaking involving certain risk.
"pioneering ventures into territories
where no one has been before"
o Entering into a certain
type of business venture.
" the two spectacle manufactures
have entered into a joint venture"
verb
verb: venture; ventures; ventured; venturing
1.
Embarking on a certain course of action
that involves risk.
"she ventured into deep
an uncharted waters"
o expose to the risk of
loss.
"agents use other people's money to take risks, they do not venture with their own capital"
