What Is a Joint Venture?

A joint venture is a business agreement between two or multiple parties to pool their resources in order to accomplish a task. The task may be a business activity or a new project. The resources might be time, money, staff, or intellectual property. Each party agrees to divide up the costs, losses, and profits of the joint venture and create a contract to that division.

What Is a Joint Venture?

It is a business agreement between two or multiple parties to pool their resources in order to accomplish a task. The task may be a business activity or a new project. The resources might be time, money, staff, or intellectual property.

Each party agrees to divide up the costs, losses, and profits of the joint venture and create a contract to that division.

A joint venture can take any kind of legal structure, such as an LLC or corporation. While a joint venture is usually temporary in nature, successful joint ventures may continue. Here are the three main reasons behind forming a joint venture:

To Leverage Resources

All parties combine their resources to achieve the joint venture’s outcome. The resources may be technology, expertise, or even distribution processes.

To Save Costs

By combining forces, every party involved in a joint venture can buy materials or services required for production at a lower cost. Instead of Party A negotiating based on 5,000 units and Party B negotiating based on 6,000 units, they are jointly negotiating based on 11,000 units.

To Combine Expertise

Companies from different industries may combine to their expertise. Each of their unique skillsets and backgrounds may lend something to the venture and benefit each company individually.

To Enter a Foreign Market

This is one of the most beneficial reasons to form a joint venture. A foreign company may provide capital, technology, and skillset, while a local company provides a distribution network and brand trust. A joint venture will also legally allow entry to countries that restrict foreign companies from entering their market.

Joint Venture Agreement

The joint venture agreement is the most important document at the heart of the collaboration. It lays out all of the obligations and rights of each party and how the costs and profits will be split. A thorough joint venture agreement will allow the collaboration to go smoothly and avoid costly litigation.

What Information Should Be Contained in a Joint Venture Agreement?

The following list contains the basic elements that should be covered in a joint venture agreement:

- The number of parties in the joint venture
- The scope of operations, including technology, product, and geography
- The initial contributions of each party and the amounts of each contribution
- The ongoing contributions of each party and the amounts of each contribution
- The joint venture’s structure
- The ownership of the joint venture
- The arrangements once the objective is achieved
- How the joint venture will be managed and controlled
- The staffing of the joint venture

Joint Ventures and Taxes

When two parties form a joint venture, they often set up a new entity to assist with taxes. When the joint venture operates as a separate entity, it will pay taxes based on its profits, just like any other business.

What Is The Difference Between a Joint Venture and a Partnership or Consortium?

A partnership is a type of an entity formed between two or multiple people, where a joint venture can be two or multiple companies working together.

People sometimes use the word consortium to refer to a joint venture, but a consortium is an informal agreement. This may be used to combine bargaining power without combining to form a new entity. A joint venture, on the other hand, creates a new business where each entity has a formal agreement on their responsibilities.

Examples of a Joint Venture

Big brand names create joint ventures all the time to reach a shared objective. Often once the objective is met, the parties will liquidate the entity, or one party will sell its share. Some well-known examples of joint ventures are:

Microsoft Corporation and General Electric Company created a joint venture called Caradigm. The goal was to combine their healthcare technology. At the conclusion of the joint venture, Microsoft sold its 50% share to General Electric Company to give them sole ownership.
Sony Ericsson is a famous joint venture which found great success. It was a joint venture between Sony and Ericsson and is today a well-known communications and entertainment brand. Today, it is solely owned by Sony.

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