A joint venture is a cooperative arrangement between two or more business entities, often for the purpose of starting a new business activity. Each entity contributes assets to the joint venture and agrees on how to divide up income and expenses.
The creation of a joint venture is a matter of facts specific to each case. Although there is no statutory definition of a joint venture, courts in several states such as New York have recognized the following are the elements of this type of association:
- An agreement (written or oral) between the parties manifesting their intent to associate as joint venturers.
- Mutual contributions by the parties to the joint venture.
- Some degree of joint control over the single enterprise or project.
- A mechanism or provision for the sharing of profits or losses.
- A joint venture is not a partnership or a corporation, although some legal aspects of a joint venture (such as income tax treatment) may be ruled by partnership laws.
There are four main reasons why companies form joint ventures:
- Leverage Resources: A joint venture can take advantage of the combined resources of both companies to achieve the goal of the venture. One company might have a well-established manufacturing process, while the other company might have superior distribution channels.
- Cost Savings: By using economies of scale, both companies in the JV can leverage their production at a lower per-unit cost than they would separately. This is particularly appropriate with technology advances that are costly to implement. Other cost savings as a result of a JV can include sharing advertising or labor costs.
- Combined Expertise: Two companies or parties forming a joint venture might each have unique backgrounds, skillsets, and expertise. When combined through a JV, each company can benefit from the other's expertise and talent within their company. Regardless of the legal structure used for the JV, the most important document will be the JV agreement that sets out all of the partners' rights and obligations. The objectives of the JV, the initial contributions of the partners, the day-to-day operations, and the right to the profits, and the responsibility for losses of the JV are all set out in this document. It is important to draft it with care, to avoid litigation down the road.
- Enter Foreign Markets: Another common use of JVs is to partner up with a local business to enter a foreign market. A company that wants to expand its distribution network to new countries can usefully enter into a JV agreement to supply products to a local business, thus benefiting from an already existing distribution network. Some countries also have restrictions on foreigners entering their market, making a JV with a local entity almost the only way to do business in the country.
Examples of Joint Ventures
- Google’s Verily Life Sciences – GlaxoSmithKline Example: Google’s parent company Alphabet and GlaxoSmithKline, announced that they would associate themselves with a joint venture in the ratio of 45%-55% to produce bioelectronic medicines. Both of these companies got committed for 7 years and Euro 540 million.
- Volvo Uber Example: Volvo and Uber have announced that they would form a joint venture to produce self-driving cars. The ratio would be 50%-50%. As per the agreement, they are making a $300 million investment for this JV.
- Bank’s Digital Currency Example: Even banks have formed a joint venture to create something new. Four world-class banks – Deutsche Bank, UBS, BNY Melon, and Santander, came together in a JV to produce a new form of digital cash. The purpose of this JV is to create an alternative to the bitcoin using the same blockchain technology.
- Starbucks and Tata Global Beverages: Perhaps the best example of a Joint venture is between Starbucks Corporation and Tata Global Beverages. Starbucks Corporation, a chain store of the USA serving coffee and such other drinks, pre-packaged foods, and evening drinks. It is famous for its coffee throughout the globe. Tata Global Beverages is the world’s second-largest producer of tea throughout the world and one of the largest producers of coffee in the world. Tata Global Beverages leveraged the goodwill that Starbucks holds for the coffee serving retail chains and captured the market of India by forming a Joint venture with Starbucks. Both firms came together and created a private limited company named as Tata Starbucks limited in 2012. It is 50:50 owned by both the firms, and presently they have around 140-retail outlets throughout the Indian Territory. Here, the basic model is that one has expertise in tea manufacturing and tea production, while the other has a brand image in the market of serving coffee at the market retail level. This combination has seen good success in the market.
Joint Venture Alternatives
Although joint ventures may seem similar to other types of business arrangements — and sometimes the term "joint venture" is used interchangeably with terms like "partnership," joint ventures are unique. With this in mind, it's important to understand how joint ventures differ from other business arrangements:
Joint Ventures Vs. Partnerships
A general partnership is a specific type of business structure where two or more people govern a company together. The partners share in the profits and losses of the business. Unlike a joint venture, a partnership is typically designed to last indefinitely. Joint ventures are usually temporary and initiated for a specific project, though they have more permanence than a simple licensing or distribution agreement, particularly when larger companies are involved. However, there are some similarities between joint ventures and partnerships, the main one being liability. “A joint venture is similar to a partnership, but courts typically distinguish between them by finding that joint ventures are usually for one single project or transaction, whereas partnerships typically are longer-lived,” explains Professor Michael Molitor of Cooley Law School at Western Michigan University. “But in any event, whether it is a partnership or a joint venture, the partners or joint venturers will be personally liable for the business’s debts.”
Joint Ventures Vs. Franchises
In a franchise, the parent company grants a license to run a business using the parent company’s name, brand and operating methods — some examples include McDonald’s, Subway, UPS and other low-cost franchises. Usually, a franchise is a long-term arrangement, and the franchisee pays an initial fee to the franchisor for the right to operate the business. Additionally, the franchisor exerts a certain degree of control over the franchisee’s business decisions. In a joint venture, neither party is in “control,” and both contribute toward a shared goal.
Joint Ventures Vs. Licensing
Licensing is similar to franchising because the licensor permits the licensee to use the company’s name and logo. The licensee manufactures products and pays a royalty fee to the licensor for the rights to use the brand. With joint ventures, on the other hand, both parties work together to reach a common goal and assume equal liability should something go wrong with the project.
Joint Ventures Vs. Mergers or Acquisitions
In a merger, two companies combine to become a single business entity. Sometimes, two companies of similar size come together, like Exxon-Mobil. Alternatively, a large company could acquire the assets of a smaller company. The purpose of a merger is usually to capture new market share, and an acquisition is often used to buy out a smaller competitor. In contrast, the purpose of a joint venture is to achieve a common goal, and each party maintains its independence.
Joint Ventures Vs. Qualified Joint Ventures
A qualified joint venture is a partnership that’s run by spouses, each of whom participates in managing the business. For tax purposes, the IRS allows each spouse to file a Schedule C for their portion of the business income and losses, in the same way that sole proprietors do.
Dissolution of Joint Ventures
The JV is not a permanent structure. It can be dissolved when:
- Aims of original venture met
- Aims of original venture not met
- Either or both parties develop new goals
- Either or both parties no longer agree with joint venture aims
- Time agreed for joint venture has expired
- Legal or financial issues
- Evolving market conditions mean that joint venture is no longer appropriate or relevant
- One party acquires the other
Advantages and Disadvantages of Joint Ventures
- Familiar, universally recognized structure with a clear corporate identity and established corporate governance regime.
- Can own its own assets, sue and be sued and enter into contracts in its own right.
- Liability is limited to the amount each party contributes by way of share capital.
- Comprehensive legislative framework supports the contractual arrangements between the JV parties.
- Tailored share rights can reflect the size, contributions and motivations of the JV parties.
- Permits employee share incentive schemes.
- Realizing an interest by way of a sale of shares will not disrupt the legal ownership of the underlying business.
- Potential for double taxation – tax will be applied at the JV company level and possibly again on the JV parties directly when they take profits out of the JV company or realize their investment in it. This lack of tax transparency is, however, not always a disadvantage in practice and the tax position will depend on the nature of the JV parties themselves (e.g., where the JV parties are also limited companies, dividends received should be tax free).
- Comprehensive legislative framework can restrict flexibility.
- Reporting and compliance requirements bring increased administration and public disclosure of information.
- Limited liability may be undermined in practice by guarantees and security required to support external financing and third party contracts.
Risks of Joint Ventures
There are several benefits to forming a joint venture, as detailed above, however, joint ventures can also create challenges. Forming a venture with another business can be complex in terms of the time and effort required to build the right business relationship. A new JV can cause the following problems:
- The new set of partners may have different objectives for the joint venture, and pursuing separate objectives may threaten the success of the venture. For this reason, it is important when forming a joint venture arrangement that the objectives of the venture be clearly defined and communicated to everyone involved at the outset.
- Cultural mismatches and different management styles between the two firms engaged in the JV can lead to poor integration and cooperation, again threatening the success of the enterprise. It’s best to pursue JV opportunities with companies that have a corporate culture similar to that of your own company.
- Imbalance in the levels of expertise, investment, or assets brought into the venture by the different parties may lead to problems between the two parties. One party or the other may begin to feel that it is contributing the lion’s share of resources to the project and resent a 50/50 distribution of profits. This can be avoided by frank discussions and clear communication during the formation of the joint venture, so that each party clearly understands – and readily accepts – its role in the JV.
- ↑ Definition - What Does Joint Venture Mean? the balance
- ↑ Elements of a Joint Venture Cornell Law School
- ↑ Why Do Companies form joint ventures? Investopedia
- ↑ Examples of Joint Ventures WallStreetMojo
- ↑ Joint Venture Alternatives Nerd Wallet
- ↑ Dissolution of Joint Ventures Wikipedia
- ↑ Advantages and Disadvantages of Joint Ventures Burges Salmon
- ↑ What are the Risks of Joint Ventures? CFI