Joint Venture (JV)
What is a joint venture (JV)?
A joint venture is a business entity created by two or more companies entering into an agreement to combine their resources with the aim of achieving a specific business goal. Whether you create an online store or have large, multiple store fronts, forming a joint venture may be a beneficial opportunity for your business. The resources that each party brings to the joint venture vary, as does the length of the agreement itself. However, each participant is responsible for covering related costs and losses and will share in the potential profits.
How do joint ventures work?
Any type of registered business, whether it be a corporation, limited liability company (LLC) or partnership, can form a joint venture. When a business decides that a joint venture is the most strategic way to accomplish its goals, they can find a partner by networking and doing their own research within their niche. For example, a small shoe company may want to increase its distribution capacity and ask other business owners for the names of large distribution companies that allow them to do so.
Once a partner has been identified, a detailed contract outlining the agreement should be signed by both parties. While this isn’t legally required, it’s the best way to ensure that each party understands the terms of the agreement and their individual roles and responsibilities. And because the IRS does not recognize JVs as separate entities, both parties may decide to create one for their venture for tax purposes. Therefore, the contract should say if a new entity will be formed or if the project will simply be a joint collaboration between two businesses. If the latter is the case, the contract should outline how taxes will be paid.
If a new entity is not formed, both parties remain independent from the other except for the work they are collaborating on. The venture is temporary, with both parties sharing liabilities, resources, losses and profits of the project until it is completed.
Primary advantages of forming a joint venture
Joint ventures give companies a sense of entrepreneurship and the opportunity to pool their resources, enabling both parties to collaborate and work together towards a mutually beneficial goal. Some of the primary advantages of forming joint ventures include:
Saving money: By working together, companies can save on costs by leveraging their scale of production. A larger scale of production means lower costs per unit than what each party would pay separately. This is particularly relevant for technology, which is costly to acquire. Other cost savings may happen by sharing labor costs and/or advertising.
Leveraging and strengthening resources: Each company brings different specialities and backgrounds to the joint venture. Combining resources will complement each parties’ unique skill sets and consequently boost overall progress and the likelihood of achieving the objective. For example, one partner may have a proven manufacturing process, while the other may offer excellent channels of distribution. Or one party may have legal expertise in a specific niche while the other has a larger budget to finance the research and casework needed. In some cases one side may have a more extensive digital network, including a business website with large traffic numbers and high conversion potential.
Entering foreign markets: A common reason to form a joint venture is so that companies can enter a foreign market, whether it’s in a different country or just a different city. For instance, a company that is looking to introduce its products into a new country can enter into a joint venture agreement with a local company. They can then benefit from the local business’s established distribution network and market presence. As some countries have certain restrictions on foreign businesses entering their market, a joint venture with a local business is an acceptable (if not only) way to do business in that particular country.
Saving time: Businesses often need to comply with strict regulations or receive certain licenses that can take time to obtain. By forming a JV with another company that has already done so, it eliminates the need for the business to fulfill these requirements itself. Instead, they can start doing business quicker by taking advantage of the fact that their partner already has the necessary permits or licenses.
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Risks of forming a joint venture
While there are many advantages of forming joint ventures, there are some drawbacks to be aware of as well. Some of these include:
Opening your business up to more liability: By working with another business, you may expose your own to further legal risks and potential losses. Each business essentially takes on the liability of the other, which can pose financial and legal risks if not done properly.
Difficulty working with other businesses: Clashing processes, company cultures and lack of communication may result in inefficiencies. This can be particularly prevalent when working with foreign businesses. To prevent this, efficient research into potential partners is necessary to ensure the companies can work well together. In addition, regular communication is also vital, preferably face-to-face or via Zoom. Relying on emails and online chats alone can lead to lack of communication and a breakdown in trust.
A failure of the joint venture: If unforeseen disagreements arise, it’s possible the venture may not work out. In fact, it’s estimated that 60%-70% of joint ventures fail, so it’s important to plan ahead and have open communication to ensure a smooth workflow. It’s also important to preface the start of the project by emphasizing the need for a flexible relationship. Regularly review your workflow with your partner and how you can improve so you can make any necessary adjustments throughout the process.
Most common types of joint ventures
There are three most common types of joint ventures, including:
Separate joint venture: This option entails establishing a separate joint venture business, like a new company, to take care of a specific contract. In this type of joint venture, each of the partners own respective shares in the new company and agree upon how it should be managed.
Limited company: This option entails one business collaborating with another business in a specific and limited manner. For example, a small business owner with a new product may want to sell and distribute it through a larger company's already established network. The two partners come up with a legally binding contract that outlines the conditions and terms for how this joint venture limited company will work. In a limited company, the shareholders are responsible for any company debts, not the directors.
Business partnerships: In this option, two business partners agree to share joint responsibility for a company when starting a business. Unless legally stated otherwise, each partner is mutually responsible for all business profits and losses as well as for paying taxes on their share of profits. Partners also share responsibility for all liabilities and debts associated with the business.
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FAQ (Frequently asked questions)
What is an example of a Joint Venture?
There are many. Starbucks located in Barnes and Noble book stores is one well-known Joint Venture example. Another one is Samsung and Spotify, where the Spotify app comes already downloaded on new Samsung devices.