Considering entering a joint venture? Curious about how a joint venture works? Here’s what you need to know.
Have you considered joining forces with another company, organisation or person on a specific project? You may want to consider entering a joint venture to access new markets and expand your resources.
What is a Joint Venture?
A joint venture is a business arrangement where two or more parties, typically companies, come together under a joint venture agreement to undertake a specific project or pursue a specific goal while remaining independent entities. Joint ventures are typically limited in expected duration. The agreement governs the relationship between the parties, sets out their objectives and establishes who is liable for what.
In a joint venture, the parties involved pool their resources, expertise, and capital to achieve a common objective. Examples of common objectives include accessing new markets, sharing risks, combining complementary strengths, or leverage each other’s capabilities.
Types of Joint Ventures
A joint venture is an often misunderstood legal concept. It is a term that is used to refer to a number of different types of structures. Let’s explore.
Incorporated Joint Venture
An incorporated joint venture involves the establishment of a company between the joint venture partners (often each a shareholder) for the sole purpose of undertaking a specific project or business activity.
Benefits of an incorporated joint venture include:
• Legal entity: it can hold and sell its own assets, sue and be sued, and contractually bind itself.
• Separation of entities: it separates the new business from any of your other businesses, which may be advantageous depending on the circumstances.
• Limited Liability: it provides limited liability protection for the partners as each party’s liability is limited to the extent of the amount they have agreed to pay on the shares of the incorporated joint venture.
This method allows the parties to clearly set out the split of profit generated from the venture per the shares they each hold.
Unincorporated Joint Venture
An unincorporated joint venture is a contractual agreement between the parties which heavily relies on the terms of the contract, rather than the creation of a distinct entity such as a company.
The joint venture agreement will set out how liability and profit are shared, as well as how resources are allocated. For example, one party may contribute financial support while the other party contributes the physical labour and equipment required for the specific purpose or project.
The advantages of an incorporated joint venture include:
• Independence: parties involved retain their legal identify and autonomy. They collaborate for a specific purpose but do not merge their operations or assets permanently.
• Flexibility: unincorporated joint ventures are flexible in terms of structure and management as the parties can tailor the agreement to suit their specific needs and objectives without formalities and regulations associated with forming a separate legal entity.
• Tax implications: depending on the jurisdiction and the nature of the joint venture, parties may be subject to different tax treatments. They may be taxed individually based on their share of profits or losses, rather than a single entity.
Whether the joint venture is incorporated or not, each party contributes their own assets, knowledge and other resources, and they share in the risks, responsibilities, profits and losses associated with the venture pursuant to the terms of their agreement.
Why enter a joint venture?
Companies will enter a joint venture for a variety of reasons depending on the strategic goals, resources, and market conditions. Common reasons include:
• Access to new markets: Joint ventures can provide the parties access to areas, regions and market segments where one or more of the parties lack a presence or expertise.
• Risk sharing: the parties can mitigate individual risk exposure by sharing the risks associated with entering new markets, launching new products or undertaking large scale projects.
• Complementary strengths: parties can leverage each other’s strengths, such as technology, distribution networks, intellectual property, or market knowledge.
• Cost sharing: by combining resources, the parties can share the costs associated with the purpose or project.
• Regulatory requirements: in some cases, regulatory restrictions or market conditions may necessitate forming a joint venture to comply with local laws or gain approval for certain business activities, especially in foreign markets. More commonly is the advantage of entering a joint venture with a party that has the required licenses.
How NoBorders Commercial Law can help you
Overall, entering joint ventures can offer companies a strategic pathway to achieve business objectives, whether it’s about expanding into new markets, sharing risks and costs, leveraging strengths or complying with regulatory requirements.
However, successful joint ventures require careful planning, clear communication, and alignment of interests among the parties involved. Clear boundaries must be drafted, and all possible outcomes must be considered.
At NB Commercial Law we can assist you in developing a successful joint venture from start to finish to achieve your goals.