To accomplish a specific business goal, a business entity or partner may need access to capital, assets, skills, or other resources they do not already possess to succeed. When this is the case, a joint venture can provide a mutually beneficial means for two or more parties to work together temporarily to accomplish that shared goal. Understanding the elements and characteristics of a joint venture and how it differs from other types of business arrangements can help determine when this type of agreement may be appropriate.
In part 2 of this article, we’ll discuss the steps of how to structure a joint venture and different structures that may be considered for this type of business arrangement.
Elements and Characteristics of a Joint Venture
The term “joint venture” can apply to number of widely varying arrangements, which may be structured differently and involve differing contributions by the parties undertaking the venture based on their specific circumstances and goals. However, in general, a joint venture shares the following:
- It is formed through a written or oral agreement between the parties stating their intention to work together as joint venturers.
- The joint venture is temporary and ends when the goal is accomplished. However, the venture can be either short- or long-term.
- Parties involved remain legally independent except for the work they pursue together as part of the joint venture.
- All parties involved make contributions of resources to the venture.
- Parties share some degree of joint control over the project.
- The agreement includes provisions for sharing profits or losses; parties share ownership of assets and liabilities.
Note that the contributions of the parties involved do not need to be equal. A joint venture is frequently employed when one party has what the other lacks—for example, a party with a novel product might seek out a joint venture partner with an established distribution channel. One common use of joint ventures is to gain an entrance into foreign markets. A foreign entity forms a joint venture with a domestic entity already present in their desired market to gain the advantage of their existing commercial relationships and established legal standing, while the domestic entity stands to profit from introducing new products, technologies, or business practices provided by their foreign partner.
While a party to a joint venture might be referred to as a “partner,” a joint venture is not a partnership, legally speaking. A general partnership is a business structure in which two or more people run a company together, an arrangement that is typically meant to last indefinitely. Likewise, a joint venture is distinct from a merger or acquisition because the companies involved remain independent, rather than combining to form a single entity or one taking on the assets of the other.
Possible Benefits and Risks of a Joint Venture
Through a joint venture, it can be possible for an organization to gain access to capital, markets, resources, talent, and/or technology they wouldn’t otherwise be able to leverage to more easily accomplish a business goal that would have been difficult to achieve on their own. They may also be able to take advantage of the fact that their chosen partner has already met business license and regulatory requirements in new or foreign markets to avoid having to spend time and money meeting those requirements separately.
Of course, joint ventures are not without risk. No business venture is guaranteed to succeed, and the effort could result in disputes as well as lost time, effort, and resources. Organizations may also open themselves to additional liability and other legal risks, depending on how the joint venture is structured. The risk of friction with other parties in a joint venture increases if the purpose, structure, and agreement are not well defined and detailed enough to give each participant a clear picture of their rights and responsibilities. When setting up a joint venture, it is highly advisable to have knowledgeable legal counsel as well as professional financial advice to ensure that all legal, financial, and operational considerations are taken into account.
Expert Business Law Guidance
If you’re contemplating a joint venture, the choices you make at the outset can help mold a profitable working relationship with another business or expose you to liability, misunderstandings, and unnecessary risk. The expert legal team at Bridge Law LLP is experienced in structuring both domestic and cross-border joint ventures for clarity and tax efficiency to give your venture a strong foundation to pursue success. To learn more, contact us here to schedule a consultation.