Joint Venture (JV): What Is It and Why Do Companies Form One?

A Joint venture (JV) is a company formed by two or more people, often distinguished by shared ownership, rewards and risks, and governance. In general, businesses enter into joint ventures for one of four reasons: to obtain access to a new market, especially an emerging one; to increase scale efficiency by integrating assets and operations; to share risk for significant expenditures or projects; or to gain access to talents and capabilities.

Although most joint ventures are incorporated, others, including those in the oil and gas sector, are "unincorporated" joint ventures that resemble corporations. Regarding individuals, a temporary partnership formed by two or more people to carry out a specific project may also be referred to as a joint venture. The parties involved are referred to as "coventurers."

Each member of a JV is accountable for the venture's gains, losses, and expenses. The endeavour, however, exists independently of the partners' existing commercial ventures. Many Indian businesses entered into joint ventures with numerous international businesses that were either geographically dispersed or more technologically advanced. The main joint ventures in India were in the banking, insurance, and commercial vehicle industries.

How to Set Up a Joint Venture

The agreement that details all of the rights and duties of each venture member will be the most crucial document, regardless of the JV form. The JV agreement specifies the goals, the partners' initial financial commitments, the day-to-day activities, the right to the profits, and the liability for losses. To prevent future lawsuits, it must be carefully drafted.

A joint venture may be formed in any of the following ways:

• When a local firm wants to extend its operation into new areas, it can purchase some stake in the existing foreign corporation. Alternatively, a foreign company enters a new market by acquiring an interest in a local company.
• However, a new corporation might be established for a new enterprise that the coventurers want to launch.
• The government occasionally forms partnerships with businesses to benefit from their knowledge and experience.

Characteristics of Joint Venture

1. Creates Synergy

Two or more parties participate in a joint venture to benefit from one another's strengths. One firm could have a unique quality that another company might not have. Similarly, the other firm has a benefit that another company cannot match. These two businesses might form a joint venture to create synergies between them for a larger cause. These businesses can take use economies of scale to lower costs.

2. No Separate Laws

Regarding joint ventures, there isn't a distinct governing body that oversees their operations. Companies are monitored by the Ministry of Corporate Affairs in collaboration with the Registrar of Companies once they have adopted a corporate structure. Apart from that, there is no specific legislation that regulates joint ventures.

3. Risk and Rewards Can be Shared

In a typical joint venture agreement among two or more entities, whether from the same country or other nations, there are numerous diversifications in lifestyle, technologies, topographical benefits and drawbacks, target audience, and many other obstacles to overcome. Consequently, the parties may decide how to allocate the risks and rewards related to the joint venture's planned activity, as specified in the written agreement.

Understanding Joint Venture

Although a JV can be formed using any legal structure, including corporations, partnerships, limited liability companies (LLCs), and other business entities, it is a partnership in common sense. Even though a JV is often formed for manufacturing or research, one can also be created for an ongoing purpose. JVs can bring together big and small businesses to work on a single project or several of them.

The four main reasons why businesses create JVs are listed below.

1. To Leverage Resources

The combined capabilities of the two companies in a JV can be used to achieve the partnership's goal. One business may have a well-established production process, whereas the other may have a greater network infrastructure.

2. To Reduce Costs

The two firms in the Joint Venture can boost output at a lower cost per unit thanks to economies of scale than they could do on their own. This is particularly important for technical improvements that cost a lot of money. By sharing labour costs or advertising expenditures, a JV may also save costs.

3. To Combine Expertise

Two companies or parties with different histories, domains of expertise, or sets of skills may come together to create a joint venture (JV). When two businesses collaborate through a JV, one can benefit from the skills of the other.

4. To Enter Foreign Markets

Joint Ventures (JVs) are regularly utilized to work with a local business to enter a new market abroad. To sustain and grow in new countries, a firm can enter into a JV agreement to manage resources for a local business. By doing so, it can benefit from an existing distribution network. A JV with a local firm is effectively the only method of doing business there because some marketplaces forbid foreigners from accessing them.

Advantages of Joint Venture

1. Access to New Markets and Distribution Networks

Creating a joint venture between two businesses opens up a sizable market with the potential to grow and succeed. For example, when a firm from the United States of America creates a joint venture with a business from India, the joint venture allows the American business access to the large Indian market, providing several payment choices and a wide range of alternatives. At the same time, the Indian firm benefits from having access to the geographically dispersed and lucrative American markets, where the product's quality remains unaffected. Global markets for unique Indian items are substantial.

2. Innovation

Joint ventures provide an additional benefit for advancing the technology of the products and services. Innovative platforms may be used for marketing, and technological advancements enable the production of high-quality goods at low cost. International businesses can develop fresh concepts and technologies to cut costs and deliver superior products.

3. Brand Name

The Joint Venture may have its unique brand name. This aids in providing the brand with a distinctive appearance and awareness. The well-known brand name of one business in the industry may be leveraged by another organization to obtain a competitive advantage over other market makers when two parties form a joint venture. For example, a prominent European brand joining forces with an Indian company will be advantageous due to the brand's global recognition.

4. Access to Technology

Technology is a compelling motive for businesses to form a joint venture. One company's use of advanced technology to make items of the highest calibre results in significant time, energy, and resource savings. Only when businesses form joint ventures and achieve a competitive edge is it possible to use the same technology without investing significant sums of money again in its creation.

5. Economies of Scale

Joint ventures assist businesses in expanding despite their restricted resources. One organization's strength can benefit the other. This gives both firms a competitive edge to produce economies of scale.

6. Low Cost of Production

When two or more businesses collaborate, the primary goal is to offer the items at the most competitive price, and this is possible if production costs can be lowered or service costs can be controlled. The only goal of a true joint venture is to offer its customers the greatest goods and services.

Disadvantages of Joint Venture

1. Limited Outside Opportunities

Joint venture agreements can include limitations on the member companies' external activity while the development is in progress. Participants in joint ventures may be obligated to sign non-compete or confidentiality agreements, affecting their current relationships with vendors or other business contacts.

These agreements are designed to lessen the possibility of conflict of interest between member firms and third parties and maintain the joint venture's viability. Even if contractual restrictions are only in effect while the joint venture is ongoing, having them in place might interfere with one of the partners' primary business operations.

2. Increased Liability

Most businesses that engage in joint ventures are organized as partnerships or limited liability corporations and run with an awareness of the potential risks involved with their chosen business structures.

Unless a distinct corporate organization is established to conduct the joint venture, the contract under which a joint venture is constituted exposes each participant company to the liabilities inherent in a partnership. This implies that regardless of how involved each firm was in the acts that led to the claim, they are all equally liable for claims against the joint venture.

3. Uneven Division of Work and Resources

While the joint venture's participating firms share ownership over the project, they are not necessarily evenly split up regarding work tasks and resource consumption.

In many joint ventures, one participating firm is frequently anticipated or obliged to provide technology, access to a distribution network, or manufacturing facilities during the venture. At the same time, the other partner company is just required to supply the necessary staff to finish the project.

A larger load on one company results in a difference in the amount of time, effort, and money devoted to the joint venture, but it may not increase the overburdened partner's profit share. Instead, an uneven distribution of work and resources might cause disputes between the participating companies and diminish the joint venture's success rate.

There are several drawbacks to creating a joint venture, even though it can be a successful economic strategy for some organizations with shared goals. Companies thinking about forming a joint venture should weigh the benefits of cost reductions from sharing resources against the inherent drawbacks of this kind of business organization.

4. Culture Clash

Due to a clash of cultures, procedures, and techniques when two organizations collaborate, many joint ventures fail. It can be challenging for joint ventures to mesh due to divergent management styles and aptitudes opening in a new window, clashing HR procedures, and disparate workplace cultures.

5. Privacy and Sharing Information

A joint venture invariably entails some information exchange, which may result in you losing ownership of your intellectual property. Ensure non-disclosure agreements are in place to prevent trade secrets or other sensitive firm information from becoming public.

6. Unequal Commitment

A joint enterprise should ideally be a one-for-all, all-for-one arrangement. An uneven joint venture may result from one of the partners' lack of commitment.

Types of Joint Venture

1. Horizontal Joint Venture

Businesses that offer identical items and are intense competitors are involved in this type of joint endeavour. To create a good that can be sold to both their clients and the consumers of the competing firm at the same time, they collaborate in a joint venture. This kind of joint venture is extremely difficult to manage and usually leads to disputes since relationships between the parties in the same business line have been established. Also, the participants in this kind of joint venture behave as opportunists since they work in related businesses.

The parties to the joint venture split the profits earned by this partnership in line with their contract or equally.

Example - Aeromexico Cargo, Air France Cargo, Delta Air Logistics, and Korean Air Cargo formed the exclusive partnership of air cargo firms known as SkyTeam Cargo in 2000. The major goals of the collaboration were to divide earnings and reduce staffing and gasoline costs for businesses. They got into the partnership because they had many aeroplanes with vacant seats. By operating on a wider scale, they benefitted their firms and clients, who received more value for less money.

Even now, the SkyTeam Cargo Alliance is still in operation, and there are currently 11 firms engaged. Several partners have joined the partnership throughout the years, while others have left for various reasons.

2. Function-Based Joint Venture

This type of joint venture brings two or more commercial entities together under an agreement for collective gain or mutually on the premise of synergy, which is operational competence in one or more areas that, when combined, may assist the business entities in performing successfully and efficiently. Organizations should carefully assess if they can do the same objective as a team before engaging in a joint venture arrangement.

For instance, if one business has a fleet of vehicles while another has spare space for storage, the two can cooperate in inventory management, share costs for maintaining separate fleets or storage facilities, and utilize each other's resources when not in use.

3. Project-Based Joint Venture

In this type of joint venture, a company enters into a partnership to perform a certain job; the task might be whatever, such as completing a particular project or a particular service that will be supplied jointly. Businesses frequently form these partnerships for a specific purpose, and they end after the intended objective is finished. To put it simply, these are the sorts of joint ventures that are restricted by a certain objective, for a specific project, or by time.

Example - A joint venture between Axon Limited, the company that helped build housing properties, and Trump Industries, the market leader in housing project marketing and advertising, was recently established for "Living Rise," a development site for Axon Limited. This can illustrate a project-based enterprise focused on a single activity and will end after the goal has been met.

4. Vertical Joint Venture

This kind of joint venture involves a transaction between the suppliers and the purchasers. It is typically referred to as bilateral trade and is not a financially viable choice. In these joint ventures, the supply side parties often make the most money, while the purchaser side parties only get a limited number of games. To create economies of scale and reduce the cost per unit of goods, several processes in manufacturing a single item are merged in this partnership. This streamlines the entire operation and reduces the price per unit of goods. This joint venture typically has a better success rate and positive connections between the buyer and supplier. Both aid businesses by enabling them to provide customers with high-quality goods and services at competitive prices.

An actual example would be a certain type of computer chip employed in manufacturing specific patented technology products. This is true even when expenses can be reduced. For instance, Marks & Spencer uses sweatshops in south-east Asian nations because it is economical.

5. Contractual Joint Venture

This kind of joint venture can be employed when a company does not require a separate legal body or when it is not practical to establish one. The corporation prefers this agreement when a JV needs to be established for a brief period, there is a restricted activity, or when a temporary duty is involved.

6. Equity-Based Joint Venture

When there is an agreement between two or more parties, the legal entity address independent is created. The parties involved in this independently constituted business have agreed to contribute resources or cash as part of the corporate identity's assets or capital.

Examples- Hindustan Aeronautics Ltd, Vistara, Mahindra Renault Ltd., ICIC Lombard, and ICIC prudential life insurance company Ltd.

Does a Joint Venture Need an Exit Strategy?

A JV terminates after the project is over since it is created to satisfy a certain project's objectives. An exit strategy is crucial because it lays out a clear path for dissolving the joint venture, avoiding protracted negotiations, expensive legal fights, unethical business practices, detrimental customer effects, and accounting for potential financial loss. In most JVs, an exit plan might take one of three main shapes: employee ownership, a spinoff of operations, or a sale of the new firm. Each departure plan comes with a unique set of benefits for JV partners and possibilities for dispute.

Why Implement an Exit Strategy?

A joint venture can have many advantages, but unless a good exit strategy is in place, none of the participants will fully benefit after the venture is dissolved. A joint venture's duration is determined by the project's end date because it is created to meet a certain project's objectives.

Yet, as the project progresses, business demands, product portfolios, and served audiences change. These changes can cause conflict among joint venture partners after the project has concluded. Joint ventures could fail and possibly require court intervention if a participating company is left to structure the allocation of additional assets or market reach on its own.

Termination Conditions in the Partnership Agreement

Partners can safeguard themselves against disagreement with other participating companies by putting termination provisions in the partnership agreement that creates a joint venture. To terminate the commercial connection, a partner may be required to offer three- or six-month notice, and the remaining partner may be permitted to buy out the departing partner.

When the joint venture is established, each termination requirement should be discussed and accepted by each participating business or individual. A partner buyout ends the majority of joint ventures, but the inclusion of explicit termination clauses in the joint venture agreement can control how the deal is handled for each partner.

Why Would a Firm Enter Into a Joint Venture (JV)?

There are various reasons to temporarily combine forces with another business, such as those related to expansion, the creation of new goods, and the penetration of untapped areas (particularly overseas).

JVs are a popular way to combine two unrelated organisations' workforce, commercial acumen, and industry knowledge. This kind of collaboration allows each participating business to scale its resources to finish a particular job or objective while lowering overall costs and distributing the associated risks and obligations.

Paying Taxes on a Joint Venture

Establishing a new company is the most frequent action the two parties can take when creating a JV. The JV itself is not recognized by the Internal Revenue Service (IRS); therefore, how taxes are paid depends on the business structure between the two parties. The JV will pay taxes like any other company or firm since it is a distinct entity. Yet, if it decides to function as an LLC, its earnings and losses would, like any other LLC, be reported on the owners' tax returns.

The terms of taxation will be outlined in the JV agreement. It will decide how the tax is split if the agreement is just a contractual arrangement between the parties.

JVs vs Partnerships and Consortiums

JVs are not partnerships. That phrase only applies to a single company created by two or more persons. JVs combine two or more separate businesses into one that could or might not be a partnership.

There are parallels between a JV and the term "consortium," which is occasionally used to describe them. A consortium, as opposed to a JV, is a less formal arrangement. For instance, a group of travel agencies may bargain for discounted rates on lodging and travel, but this does not constitute the formation of a new company. The agencies continue to operate freely in their respective businesses. Under a JV, they would each own a portion of the newly founded company and share responsibility for its governance, risks, profits, and losses.

Examples of Joint Venture

After the JV reaches its objective, it can be sold or liquidated like any other company. For instance, Microsoft Corporation sold its 50% ownership in Caradigm, a joint venture formed in 2011 with General Electric Company, in 2016.

The JV was created to combine certain GE Healthcare technologies with Microsoft's Amalga enterprise healthcare data and analytics system. Now that Microsoft has sold its interest to GE, the JV is practically over. As it is now the only owner of the company, GE is free to run it in any way it sees fit.

Another well-known example of a JV between two big businesses is Sony Ericsson. In this instance, they collaborated in the early 2000s to dominate the mobile phone market. The joint venture finally changed ownership to Sony alone after several years of operation as a JV.

Key Takeaways

• A Joint Venture (JV) is an arrangement between two or more businesses to combine their resources to accomplish a certain goal.
• Although they are a partnership in the traditional sense of the word, they are free to take any legal shape.
• Joint ventures (JVs) are regularly employed to work with a local business to join a foreign market.

Conclusion

A joint venture between two businesses might allow each member to expand into a new market at a comparatively low cost. In truth, it makes perfect sense: Each firm brings its skills, yet the venture's costs are shared among them. However, it's only perfect if the businesses have a common goal and are equally dedicated to accomplishing the joint venture.