What is a joint venture (JV)?
A joint venture (JV) is a business agreement in which two or more parties agree to pool their resources to accomplish a specific task. This task can be a new project or any other commercial activity.
In a joint venture (JV), each participant is responsible for the profits, losses and associated costs. However, the business is its own entity, distinct from the other business interests of the participants.
Operation of a joint venture (JV)
Joint ventures, although a partnership in the ordinary sense of the term, can take any legal structure. Companies, partnerships, limited liability companies (LLC) and other business entities can all be used to form a joint venture. Despite the fact that the purpose of joint ventures is typically for production or research, they can also be formed for an ongoing purpose. Joint ventures can combine large and small businesses to support one or more large or small projects and agreements.
Regardless of the legal structure used for the joint venture, the most important document will be the joint venture agreement which defines all the rights and obligations of the partners. The objectives of the JV, initial partner contributions, daily operations and the right to profit and / or liability for losses from the JV are all defined in this document. It is important to write it carefully, to avoid any litigation along the way.
[Important: JVs aren’t recognized by the IRS, where the JV agreement will determine how taxes are paid.]
Pay taxes on a joint venture (JV)
When forming a joint venture, the most common thing that both parties can do is create a new entity. But because the JV itself is not recognized by the Internal Revenue Service (IRS), the business form between the two parties helps determine how taxes are paid. If the joint venture is a separate entity, it will pay taxes like any other business or corporation. So if it functions as an LLC, the LLC will then pay taxes.
The JV agreement will explain how profits or losses are taxed. But if the agreement is simply a contractual relationship between the two parties, their agreement will determine how the tax is distributed between them.
Use of a joint venture (JV) to enter foreign markets
A common use of JVs is to partner with a local business to enter a foreign market. A company wishing to extend its distribution network to new countries can usefully conclude a joint venture agreement to supply products to a local company, thereby benefiting from an already existing distribution network. Some countries also impose restrictions on the entry of foreigners into their market, making a joint venture with a local entity almost the only way to enter the country.
Key points to remember
- A joint venture is a business agreement in which two or more parties agree to pool their resources to accomplish a specific task.
- They are a partnership in the current sense of the term but can have any legal structure.
- A common use of JVs is to partner with a local business to enter a foreign market.
Joint Venture (JV) vs Partnerships and Consortium
A joint venture (JV) is not a partnership. This term is reserved for a single commercial entity made up of two or more people. Joint ventures join two or more different entities into a new one, which may or may not be a partnership.
The term “consortium” can be used to describe a joint venture. However, a consortium is a more informal agreement between a group of different companies, rather than creating a new one. A consortium of travel agencies can negotiate and give members special rates on hotels and air tickets, but it does not create a whole new entity.
Example of a joint venture
Once the joint venture (JV) has reached its goal, it can be liquidated like any other business or sold. For example, in 2020, Microsoft Corporation (NASDAQ: MSFT) sold its 50% interest in Caradigm, a joint venture it had created in 2020 with General Electric Company (NYSE: GE) to integrate the data and data system. Microsoft’s Amalga enterprise health intelligence, as well as a variety of GE Healthcare technologies. Microsoft has now sold its stake in GE, ending the JV. GE is now the sole owner of the company and is free to continue its activities as it pleases.
Sony Ericsson is another famous example of JV between two big companies. In this case, they joined forces in the early 2000s with the aim of being a world leader in mobile phones. After several years of operation as a JV, the company finally became the exclusive property of Sony.
Requirements for joint ventures
Key elements of a joint venture may include (but are not limited to):
- The number of parties involved
- The scope in which the JV will operate (geography, product, technology)
- What and how much each party will contribute to the joint venture
- The structure of the JV itself
- Initial contributions and sharing of ownership of each party
- The type of arrangements to be made once the agreement is reached
- How the JV is controlled and managed
- How the JV will be staffed