Joint Venture

joint ventureJoint venture (JV) is a business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity.

A joint venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it. However, the venture is its own entity, separate and apart from the participants’ other business interests.

Although they are a partnership in the colloquial sense of the word, JVs can take on any legal structure. Corporations, partnerships, limited liability companies and other business entities can all be used to form a JV.

Regardless of the legal structure used for the JV, the most important document will be the JV agreement that sets out all of the partners’ rights and obligations. The objectives of the JV, the initial contributions of the partners, the day-to-day operations and the right to the profits (and responsibility for losses) of the JV are all set out in this document. It is important to draft it with care, to avoid litigation down the road.

A common use of JVs is to partner up with a local business to enter a foreign market. A company that wants to expand its distribution network to new countries can usefully enter into a JV agreement to supply products to a local business, thus benefiting from an already existing distribution network. Some countries also have restrictions on foreigners entering their market, making a JV with a local entity almost the only way into the country.

Although they are a partnership in the colloquial sense of the word, joint ventures can take on any legal structure. Corporations, partnerships, limited liability companies (LLCs) and other business entities can all be used to form a JV. Despite the fact that the purpose of JVs are typically for production or for research, they can also be formed for a continuing purpose.

Joint ventures can combine a large and smaller companies to take on one or several big and little projects or deals.

JV Agreement

Regardless of the legal structure used for the JV, the most important document will be the JV agreement that sets out all of the partners’ rights and obligations. The objectives of the JV, the initial contributions of the partners, the day-to-day operations, and the right to the profits and/or the responsibility for losses of the JV are all set out in this document. It is important to draft it with care, to avoid litigation down the road.

What a Joint Venture May Look Like

The key elements to 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 JV
  • The structure of the JV itself
  • Initial contributions and ownership split of each party
  • The kind of arrangements to be made once the deal is complete
  • How the JV is controlled and managed
  • How the JV will be staffed

Paying Taxes on a JV

When forming a JV, the best — and most common — thing the two parties can do is to set up a new entity. But because the JV itself isn’t recognized by the Internal Revenue Service (IRS), the business form between the two parties helps determine how taxes are paid. If the JV is a separate entity, it will pay taxes like any other business or corporation does. So if it operates as an LLC, the LLC will then pay taxes. The JV agreement will spell out how profits or losses are taxed. But if the agreement is merely a contractual relationship between the two parties, then their agreement will determine how the tax is divided up between them.

JVs vs. Partnerships and Consortiums

A JV is not a partnership. That term is reserved for a single business entity that is formed by 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” may be used to describe a joint venture. However, a consortium is a looser agreement between a bunch of different businesses, rather than creating a new one. A consortium of travel agencies can negotiate and give members special rates on hotels and airfares, but it does not create a whole new entity.

Using a JV to Enter Foreign Markets

A common use of JVs is to partner up with a local business to enter a foreign market. A company that wants to expand its distribution network to new countries can usefully enter into a JV agreement to supply products to a local business, thus benefiting from an already existing distribution network. Some countries also have restrictions on foreigners entering their market, making a JV with a local entity almost the only way into the country.

There are always things that corporations need to consider before executing a joint venture, especially in a foreign market. Several things may need to be researched and resolved before any activity takes place: Are there any political ramifications when moving into a foreign country? What are the tax implications of going into a specific market? What type and size of investment must be made? Are there any local laws that need to be considered?

Winding Up of a JV

Once the JV has reached its goal, it can be liquidated like any other business or sold. For example, in 2016, Microsoft Corporation sold its 50 percent stake in Caradigm, a JV it had created in 2011 with General Electric Company (GE) to integrate Microsoft’s Amalga enterprise healthcare data and intelligence system, along with a variety of technologies from GE Healthcare. Microsoft has now sold its stake to GE, effectively ending the JV. GE is now the sole owner of the company and is free to carry on the business as it pleases.

 


 

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