We all know that joining forces in the fantasy world of superheroes is a great way to beat their biggest enemy. But when it comes to the business industry, when two companies work together, their business partnership brings up a lot on the table, aiming to get on top of the economy.
However, forming a joint venture is not easy as it sounds. You should be aware of several things, paperwork to obtain, undergoing a confidentiality agreement, and much more.
By reading this article, we aim to give you some information on how you could start a joint venture and what are the possible benefits of it. So keep reading until the end if you are curious to know more.
What is a joint venture?
A joint venture involves an agreement between two or more businesses or individuals with a common mindset in achieving a particular goal. It sounds like a business partnership since it talks about joining forces, but the truth is, they are far different from each other.
Unlike business partnerships, joint ventures often disperse after the goal is achieved. Notably, a joint venture can be seen as a business entity with a contractual relationship while it is still growing.
Indeed, joint ventureship makes any business bigger and reaches more networks and projects. In fact, most of the time, joint ventures are hired for government contracting programs. Joint ventures examples are Boeing and Lockheed Martin, Leidos and Lockheed Martin IT sector, L3 Technologies, and Harris Corporation, and many more.
How does a joint venture work?
A joint venture works by signing an agreement, specifically a partnership agreement. In this agreement, a company and its business partner collaborate their resources and expertise and convert it to their advantage in meeting a common goal and expanding their businesses.
One of the goals of joint ventures is to target new markets, provide the demand for skills, or offer better and raw products. But here’s the thing, the concept of joint ventures is tricky. While there is an ongoing joint venture project, the business entity may remain independent.
Depending on their exceptions in interactions, a joint venture may be considered legally independent, but they still have to share liabilities and opportunities.
As mentioned above, joint ventures may separate right after their joint venture project is accomplished. But, in reality, joint ventures may fail when one of the parties involved is not doing a great benefit to another, making the business partnership always temporary.
How is a joint venture created?
The first step in creating a joint venture is to find a potential partner. Tons of large and small business can work with you, but it is highly suggested that you pick the one that can perform a specific role.
A good example when looking for a business partner is when you have a wide range of products but have trouble selling them. As a result, you can seek a potential partner that can put in distribution channels where you can make your goods available for purchase.
Another example of scouting a joint venture partner is when you have all the pieces of machinery while your joint venture partner can bring in the skilled personnel to operate it.
A joint venture needs thorough collaborative work to achieve a specific goal. So, when two companies do a joint venture, they may need to find a joint venture partner that is competent enough to fulfill the role.
There are various types of a joint venture that you may choose from when planning a joint venture:
Project-Based Joint Venture
Under this joint venture, you and your potential partner come into a joint venture to accomplish a specific task. Your collaboration is exclusive only for a particular purpose like it ceases to exist once the job is complete. It is bound by time, in other words, a specific project.
Functional Based Joint Venture
Companies join forces under this joint venture agreement to operate more effectively and efficiently and achieve a mutual advantage based on synergy in terms of functional competence in particular areas. The functional-based joint venture focuses on performing better is more together than doing it separately and more effectively.
Vertical Joint Venture
Transactions occur between buyers and suppliers in a vertical joint venture. While buyers achieve limited gains, suppliers capture maximum gains since various stages of an industry chain are integrated to create more economies of scale.
The benefits of the joint venture businesses are the quality products and services to customers at reasonable prices. It deepens the relationship between the suppliers and buyers.
Horizontal Joint Venture
When a transaction happens between companies in the same industry, it is called a horizontal joint venture. As the alliance is between partners in the same industry, they might sell the products from the joint venture to their customers, but this frequently leads to disagreements.
Such joint ventures allow both partners to benefit from participating in the same industry equally.
When both parties have to work in a limited way, they are undergoing limited co-operation. It is when you agree to collaborate and sign a contract of the business’s conditions.
Separate joint venture business
A separate joint venture can work as a separate legal entity. This means that you can form a business, whether it is a corporation or a limited liability company but can still as a separate legal entity.
The joint venture under this agreement can have a flexible option, whereas the ownership between the business entity can be split. However, the partners must first agree on how they would manage it before splitting everything.
A limited company or co-operation may not be suitable for some cases. That is why you can just form a business partnership instead of having that type of joint venture. A business partnership does not need to undergo a separate legal entity or a strategic alliance. All that will require is a partnership agreement and the necessary documents your local or state government requires.
With all the said types of joint ventures, there are lots of advantages and disadvantages to that. But to gain a much safer joint venture company, it is better to have a legal entity. Although a legal entity costs more, it can guarantee safety because parties involved have to hold certain accounts. Additionally, the business working together will also pay taxes. Also, without any legal protection, unwanted problems may occur whenever there are disputes between the two parties.
Forming a joint venture agreement
The right business structure of a joint venture depends on the joint venture partnership agreement. That is why when creating a document for a joint venture agreement, the following must be indicated:
a.) the purpose of the joint venture
b.) the joint venture format
c.) cost and profit distributions
d.) responsibility of each party
e.) overall business structure
f.) lifespan of the joint venture
g.) tax obligations
Tax obligations for corporations within the joint venture fall into a flat income tax rate. Meanwhile, the LLCs and unincorporated tax ventures have their taxation under their individual parties.
Additionally, there are laws applied to all joint ventures. One of them is having an employer identification number to share or outsource the employees to small business owners. Alongside that, labor law shall strictly be followed. So, ensure you fully indicate all the crucial information on your agreement. If you are experiencing problems creating a joint venture agreement, law firms can help in such situations.
Does a joint venture have to be 50-50?
Joint ventures do not necessarily have to be a 50-50 profit share. Of course, profit sharing will depend on the business structure and agreement between the two parties.
The confidentiality agreement in a joint venture dictates how many financial resources, obligations, risks, and profits both parties will take. That is why essential things should be dictated and written in a document when forming a joint venture.
More often, the company that contributes more resources, risk, and expertise gains more profit than the other. In some joint venture, the parent company or the more prominent company in the partnership agreement will only oversee the whole operation.
At the same time, they provide permits, licensing, and even business strategy for their joint venture but will still require a 50-50 gain profit. That is why when forming a joint venture, make sure you clear things up and identify whether the amount of effort dictates the proportions of the joint venture.
What documents are needed for a joint venture?
Joint venture agreement are the documents needed for a joint venture. It specifically contains the following:
- The first document needed in a joint venture agreement is a written agreement called a letter of intent. It is a memorandum of understanding to show the involved parties’ intention. Also, it becomes the basis of the professions of the businesses involved in the joint venture.
- In definitive agreements, these are all the clauses that need to be satisfied by the partnership. The conditions and terms are stated here regarding risks and business profits distribution agreement. This document is the basis of a qualified joint venture.
- Other agreements like intellectual property and business transfer are governed here. This document clearly states the progress and the rights of intellectual property. Confidentiality agreements are also necessary to protect data and knowledge from each other’s businesses.
These documents will help the joint venture in resolving disputes faster.
What are the four benefits of joint venture business?
The four benefits of making a joint venture for the small business owner are:
- It will be a massive start for small businesses to have a wide array of capital. Even skills and networks are considered valuable to them.
- Since you’re working directly in a joint venture business, it can reduce competition that might result in a more significant business income.
- Also, the management team for your company will have additional time to focus on what your company prioritizes. It makes it easier than running the whole company alone, let alone leading a law firm.
- Being part of a joint venture agreement will significantly reduce the operating time of every company authorized to run the business.
What is a joint venture, and what are its advantages and disadvantages?
The following are the joint venture pros and cons:
- In a joint venture, your product or service can be widely distributed to new distribution channels.
- Also, in a joint venture, you can have an additional workforce in your utility since you now have another party’s employee.
- In addition, a joint venture reduces the risk of achieving goals since you can reach more goals without spending too much.
- Further, a successful joint venture allows you to cope with technological innovations and new management teams.
- When you sign a joint venture agreement, permission and consent should be obtained from other partnerships. It reduces your income and flexibility as a business.
- In a joint venture, there might also have a poor integration of expertise that will lead to party conflicts.
- In a joint venture, the adjustments conducted by various management can hinder the company’s growth from being successful.
- Being part of a joint venture does not guarantee a financially secure business. It might harm the management involved, leading to breaking the joint venture agreement.