A joint venture is a cooperative arrangement between two or more business entities, often for the purpose of starting a new business activity. Each entity contributes assets to the joint venture and agrees on how to divide up income and expenses.
If you are thinking of setting up a joint venture between your business and another entity, it's important to consider how it might work, especially in terms of management and taxation.
What Is a Joint Venture?
Each entity in the joint venture, which could be individuals, groups of individuals, companies, or corporations, keeps its separate legal status. A joint venture may be set up by a contract that outlines the resources, such as money, properties, and other assets, each entity will bring to the venture. The contract also establishes how the venture will be managed and how control of it—and profits and losses from it—will be divided.
A joint venture might involve two companies with different areas of expertise working together to create a new product or provide a new service. Or a company looking to break into a new geographical market might form a joint venture with a company that is based in or has an established presence in the country or region. For example, BMW Group and Brilliance China Automotive Holdings Ltd. formed a joint venture called BMW Brilliance Automotive Ltd. to produce and sell BMW cars in China.
- Acronym: JV
A joint venture may result in the creation of a new, separate business entity or it may operate based solely on an agreement between the existing companies, without the formation of a new legal entity. The latter is known as an unincorporated joint venture.
How Does a Joint Venture Work?
If the JV results in the formation of a new entity, it may be structured as a corporation, limited liability company, or partnership. If the joint venture is a corporation, for example, and the two founding businesses want equal control over it, they would typically structure the JV so each founding company has an equal number of shares of the corporation's stock as well as equal management responsibilities and representation on the board of directors.
A joint venture may last a long time or exist only until a short-term goal is reached.
Businesses create joint ventures for many different reasons, including the following:
- To combine resources: The JV entity may have more clout in an industry or more resources to ensure the success of the venture than either company on its own.
- To combine expertise: For technology businesses, for example, one company might have a great team of designers, another might own a key patent, and a third might excel at marketing.
- To save money: Two small companies might consider a joint venture to save money on marketing and advertising, maybe at a trade show or in a trade publication. Additionally, two companies involved in mining for precious metals or drilling for fossil fuels—both of which are expensive propositions—might form a JV to begin mining or drilling in a particular area.
A qualified joint venture (QJV) is a type of federal income tax arrangement for spouses who run a business that is set up as a partnership. The married couple file a joint return that is less complicated than it would be if their business were treated as a partnership for federal tax purposes.
The Joint Venture Agreement
If all parties completely trust one another, a joint venture could theoretically be arranged through a simple handshake. But all business entities that decide to pursue a JV would be wise to outline the terms of the venture in a signed contract that was created with legal assistance.
A joint venture agreement often includes the following items:
- The parties to the agreement
- The JV's management structure and members
- The parties' percentages of ownership
- The distributive share—the percentage of profit or loss—allocated to each party
- The bank account the JV will use
- A list of resources
- The employees and/or independent contractors who will work on the venture
- How administrative records and financial statements will be produced and retained
- Which state's laws will apply to the JV
A joint venture is not required to register itself with a state or the federal government.
How a Joint Venture Pays Taxes
If the joint venture is its own separate business entity, it will pay its own income taxes according to the form of business—such as a partnership—it was created as. If it's an unincorporated joint venture, any profits must be accounted for by the entities who signed the JV agreement.
A Joint Venture vs. a Consortium
A consortium is another type of business agreement between two or more entities. The main difference between a consortium and a JV is that a consortium is generally seen as a looser arrangement between entities that remain decisively separate. The entities cooperate on a project together—for example, construction firms building a skyscraper—but don't exert much influence over each other.
- A joint venture is a cooperate arrangement that is intended to benefit two or more separate business entities.
- The joint venture may or may not result in the formation of a new business entity.
- Companies may form a joint venture to combine their different areas of expertise in pursuing a common goal or to enable one entity to gain access to a market in which the other entity is based or has a strong presence.