- Learn how to form a joint venture.
- Find out why businesses form joint ventures.
- Discover how a joint venture works and how it differs from a consortium.
- Learn what a well-crafted joint venture agreement should include.
When multiple business entities make a decision to start a new business together as a cooperative arrangement, they form a joint venture. In creating a joint venture, each of the involved entities agrees to a few things. They agree to the assets they will contribute, how they will distribute income and share expenses, and how the new entity will move forward.
Before deciding to get involved in a joint venture, business owners must carefully assess how they plan to proceed. It is essential that every detail of the new organization’s operations be thought out and addressed ahead of time. Everything from its management and tax liabilities to the distribution of profits and losses must be discussed. Read on for Fiducial’s guide to joint ventures!
Forming a Joint Venture
Even though a joint venture represents a cooperative between two or more business entities, each of those original entities retains its original legal status, whether as companies, corporations, or as an individual or group of individuals. Not all joint ventures involve the actual formation of a new business entity. However, if created, a new entity must pay its own taxes.
The tax liability will be based on the form of business adopted. If an unincorporated joint venture, the tax on profits will belong to the entities who originally joined the agreement. However, as a corporation, it will have its own tax responsibility.
A joint venture can exist solely as an agreement between the original cooperating entities. Whatever form a joint venture takes, partners should arrange it via a detailed, comprehensive contract. The contract should specify what assets each of the participating entities will contribute, how they will manage the new entity, who will control important decisions, and how they will accomplish the distribution of profits and losses.
Why Form a Joint Venture?
There are numerous advantages to forming a joint venture, including combining distinct talent and background from two separate entities to create a novel product or service, or taking advantage of one entity’s strength in marketing with another’s innovation.
BMW Brilliance Automotive, Ltd, an entity formed between BMW Group and Brilliance China Automotive Holdings, illustrates a good example of a joint venture. The two created a new entity to sell BMW vehicles in China, leveraging Brilliance China’s geographic presence to sell BMW’s products.
Among the reasons for forming a joint venture are:
- Leveraging the combined resources of multiple entities in order to strengthen the organization’s strength and viability.
- Leveraging the expertise of one or more of the original entities in order to create a better product or improve its delivery or marketing.
- To achieve economies of scale. Though many joint ventures begin with an eye to the future, some exist to accomplish short-term goals. Then, they quickly disband upon achieving those goals.
How Does a Joint Venture Work?
A joint venture can take the shape of any type of business entity, including a partnership or corporation. Whatever type of entity the founding businesses land upon, decisions need to be made regarding division of stock if creating a corporation, who will be on the board of directors, and how much responsibility for the new entity’s management each original entity will carry.
In some cases, entities establish a joint venture under a unique federal income tax arrangement called a qualified joint venture. This allows a married couple greater simplicity in filing their joint return than they would find if they established the business they operate together as a partnership.
Though similar, a consortium is not the same as a joint venture, as it is a more casual business arrangement that does not involve the creation of a new entity. Rather, in a consortium, distinct entities remain separate but make the decision to cooperate.
Crafting an agreement
Though it is conceivable that multiple entities would be willing to enter a joint venture on a casual basis or via an oral agreement and there is no requirement that a joint venture register with either a state or federal government, it is still better to involve an attorney who can craft a document requiring the signatures of all parties involved. A well-formulated joint venture agreement may include:
- The names of all entities involved in the agreement
- The management structure is adopted in the formation of the joint venture
- The ownership percentage of each of the named members
- The percentage of profit or loss allocated to each named member (also known as their distributive share)
- The name of the bank through which the joint venture will manage its funds
- The identities of all contractors and employees who will manage the day-to-day operations
- The resources being made available for the organization
- How financial statements and records will be created, dispersed, documented, and archived
- Under what state’s laws the joint venture will operate
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