Joint Venture Partnership: Everything You Need to Know
A joint venture partnership is a cooperative temporary partnership where two or more business entities join together for a specific project or business activity. 3 min read
A joint venture partnership is a cooperative temporary partnership where two or more business entities join together for a specific project or business activity. The joint venture provides mutual benefits to both parties by sharing the costs, risks, and rewards.
Forming a Joint Venture
Regardless of the size of the two businesses forming a joint venture, there should be, at minimum, an agreement in writing between the partners.
The agreement should cover the following:
- The structure of the joint venture. The most common structure is to set up a separate business entity with each entity owning a specific percentage of the entity.
- The objectives.
- Financial contributions to be made by each party.
- Whether assets or employees will be transferred to the joint venture by either party.
- The ownership of any intellectual property created by the joint venture.
- The management and control responsibilities and processes the joint venture is to follow.
- Clarification of how profits, losses, and liabilities will be shared.
- An outline of how disputes arising between the partners will be resolved.
- An exit strategy for ending the joint venture.
Joint Ventures and Taxes
The business form chosen by the joint venture company will determine how its taxes are paid.
A joint venture set up as a separate business entity pays income taxes and any other taxes. For example, a joint venture formed as a limited liability company (LLC) will pay taxes as an LLC.
If the joint venture is a simple contractual relationship with two independent companies forming an agreement, the terms will determine how it is to be taxed and how the taxes are apportioned between the two businesses.
Joint ventures can also be taxed as a partnership or a corporation. Those taxed as corporations pay taxes at the corporate level and again at the shareholder level. This is referred to as double taxation.
The Risks of Joint Ventures
To form a partnership with another business can be a complex process that takes time and effort to build. Some of the common problems that may arise include:
- The objectives of the venture are not clear and have not been communicated to everyone involved.
- The partners do not have the same objectives for the venture.
- There is an imbalance between the partners in the level of expertise, investments, or assets each brings to the joint venture.
- There may be poor cooperation due to cultural differences or management styles.
- Sufficient leadership and support are lacking by both partners in the joint venture's early stages.
Making a Joint Venture Relationship Work
For a joint venture to be successful, it must begin with thorough research and analysis of what the goals and objectives will be. Once determined, this should be communicated to all persons involved in the business.
Sharing financial information openly between partners can help prevent suspicion and build trust.
Establish performance indicators that measure how well the business is going or provide early warnings of potential problems.
Aim for and maintain a flexible relationship throughout the duration of the joint venture. Do this by reviewing how the business is operating and ways in which can be improved and whether the objectives need to be changed.
To help avoid future misunderstandings between partners, outline dispute resolution procedures in the initial contract.
Ending a Joint Venture
Businesses and markets change over time and, sooner or later, most partnering arrangements will cease to exist. This is especially true for joint ventures set up to handle a particular project that will end naturally at some point.
Another options is for one partner to buy out the other. This information can be placed in the original paperwork.
The agreement should have a section discussing what happens when the joint venture is over. Things to consider include:
- How shared intellectual property will be dispersed.
- The steps in place to ensure confidential information remains secure.
- Clarifying how future income earned through the joint venture will be dispersed.
- Deciding who will have the responsibility for debts and guarantees.
The easiest way to end a joint venture is by outlining the termination conditions when the joint venture is first set up. An example would be to stipulate in the contract that there is a three-month notice to end the agreement.
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