A joint venture is an arrangement between two or more parties for a specified enterprise. This type of endeavor is a strategic alliance which is limited in scope and, often, only for a specified period of time. The parties to a joint venture share markets, intellectual property, assets, knowledge and profits. The term joint venture refers to the purpose of the enterprise and not a specific type of business entity. A joint venture may be organized as a corporation, partnership or limited liability company. In organizing a joint venture, considerations such as taxation and tort liability factor heavily into the choice of entity decision-making process. Click here to read more about choice of entity considerations.
There may be substantial advantages to gaining market access without the benefit of a joint venture partner such as reaping the profits of your successful efforts without the need to share them. However, it may be a great deal more difficult or even impossible to enter the targeted market without a joint venture arrangement. Cost, lack of assets (both tangible and intangible) or even market regulation may prohibit you from entering the market outside the scope of a strategic alliance.
Other businesses have likely entered and been successful in the market you are targeting. You must identify whether these businesses are competitors or potential joint venture partners. Do any of the business enterprise offer products or services that would be a good fit with your products or services? If so, this type of business enterprise may be a good joint venture partner candidate.
Identifying your business’ strengths and weaknesses can often help you select your joint venture partner. You will reference your weaknesses in your search for a suitable joint venturer. The proposed partner should possess strengths where your business has weaknesses and visa versa. You will use your strengths in marketing the idea to potential partners to garner enthusiasm for the proposed joint venture.
Joint venture arrangements are often entered into to reduce costs and maximize results through combined efforts. In addition to expense savings, the joint venture also enables the parties to expand their sphere of business influence, create a more powerful market presence and share the potential risks and rewards of the alliance. Joint ventures are organized both for the manufacture of goods and the provision of services. Travel, sales, marketing, banking, technologies, science and engineering are industries in which joint ventures are quite popular.
In technologies, for example, a more established, well connected business in the marketplace may require certain technology in order to provide better products or services to its customer base. This company could exhaust funds and expend valuable time in attempting to develop the technology on its own. It is likely more efficient to partner with someone who already possesses the required know-how (in this example, technology) to develop or improve the products or services on a shorter timeline. The party possessing the know-how may not however have the infrastructure or manufacturing power to bring his or her asset to market but not be willing to sell the know-how. These two parties make ideal joint venture candidates.
In the example above, one company had manufacturing power, infrastructure and money, the other party had technology. You can see how the two parties had resources which complimented the other. The best joint venture partners will compliment rather than compete with each other. In another example, one party may bring a brand name to the table, while the other party may bring local connections and experience in the targeted market but lack a recognizable brand.
A well-drafted joint venture agreement is necessary to the success of a joint venture. Entrepreneurs who invest in putting a detailed, carefully drafted joint venture agreement in place will save money and reduce stress, misunderstandings, disputes and other problems down the road. The joint venture agreement should state the objectives and scope of the joint venture, detail what assets, both tangible and intangible, each party brings to the enterprise, outline the rights and responsibilities of the parties, state how profits and losses are to be shared and determine the life cycle of the alliance.
Sometimes joint ventures are operated as general partnerships, because they are simple to create. No Secretary of State filing is necessary. All that is required is a well-drafted partnership agreement between parties to the joint venture. Also, partnerships do not pay Federal or state income taxes; profits are passed through to partners who report and pay income taxes on their personal returns. In a general partnership, each partner is permitted to part in the management of the business of the joint venture but also takes responsibility for the liabilities of the alliance. The downside to operating the joint venture as a general partnership is that if one joint venturer is sued, each party will held liable. General partnerships are not afforded limited liability protection which leaves not only the assets of the joint venture but all the assets of the parties at risk for the liabilities of the strategic alliance. For this reason alone, the general partnership model is not the most desirable form of association for a joint venture. The parties to a proposed joint endeavor should consider organizing a limited liability company to conduct the business of their strategic alliance. Click here to read more about limited liability companies.
The joint venture agreement should be in writing spelling out each detail to which the parties agree. Some agreements MUST be in writing according to law. The following types of agreements need to be in writing: real estate sales, agreements to pay someone else’s debts, agreements which take longer than one year to complete, real estate leases for longer than one year and agreements for over a certain amount of money (typically over five hundred dollars).