What is added is the contribution of the characteristics of each company. These characteristics are made available to all contractors. The agreement involves the creation of a new company. The latter has its own legal personality with respect to the participating companies. In other words, they carry out activities in common. What steps must be taken to carry out a successful Joint Venture contract?
This would be an example of a successful joint venture. Example 2 Company A and Company B have different skill sets. Company A produces widgets that Company B desperately needs to help his failing business. Company B and Company A decide to enter into a joint venture with Company A as it is beneficial to both businesses. The most important part of a joint venture is not the process itself, but instead the rationale behind creating a joint venture. When creating a joint venture there should be a common agreement and understanding between the parties for a successful joint venture to occur.
However, it is very easy to overlook the fact that you will be joining another business. Some parties run into difficulties when calculating profits and other shared duties. It is most common for different individuals or companies to form a joint venture through a contract. The contract agreement will contain all of the relevant provisions for the entire project, from beginning to end. The contract need not be created in an official drafted agreement and sometimes a court may infer the existence of a joint venture from the circumstances, facts, and conduct related to the parties.
For example, a joint venture can be formed through the court system, a memorandum of understanding, or by obtaining regulatory approval. Some of the common elements and characteristics of a joint venture may include:.
Joint ventures may be created for nearly every type of business and there are no uniform guidelines that determine when a joint venture has formally been entered into. Determining whether a joint venture has been formed is usually done on a case-by-case basis and will depend on the facts of each venture. However, a valid joint venture agreement or contract is usually more helpful to establish the existence of a joint venture. Dissolution is the termination of a joint venture.
Dissolution or termination of a joint venture will depend largely on each case and the relevant facts. Listed below are the ways a joint venture can be terminated or dissolved:. Upon dissolution , the different co-venturers are usually entitled to profits that are proportionate to the number of contributions that they have provided.
It takes time and effort to build the right relationship. Problems are likely to arise if:. Success in a joint venture depends on thorough research and analysis of aims and objectives. This should be followed up with effective communication of the business plan to everyone involved. Setting up a joint venture can represent a major change to your business. However beneficial it may be to your potential for growth, it needs to fit with your overall business strategy.
It's important to review your business strategy before committing to a joint venture. This should help you define what you can realistically expect. In fact, you might decide that there are better ways to achieve your business aims. See our guide on how to assess your options for growth. You may also want to look at what other businesses are doing, particularly those that operate in similar markets to yours.
Seeing how they use joint ventures could help you choose the best approach for your business. At the same time, you could try to identify the skills they apply to partner successfully. You can benefit from examining your own business. Be realistic about your strengths and weaknesses - consider performing a SWOT strengths, weaknesses, opportunities and threats analysis to discover whether the two businesses are a good fit.
You will almost certainly want to find a joint venture partner that complements your own business' strengths and weaknesses. You should take into account your employees' attitudes and bear in mind that people can feel threatened by a joint venture. It can also be difficult to build effective working relationships if your partner has a different way of doing things.
If you do decide to form a joint venture, it may well help your business to grow faster, increase productivity and generate greater profits. Joint ventures often enable growth without having to borrow funds or look for outside investors. You may also be able to use your joint venture partner's customer database to market your product, or offer your partner's services and products to your existing customers.
Joint venture partners also benefit from being able to join forces in purchasing, research and development. Before starting a joint venture, the parties involved need to understand what they each want from the relationship. Smaller businesses often want to access a larger partner's resources, such as a strong distribution network, specialist employees and financial resources. The larger business might benefit from working with a more flexible, innovative partner, or simply from access to new products or intellectual property.
Similarly, you might decide to build a stronger relationship with a supplier. You might benefit from their knowledge of new technologies and get a better quality of service. The supplier's aim might be to strengthen their business from a guaranteed volume of sales to you. The objectives on which you agree should be turned into a working relationship that encourages teamwork and trust.
See the page in this guide on how to make your joint venture relationship work. The ideal partner in a joint venture is one that has resources, skills and assets that complement your own.
The joint venture has to work contractually, but there should also be a good fit between the cultures of the two organisations. A good starting place is to assess the suitability of existing customers and suppliers with whom you already have a long-term relationship. Comprehensive legislative framework supports the contractual arrangements between the JV parties.
Tailored share rights can reflect the size, contributions and motivations of the JV parties. Permits employee share incentive schemes. Realising an interest by way of a sale of shares will not disrupt the legal ownership of the underlying business. Disadvantages Potential for double taxation — tax will be applied at the JV company level and possibly again on the JV parties directly when they take profits out of the JV company or realise their investment in it.
This lack of tax transparency is, however, not always a disadvantage in practice and the tax position will depend on the nature of the JV parties themselves e. Comprehensive legislative framework can restrict flexibility. Reporting and compliance requirements bring increased administration and public disclosure of information. Limited liability may be undermined in practice by guarantees and security required to support external financing and third party contracts.
Useful for strategic alliances or short term, single-goal ventures. JV parties retain ownership of their own assets. JV party is not normally liable for the debts of the other JV party but they may share liability on specific contracts with third parties.
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