As a new entrepreneur, it might be tough to determine whether to form a joint venture or partnership. Are there any noticeable differences? What are the positive and negative aspects of each? Make sure you know what each arrangement entails before you begin. Additionally, you should consult with a lawyer and an accountant. A joint venture and a partnership are described in detail in this Joint Venture Vs Partnership article. The pros and downsides of each are also laid forth.
What is a Joint Venture?
When two or more individuals or businesses agree to work together toward a common objective, it is called a joint venture. When two or more people agree to work together, they may form a distinct company entity, or they can simply form a partnership. Unlike a partnership agreement, a joint venture lasts for as long as the work at hand.
How does a joint venture function? What are the potential advantages and disadvantages of a situation like this?
Here we’ll go through the advantages and disadvantages of joint ventures, how they differ from other forms of business entities, and how to create your own joint venture.
How a Joint Venture Works
A joint venture is a sort of arrangement that enables you to work with a group of people or organizations to complete a specified task or goal. In the real estate, technology, and media industries, joint ventures are popular.
When it boils down to it, company owners form joint ventures in order to get access to new markets, tap into complementary skills, or combine their resources with those of their partners. There is a degree of cooperation and independence in the notion of a joint venture.
To accomplish a certain goal, two or more individuals or businesses form a joint venture. Nevertheless, the partners are not legally obligated to each other in any way outside the joint venture’s area of operations.
Characteristics of a Joint Venture
The following traits are often seen in a joint venture:
- With the exception of their work together, the parties involved in the joint venture are separate legal entities.
- The parties collaborate to achieve a mutually advantageous outcome.
- The joint venture’s assets and liabilities are contributed by both parties, and the parties participate in the project’s execution.
- When the goal is met, the joint venture dissolves.
The key point in a Joint Venture is that all parties are involved and they participate in both the opportunities and hazards.
However, the contributions don’t have to be equally distributed. If, for example, one party manufactures the goods, while the other party provides a distribution channel, this may be a possible arrangement. This means one party may contribute 70% of the money when another brings just 30%.
Regardless of how the contributions and earnings are divided, each participant is responsible for the joint venture’s success or failure.
Two real estate developers, for example, may form a joint venture to create an apartment complex. One of the real estate developers leaves behind building debris that injures a spectator. Though a spectator sues one of the developers, even if only one of them was responsible for the accident, both developers will be held accountable for the damages.
It is only possible to avoid this shared obligation if the joint venture is set up as a distinct legal company. Even though it isn’t required, many companies often take this route of business arrangement.
Joint Venture Agreement
An agreement outlining the parameters of a joint venture needs to be drawn up and signed by all parties involved. Although, if you’re going to form a joint venture, you don’t have to have a contract in writing, it’s a good idea since it lets everyone know what is expected of them.
Similar to a partnership agreement, the contract should state what each party involved will be contributing to the joint venture, the rights and obligations of each party, and the amount of profit each party will get from the business.
Overall, joint ventures may break apart due to disagreements between the parties just like any other sort of business partnership without a written agreement, therefore it’s worth the effort to develop and agree upon a business contract from the start.
Joint Venture Examples
According to an experienced attorney, “If you think a joint venture is the exclusive territory of Fortune 500 companies, think again. Joint ventures offer the option of pooling resources with others, so you don’t have to go it alone. Your joint venture might be as straightforward as sharing a customer list for a combined marketing campaign… or providing original content for a website.”
Here are a few instances of joint ventures:
- Sharing of the network by two mobile companies.
- In order to offer Wi-Fi on the transportation platform, a transportation provider and a network provider team together.
- In order to construct a shopping mall, a number of different real estate developers get together.
- For its items to be available in supermarkets all throughout the country, a restaurant ties up with a major distributor.
- Two automotive companies delve into a Joint Venture to conduct research on fuel efficiency.
All of these instances are based on real-world joint ventures.
In 2015, BMW and Toyota created a joint venture to develop a hydrogen fuel cell-powered car. In 2009, Vodafone and Telefónica teamed together to share the mobile network infrastructure throughout Europe, saving both firms millions of dollars.
Benefits & Risks of a Joint Venture
We’ll go through the advantages and disadvantages of forming a joint venture. Is there a reason you shouldn’t be participating in a joint venture with a company?
Before committing to a joint venture with another company or person, it is important to weigh the pros and downsides. Let’s begin by looking at the available perks:
Benefits of Joint Ventures
Access to markets, resources, people and money may be gained that you wouldn’t otherwise be able to get.
- Reducing competition is possible, particularly when dealing with a direct competitor.
- Working with another person or firm allows you to achieve a goal or purpose that would otherwise be impossible, which may lead to an increase in revenue.
- It is possible that working with a firm that has previously fulfilled all of the necessary licensing and regulatory criteria can save you time.
- It is possible to cooperate on a joint venture with another firm without having to merge your two businesses.
Risks of Joint Ventures
Engaging in a contract of this kind has the potential to have the following drawbacks:
- Working with the other company might be tough, and you may have to resolve disagreements along the way.
- The collaborative initiative might go wrong, wasting everyone’s time, energy, money, and resources involved.
- The objective of your joint venture may be doomed.
- Cooperating with another company might expose you to extra-legal liabilities and dangers (particularly if you don’t set up an independent legal entity for the joint venture).
A joint venture has both benefits and downsides, so you should examine the pros and cons carefully before choosing whether or not this sort of arrangement is appropriate for your company’s needs.
5 Steps to Form a Joint Venture
According to our previous discussion, firms and company owners often create joint ventures in an effort to expand their reach into new industries or acquire an advantage over their rivals or complementary resources. Here are the actions you’ll need to follow to get started:
1. Find a Partner
When looking for a business partner, the first step is to precisely define your goals and objectives. For example, you may have produced a new product but lack widespread distribution methods to put it on the shelves of retail outlets throughout the country. You may find out what distributors other businesses use by asking them and doing your own market research. Then, contact several distributors to see if they’d be interested in working together.
That said, it’s important to assess the individuals you plan to work closely within terms of both their technical abilities and their cultural fit. As a matter of course, they must be able to demonstrate the extent of their distribution network.
There are a few things you should keep in mind, though. Is it safe to put your faith in those in charge? Are the company’s financial ambitions for the joint venture financially realistic? Any additional obligations or conflicts of interest might jeopardize this deal?
It’s important to be ready for a lot of back and forth when you’re looking for a business partner. You and your potential business partner may need to discuss production schedules, client lists, and other confidential information.
A mutual nondisclosure agreement should be drawn up and signed by everyone participating in the venture.
2. Choose the Type of Joint Venture
Once you’ve selected a business partner, the following step is to put the foundations of your partnership in place.
There are two methods to go about this, as we’ve already established:
- Set up a distinct legal organization, such as a limited liability company or a corporation, with each partner owning an interest in the new firm.
- Without forming a distinct legal corporation, work under a joint venture agreement. This is referred to as an unincorporated joint venture.
Both alternatives have their merits and drawbacks, much like creating a joint venture itself.
The more costly and time-consuming approach is to form a distinct legal corporation for your joint venture. For example, if you organize a corporate joint venture, the joint venture will be in charge of its own tax filing and payment. Legally speaking, having a distinct legal company gives you additional protection in the event of a problem.
A simple contractual agreement is the quickest and least costly way to get started. No earnings or taxes are reported or paid by the joint venture in this situation. Profits are shown in the tax returns of each of the parties involved.
In certain cases, it may be acceptable to begin the process of forming a joint venture with a limited objective in mind if liability isn’t a major worry. However, a distinct legal entity is preferable for a more complex joint venture.
3. Draft the Joint Venture Agreement
A joint venture agreement should be drafted for each joint venture, regardless of the sort of company you’re doing. Your decision to counsel a business attorney will depend on the nature of your partnership, as well as the dangers it entails.
The following details should be included in your joint venture agreement:
- The goal of the partnership.
- The process of putting something together (i.e. if the venture will be established by a contract or will it be a separate entity).
- Apportioning of profits and losses, which do not have to be equal.
- Contribution from each party may or may not be equal.
- What each party’s responsibilities are in order to make the joint venture a success.
- Meeting scheduled to take important decisions on different matters.
- Each party’s voting rights.
- When the joint venture will come to an end.
For the most part, both parties involved in signing and preparing the joint venture agreement should have legal counsel present.
4. Pay Taxes
In a joint venture, taxes must be paid as with any profit-seeking firm. The form of your partnership affects the taxes of your joint venture, as previously stated.
Any joint venture earnings will be taxed depending on the kind of legal company formed. A flat tax of 21% is levied on corporate earnings by C corporations, and shareholders are taxed again on dividends. Pass-through businesses are taxed like LLCs, which means that each owner’s tax return reflects the business’s profits and losses.
The tax treatment of unincorporated joint ventures is comparable to that of LLCs. In accordance with the terms of the joint venture agreement, the partners are responsible for reporting the joint venture’s earnings on their individual tax returns.
Joint venture revenue is reported on each corporation’s corporate tax return if both partners are companies. You cannot file a business tax return for an unincorporated joint venture.
5. Follow Other Applicable Regulations
Be careful to comply with any additional local, state, or federal rules that may apply to your joint venture.
Employer identification numbers and other labor rules may be required if you’re “borrowing” personnel from one of the companies involved in the arrangement. You may require a business license depending on the industry in which your joint venture operates.
There are several international rules that might restrict your capacity to operate in other nations if you’re thinking about forming a cross-border joint venture.
What is a Partnership Agreement?
It is a legally binding contract outlining the partnership’s organizational structure, as well as the members’ respective responsibilities, rights, and interests in the business. A partnership agreement isn’t needed by law, but it’s strongly recommended if you want to prevent partner disputes.
One of the hopes of starting a company with a partner is that you and your partner would always get along well. This isn’t always the case, of course. Having a robust founders’ agreement is an important part of preserving any form of company organization.
A partnership agreement is a kind of founders’ agreement in the context of a partnership. An agreement between business partners is essential, and this article discusses why, what to include in the agreement, and how to form a legally enforceable agreement for all parties.
The Importance of a Partnership Agreement
In a business partnership, a partnership agreement serves as a fundamental contract and is legally enforceable for all partners. An operating agreement lays out the business’s day-to-day operations and each partner’s obligations. As a result, a partnership agreement is comparable to a corporation’s bylaws or the operating agreement of a limited liability company.
It is possible to create a firm without a partnership agreement in any state. Some partners merely have an oral agreement or scribble down something fast in a notepad to establish their partnership.
You must wait until all partners have agreed to the terms of the partnership agreement in writing before you begin your firm. The signed agreement, along with all of your other crucial company paperwork, should be kept safe.
Creating a Partnership Agreement
Not having a partnership agreement is one of the most common blunders small-business entrepreneurs make, so you’ve already gotten a leg up on the competition. To draft a partnership agreement, you can choose from a wide range of options.
Consult a company lawyer if the case is more complicated. You can’t go wrong with tailored legal guidance. For example, if your partnership has more than two participants or a large number of assets, you should definitely hire a lawyer. The best way to guarantee that your agreement accurately reflects the verbal agreements you and your partners have made is to consult with an attorney. In order to get your partnership off the ground and design your partnership agreement, you can contact attorneys licensed in every state. To know the importance of a business formation attorney you can read our article on what can a business formation attorney do?
For the partnership agreement to be legally binding, each partner must sign it. In most circumstances, electronic signatures are just as valid as physical signatures, if not superior. Each partner should have a copy of the agreement, whether it’s electronic or physical, to retain as part of their critical business documents.
Benefits of a Partnership Agreement
Benefits of a partnership agreement includes the following:
- Minimal start-up expenses and quick setup
- The opportunity to split the income
- Allows you to easily change the business structure in the future.
- There’s less external regulation in comparison to a company.
- The business affairs of each of the partners remain private.
Risks of a Partnership Agreement
A Partnership Agreement of course may not come without its drawbacks. Below are some to consider:
- Each partner is accountable for the obligations of all the other partners.
- It is the responsibility of each partner to hold the other partners accountable for their acts and omissions.
- Share in the profits with your co-owners.
- The responsibility of the partners is infinite. If you’re a partner, it’s possible that your personal assets and funds may be utilized to settle the partnership’s obligations.
As a result of these drawbacks, it is imperative that you form a relationship with someone you can rely on. Before engaging in a partnership arrangement, be sure you’ve assessed the benefits and risks.
Key Differences Between Joint Venture Vs Partnership
When it comes to Joint Venture Vs Partnership, each has a number of significant distinctions.
- A Joint Venture is a kind of business arrangement that is meant solely for the accomplishment of a specific purpose or goal. Whereas, an agreement between two or more parties to run a business and share the profits is called a Partnership.
- Members of a partnership are referred to as “partners,” whereas those engaging in a joint venture are referred to as “co-venturers.”
- There is no way for a minor to participate in a Joint Venture. Minors may take advantage of the firm’s perks by becoming partners.
- In Partnership, there is a distinct trade name, however, in Joint Venture, there is none.
- The going concern idea does not apply to a joint venture since it is founded for a brief period of time. The Partnership, on the other hand, is predicated on the idea of a “going concern.”
- In a joint venture, there is no need to keep books of accounts, but in a partnership, this is a need.
It is critical that you know the distinction between a joint venture and a partnership before engaging in one. A joint venture is a collaboration between two or more parties with the aim of achieving a common objective. Notably, the project/relationship has a clear end date. Alternatively, a partnership is about two or more people entering into a continuous collaboration. Legal and financial guidance should also be sought out while evaluating the options available to you. You must also do your due research to guarantee that the business partnership succeeds.
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