Joint Venture: Formation & Agreement
A Joint Venture Agreement is a contract between two or more parties who want to do business together for a period of time. Instead of creating a formal partnership or new legal entity, a contractual JV allows the parties to continue filing their tax returns yet reap the financial benefits of sharing resources and risks.
The ever increasing requirements of business require a large investment, expertise, experience, and knowledge. In the case where the resources are sufficient but the way of investment is not available then such individuals/entities can join their ventures for mutual benefit and thus, in such scenario when the two or more individuals/entities/corporations come together to respective contributions with objectives defined for a specified time frame such a venture is known as Joint Venture.
Such a venture is guided by an agreement known as Joint Venture Agreement which sets out the terms of governing of such alliance which includes contribution form and details of parties, profit sharing ratio, right and liabilities inter se and towards the objective of such venture.
The Joint venture can be defined by the following features which are as under:
- It is an association of two or more individuals or business entities or corporations or partnerships.
- There exists a joint contract of co-ventures over business assets, operations, administration and event the venture.
- A joint venture is not a separate legal entity, it does not enter into contracts or have its tax liabilities in the name of such JV but vests with the co-venturers.
- In such an association, there is a pool of resources by the respective co-venture parties. The resources can be in the form of expertise, financial resources, experience or knowledge.
- Such a venture is taken ahead of pre-defined projects or objects and specific business activities.
- Such a Joint venture is for the limited time of span as defined in the joint venture agreement or can be of indefinite period.
- Each such joint venture partner has an interest in the entity. Each such joint venture partner has a role in the active involvement of management or as agreed.
- The co-venturers agree to share profits and losses of the business in an agreed
Reasons for forming such Joint Venture
- Risk sharing
Due to the large investment in the enterprise by the joint venture partners, the need for sharing risks in proportionate to such is reasonable, hence, it promotes active participation of partners in making a venture successful in achieving the objects.
- Economies of scale
With respect to resource pooling in a large joint venture, the company gets adequate resources to compete globally which reduces the costs and increases the margins.
- Market access
The venture can be established on a national or an international level, which makes the entity which is previously operating domestically can now function on an international level.
- Geographical constraints
The company which wants to move internationally can do so if the rules and regulations are known to such other foreign company. This is viable with the collaboration of local company hence, liasioning with local people is a pre-requisite to proceed.
- Way of Working
In cases where the company wants to acquire another entity but cannot do so due to constraints in cost, size or so, it becomes feasible with joint venture and thus, this is easy and viable.
- Use of Technology
When two or more companies get into a joint venture, they also share their resources such as techniques of production and strategies of doing marketing. Advanced technologies can be used by companies to benefit their business and to create new products. In this way, the overall cost of business reduces, innovation happens and profit increases.
Types of Joint Ventures
There are different types of joint ventures which are as follows:-
- Corporations –
A corporation has its own assets, incur liabilities and enter into legally binding contracts that are obvious to third parties. The liability of shareholders for the corporation’s debts and obligations is limited to their capital investment in the corporation
- General Partnerships –
All partners in a general partnership have personal liability for debts and other obligations incurred by the partnership. One advantage of a general partnership in many countries is that normally tax imposed is less on it. Also, all partners can act on behalf of, and legally blind, the partnership via third parties.
- Limited Partnerships –
There are two distinct types of partners, general and limited. The general partner carries responsibilities similar to the one he carries in a general partnership, including the ability to legally bind the whole partnership and being personally liable for debts and obligations of the partnership. The limited partner, on the other hand, mainly contributes to capital and receives a specified share of the profits.
- Limited Liability Company (LLC) / Limited Liability Partnerships (LLP) – Two or more joint ventures handle a particular activity. Entities maintain their separate identities for all purposes as per joint venture agreement.
Contents of Joint Venture Agreement
- Name of joint venture business.
- Purpose of a joint venture
- Contribution of parties
- The capital structure of a joint venture
- The management, control structure
- Details of joint venture partners.
- Place of business operations
- Memorandum of Association (“MOA”) and Article of Association (“AOA”) in case of a company, Partnership deed in case of a partnership firm.
- Period of operation of such a joint venture.
- Joint venture partners duties, obligations, and responsibilities inter se and towards the object
- Shareholding pattern i.e. profit sharing ratio.
- Dispute Settlement provisions and jurisdiction for the settlement
- Applicability of laws
- Termination provisions
- Rules to follow for modification in the JV agreement.
- IPR and other rights.
- Certain prohibitory or restrictive terms.
- Transferability and ownership
The joint venture agreement terms are not exhaustive to this list and include various other provisions.
Advantages of the Joint Venture Agreement
Following advantages of the joint venture agreement which are as follows:-
- Businesses have set up or grown without having looked for outside funding.
- They share resources, knowledge or investment for the smooth-running business.
- In case the joint venture project fails, all parties bearing the losses equally.
- A joint venture is a great way to save money such as marketing costs, advertisement costs, etc.
- The risks and rewards can be shared on mutually agreed terms.
- Establishment of brand name for such Joint Venture.
Disadvantages of the Joint Venture Agreement
Following the disadvantages of the joint venture agreement which are as follows:-
- Different management or leadership styles created disputes because parties or co-venture come to different workplace cultures.
- If the scope of the joint venture agreement is not framed correctly are created disputes between co-ventures.
- Co-ventures or parties are restricted to work as per the joint venture agreement. Thus the flexibility is restricted.
- Joint venture agreement prepares on the basis of research and analysis of objectives. So it takes more time and the cost of parties.
- It may be difficult to exit the Venture due to the legal enforceability of the contract.
Termination of Joint Ventures
Following are the circumstances where a joint venture can be terminated, which are as under:
- Upon achievement of objectives as defined in the joint venture agreement.
- Upon breach of certain covenants.
- Upon non-meeting of deadlines as prescribed for the achievement of objects.
- As per the terms of JVA, which can provide that one JV partner may sell out or buy out the shares of other partners.
- On the other circumstances that render a termination
Joint ventures are the best way to achieve the business goal with the contribution of resources, risk, and profits with limited liability. It increases the probability of achieving success in competitive businesses. After completion of the project, parties can easily exit the joint ventures as per the joint venture agreement.
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