Joint venture – What is a joint venture?
A joint venture is a temporary, strategic business arrangement in which two or more parties collaborate in order to achieve a specific goal.
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Within a joint venture, the parties involved remain distinct legal entities (i.e. individual companies or organisations), but they share resources, expertise, and profits, as well as any potential risks, losses, and costs.
Joint ventures are always temporary arrangements, but they can be short-, medium-, or long-term, depending on the nature of the tasks and goals driving the joint venture.
A joint venture is sometimes abbreviated to JV and can also be referred to as a joint company, joint investment, or a business collaboration.
Types of joint venture
The UK GAAP defines three main types of joint venture:
- Jointly controlled operations: whereby parties share equipment and collaborate on day-to-day operations, but do not share ownership of any assets or management of economic activities.
- Jointly controlled assets: whereby each party involved in the joint venture contributes to the purchasing of an asset. The asset is then shared equally between the joint venture parties.
- Jointly controlled entities: whereby parties share management and control over economic activities. This type of joint venture is usually strictly regulated by a joint venture agreement.
Legal types of joint venture
In the UK, there are no laws restricting how a joint venture should be structured, which means that:
- Joint ventures are not limited to any one specific business structure.
- The organisation and day-to-day management of a joint venture is defined by the joint venture agreement, rather than by the law.
Although many don't follow a specific legal structure, joint ventures could be registered as:
- A corporation
- A partnership with either unlimited or limited liability
- A franchising arrangement
- An agency agreement
- A distribution agreement
Whether a joint venture should register as a corporation, a partnership, or one of the many other types of joint venture depends on the needs and objectives of the parties involved.
Joint venture agreement
All types of joint venture should have a joint venture agreement, which is an important written document that provides legal protection for all parties involved. Among other things, a joint venture agreement should include:
- The objective of the joint venture
- The structure of the joint venture
- Each party’s rights and obligations
- Each party’s initial financial contribution
- How liabilities, profits, and losses should be shared between the parties
- How the joint venture will be managed on a day-to-day basis
- How any disputes will be resolved
- An exit strategy
For some types of joint venture, a joint venture agreement might also need to address issues such as confidentiality and intellectual property.
Joint venture accounting
For companies involved in joint ventures, there are specific rules for managing company accounts. These are outlined in the Financial Reporting Council's FRS 102 Summary – Section 15.
The rules for joint venture accounting sometimes conflict with other accounting guidelines and regulations . It’s therefore essential to consult with an accounting professional if you are unsure of how to manage accounts as part of a joint venture.
Joint venture and tax
HMRC considers some joint ventures to be a kind of partnership for tax purposes. This is known as a joint venture for VAT.
Joint ventures for VAT are distinct legal entities with their own VAT registration numbers. Like other businesses and organisations registered for VAT, joint ventures for VAT are responsible for reporting their VAT to HMRC.
Advantages and disadvantages of a joint venture
There are many reasons why businesses choose to become part of a joint venture, such as expanding their business, developing new products or services, and moving into new markets (and to new countries in particular).
However, before making a commitment to another party, it’s important to weigh the advantages of a joint venture against the disadvantages of a joint venture.
Advantages of a joint venture
Some of the main advantages of a joint venture include:
- New insights, expertise, and experience from the other parties
- Increased resources, such as staff, technology, and capital
- Shared costs
- Greater market share
While there are many benefits of a joint venture, these benefits can only be realised by finding a partner and arrangement that works for your business. You should therefore carry out due diligence to ensure that the other parties involved with the joint venture are a good match with your business and that the joint venture agreement works for all parties involved.
Disadvantages of a joint venture
On the other hand, the main disadvantages of a joint venture include:
- The amount of time, planning, and research that goes into organising a successful joint venture
- A potential clash of company culture between the participating organisations
- The possibility of the other parties not pulling their weight
All types of joint venture pose potential risks, but these risks can be minimised through careful planning, effective communication, and a thorough joint venture agreement.
Joint venture examples
Many well-known companies have partnered with other organisations as a joint venture. Some of examples of joint ventures include:
- Google Earth, which is is the result of a joint venture between NASA and Google
- Vodafone UK and Telefonica UK, which merged their network infrastructure in 2012, running through a single network grid, while maintaining control over their own customer data and running as individual companies
While these joint venture examples have been successful, there are also many examples of joint ventures that have failed. For example, in 2014, Tesco was involved with an ultimately unsuccessful joint venture with Chinese retailer China Resources Enterprise.