Joint Venture Guide: How a Joint Venture Works

A joint venture is when two or more individual businesses collaborate on a specific project to complete a particular project or accomplish a shared business goal. In joint venture contracts, the different companies partnering together typically agree to share liabilities, risks, and profits involved with a business undertaking. These agreements have a limited lifespan which usually concludes with the accomplishment of the shared goal. Business owners may enter into a joint venture to expand their market reach, share greater resources, find new business, or borrow skill sets from a collaborating business or individual.

Joint ventures work by bringing together separate legal entities in order to reach a common goal. At the beginning of a joint venture, the involved parties will draft a legal agreement called a joint venture agreement (or JV agreement) making their shared business enterprise official and binding. This contractual agreement outlines the details of a joint venture, including the objectives of the venture, the responsibilities of both parties in the agreement, how profits will be shared, the projected end date of the venture, and any other disclaimers regarding the venture.

A joint venture can be set up as its own separate business entity, such as a limited liability company (LLC), or it can be a contract that is shared between businesses or parties. This type of venture allows parties to remain legally independent in all matters other than those within the joint venture.

Joint ventures fall broadly into four general categories pertaining to the duration or objective of the specific venture. Here are the four types of joint ventures.

1. 1. Project joint venture: A project joint venture is when two parties agree to work together on a specific project that has a projected end date. This type of joint venture states that the agreement will last until the project is completed.
2. 2. Functional joint venture: A functional joint venture is more open-ended than a project joint venture. In this kind of venture, two or more businesses work together to share resources or reach new markets, with no end project goal determining the life of the agreement.
3. 3. Vertical joint venture: A vertical joint venture is an agreement between two businesses that work with commodities in the same supply chain. For example, a vertical joint venture may be enacted between a raw materials provider and a manufacturer to ensure greater exclusivity between parties.
4. 4. Horizontal joint venture: A horizontal joint venture is when two businesses that produce the same goods or services team up to accomplish a greater goal. This is typical in international joint ventures when mutual parties offer access to networks in their country while gaining access to foreign markets.

Here are some of the advantages for businesses entering into a joint venture.

1. 1. Greater resources and markets: A joint venture allows the involved businesses to pool their resources. This allows either party to gain access to untapped markets, new resources, intellectual property, advanced technologies, distribution networks, or professionals with different skill sets.
2. 2. Reduced competition: Sometimes, two competing businesses will enter into a joint venture together to mutually eliminate the competition of outside business activity while sharing in the benefits. They will typically do this by signing a non-compete agreement at the beginning of the joint venture, limiting the outside activities of both parties to eliminate working with competing entities.
3. 3. Accomplishing bigger projects: Small businesses taking on large-scale projects may enter into a joint venture together to enable them to take on projects that would otherwise be too costly and time-consuming.
4. 4. Shared requirements: Some projects may require that your business meet certain licensing or regulatory requirements that you do not yet have. A joint venture with a business that already meets those requirements will save your business time.

There are some potential drawbacks and risks to consider when entering into a joint venture.

1. 1. Slows down other business activities: The efforts of a joint venture can take time and focus away from a business’s other activities outside of the joint venture.
2. 2. Exclusivity can be limiting: A joint venture agreement may require that those involved sign exclusivity or non-compete clauses, which may affect their existing business relationships in their distribution channels.
3. 3. Shared liability: If a new entity is not established for the purposes of the joint venture, both businesses will be liable for all business activities conducted by the joint venture, opening both parties up to greater legal and fiduciary risks.
4. 4. Potentially unequal benefits: A joint venture may not benefit all parties equally, no matter the allocation of labor and resources. There is no guarantee that a joint venture will be equally or fairly beneficial between joint venture partners.

Joint venture partnerships are sometimes confused with partnerships or consortiums, although the terms are not exactly interchangeable. Here are brief definitions of partnerships and consortiums and how they differ from joint ventures.

• Partnership: A general partnership is a new legal entity that is formed by two or more individual parties joining forces indefinitely. Joint ventures are typically temporary arrangements that exist only for as long as it takes to complete the venture, whereas standard partnerships exist for their own long-term business purposes. Joint ventures also typically do not involve the establishment of a new legal entity, though some businesses may choose to do so for income tax liability purposes.
• Consortium: A consortium is a less formal agreement between two or more separate businesses with a shared interest that does not form a new legal entity. A joint venture consortium is an agreement between joint venturers with a specific goal or project in mind.

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