Joint Venture Defined
A joint venture partnership is an agreement between two or more businesses to share resources and profits on a particular project.
Typically, the joint venture does not prevent businesses from continuing their core business operations.
A simple example of this would be -: Let’s imagine that you run a cafe business and a good friend of yours runs a delivery service and owns multiple delivery vans. You agree to form a joint venture – Coffee and Cake to Your Door – a meal delivery service aimed at local businesses.
While Coffee and Cake to Your Door is delivering meals and drinks to workers in local offices and factories, you are still running your cafe. And your friend is still running their normal courier business. But you each allocate some time and resources to the Coffee and Cake to Your Door enterprise and share in the profits generated.
What a Joint Venture Is Not
A joint venture should not be confused with the following things:
- A partnership -although it is possible to structure the joint venture as a partnership the two concepts are not synonymous.
- A qualified joint venture – which is the term used to describe the tax status of a married couple who run a business together. There’s nothing stopping you falling in love with your JV partner and getting married, but until that happens a qualified joint venture has nothing to do with a joint venture.
Three Key Reasons to Consider Joint Ventures
Joint ventures make good sense when one of these situations occur (sometimes these reasons intersect).
- To offer complementary services.
As is the case in our hypothetical Coffee and Cake to Your Door, the services offered complement each other. Without your friends courier service, you would have no way of getting your product to the workers – and without your cafe business your friend has no food to offer.
- To gain ground in a competitive market.
You may have all the elements necessary to break into a new market except the resources to do so – that’s where a joint venture may make all the difference.Let’s imagine that you own a smallgoods shop and you’re on reasonably good terms with the owner of a similar shop operating on the far side of town. You are both aware that a neighbouring town, Waresville, has no smallgoods shop and agree that there is huge potential in opening a store there. But the expense of opening a second location is too much for either of you – so you agree to open one together and split the profits.
- To save money
This is particularly relevant when considering making large purchases.
Australian farmers have demonstrated the practicality of this initiative by pooling their resources to purchase harvesting machinery to get around what otherwise would be prohibitive costs.
How are joint ventures formed?
Many joint ventures have been formed on the basis of a firm handshake, but it is wise to have a formal approach in place to avoid any misunderstandings that could occur.
There are basically two options: Form an entirely separate business entity or have a joint venture agreement drawn up.
Form a separate business entity
When joint ventures run as a separate business, the JV members will share responsibility for the running and control of the business as well as share in the profits.
This method makes practical sense as filing taxes in relation to the joint venture enterprise is relatively straightforward.
You have several choices for the business entity’s legal structure. These are -corporation, partnership or a proprietary limited company (Pty Ltd). It is possible for a Pty Ltd entity to file taxes as either a corporation or partnership.
The formation of a joint venture partnership
A partnership agreement will define you both as partners in the business. It will also clearly state
- how the money is to be distributed and spent
- What contributions are to be made by each party
- Buy out clauses
The biggest benefit of taking this approach is cost. In most cases it is simpler and therefore cheaper to form a partnership agreement- even if you need a solicitor to draw up the partnership agreement for you.
On the flipside is that partnerships offer less legal liability protection than companies do.
Forming a joint venture corporation
A corporation will allow you to have equal shares and board directors.
The primary reason to form corporations is to reduce exposure to personal liability. This advantage has to be weighed against the costs associated with setting up what can be a complicated process.
Form a Pty Ltd company for your joint venture
As with a corporation, the main purpose in forming a Pty Ltd company is to limit personal liability. The share sin a PTY LTD company can be either expressed in percentage or ownership unit terms.
A Pty Ltd company makes it easier to distribute ownership units to members compared to a corporation.
Sign a joint venture agreement
The joint venture agreement (JVA) is the perfect vehicle to use if you choose not to set up a separate legal entity. This will allow you to set up legal protections for all parties to the agreement.
The JVA will stipulate in writing exactly how the arrangement will work. This is critical in the event that a dispute arises between JV partners in the future.
A properly written JVA should clearly explain:
- The expected contributions of each joint venture member
- The agreed day to day duties of each member
- A proscribed end date of the agreement if applicable
- The ownership of intellectual property, client lists and shares
- The consequences of a partner leaving the joint venture
- A dispute resolution process
There are a wealth of free templates online that can assist you in drawing up your JVA
Is a Joint Venture the Right Choice For You?
While the prospect of joining forces and tapping into the benefits of a joint venture may be appealing, they are not an arrangement to be entered into without doing some proper due diligence. Before raising the prospect of a joint venture with a potential partner, it is worth taking the following points into consideration.
Can your business goals be achieved without forming a joint venture? Other options like recruiting a new employee or extending a line of credit may prove to be less complicated and costly.
Can you commit enough of your resources to a joint venture? If you’re already working long hours and struggling to keep up then a joint venture may be the last thing you need. Partnering and working with other entrepreneurs can become complicated and time-consuming. If you can’t commit the time energy and money to make the joint venture a success, it may be best to put it on hold for a while.
Is the venture likely to succeed? Before going too far down the road, it may be best to seek an independent opinion from a qualified third party such as a business consultant. A little money spent on investigation may save a lot of money and heartache if the joint venture fails.
What is the worst case Scenario? Can your current business afford the worst possible situation? Take some time to do some financial forecasting and map out the consequences of the best possible outcome, the worst possible outcome and the most likely scenario. Is the risk worth the reward?
What impact will different personalities have on the joint venture? The importance of taking this into consideration cannot be overstated. Everybody works differently and has a different set of values. Getting along with someone socially is no guarantee that you will get along with them in business. Is your prospective JV partner a good fit with you? Are you a good fit with them?