What is a joint venture? An in-depth guide to how they work

Joint ventures can present several advantages to a business. Ultimately, they allow companies to work together to reach a mutual goal. Learning how joint ventures work and how you can start one yourself can help you bring these benefits into your own business. In this article, we discuss everything to know about what a joint venture is and how they work with examples included.

What is a joint venture?

If you have an interest in business, you may want to know 'What is a joint venture?'. A joint venture is an arrangement between two or more business parties to achieve a common goal. Members of a joint venture combine resources to accomplish a particular action. These arrangements occur through formal written documentation or informally with a simple handshake.

Joint ventures can become separate business entities that do not impact the members' other business interests. In other instances, the individuals involved may operate under a joint venture agreement. While in this joint venture, each member may have a stake in its profits, losses and expenses.

Joint venture vs partnership

Although people sometimes confuse joint ventures with partnerships, there are a few key differences. The most significant difference is that a joint venture is between two or more business entities, whereas individuals form partnerships. For example, two companies can create a joint venture with a specific purpose, while two people can form a business venture to make a profit.

Another crucial difference is that joint ventures generally last only for a short period or until the task is accomplished. Partnerships can also last for several years until all parties involved choose to terminate them. Joint ventures are tantamount to partnerships, but they're usually only for one specific transaction and are much less formal.

Related: How to set up a business partnership: a step-by-step guide

Why form a joint venture?

Joint ventures form when two or more business entities believe they can help one another to accomplish a common goal. The joint venture concept typically starts with one business asking themselves what they're aspiring to achieve, which leads to some fundamental objectives, including:

• sharing expenses

• generating sales

• increased brand awareness

• access to other markets

• conducting research

It's important to have a specific goal in mind when you want to form a joint venture, as it allows you to find appropriate partners to develop a sound plan moving forward.

Related: How to develop SMART goals

What joint venture structures are there?

Because there's no clear legal framework for joint ventures, each relationship can take the form best suited to its circumstances and specific purpose. The following is a list of the most commonly employed structures with the pros and cons of each. They include:

Limited liability partnership

The pros of a limited liability partnership include:

• handled as a partnership for tax schemes

• limited liability of associates

• a common type of commercial ventures

• the legal framework for limited liability partnerships is not as extensive as those for limited companies, which affords considerable flexibility

• separate legal status

The cons of a limited liability partnership include:

• roles and duties of limited liability partnership members are not distinct like those of directors and shareholders of limited companies

• general filing requirements exist

• guarantees and security needed to support outside financing and third-party contracts impair LLPs

General partnership or limited partnership

The pros of a general partnership include:

• amenable

• fiscal transparency

• sensitive details of the venture can remain completely private

• limited partnership, which makes it great as a vehicle for investment rather than managerial roles and duties

The cons of a general partnership include:

• a general partnership means unlimited liability

• limited partnership, as a general partner manages the joint venture and has extensive liability

• limited partners cannot play a part in the daily management of the company or they risk losing the insurance benefits that come with limited liability

• lacks a separate legal identity and does not own assets, as it cannot grant a floating charge as security for financing

• any changes to party identities denote a new partnership arrangement which can be expensive and time-consuming

Company limited by shares

The pros of a company limited by shares include:

• universally recognised arrangement with clear corporate status and set corporate governance

• can own its assets, litigate and enter into contracts on its own accord

• liability is subject to the amount each party provides by way of share capital

• a complete legal framework holds the contractual agreements between the joint venture parties

• allows employees to share incentive plans

• obtaining interest by selling shares does not obstruct the legal control of the underlying company

The cons of a company limited by shares include:

• potential for duplicate taxation

• limited flexibility

• reporting and compliance obligations bring public disclosure pressure

• limited liability subject to guarantees that may support third-party contracts

Contractual venture

The pros of a contractual venture include:

• an amenable choice that is easy to set up and quick to undo

• Joint venture parties maintain ownership of assets.

• a joint venture party is typically not liable for the debts of the other party

• each party's share of venture profits and losses is taxed directly

The cons of a contractual venture include:

• devoid of separate legal status

• risk of forming partnerships, making way for unlimited joint ventures and liabilities for losses

• likely challenging to raise external loan investments while not being a legal entity nor owning assets

Deciding who to involve in your joint venture

In a successful joint venture, all parties are equally committed. Although there's not necessarily an equal share in expenses, a good joint venture has all parties committed to ensuring the venture's success in one capacity or another. If one member of the venture doesn't give it the necessary attention it deserves, the entire venture may face lots of challenges. Therefore, it's crucial to choose your fellow members carefully.

It's a smart approach to seek out other companies within your niche that are not direct competitors. Finding entities that share motivating factors, aligning principles and marketing objectives may prove fruitful in the long run. For example, a struggling dog walker and a new dog grooming business would benefit from promoting each other's services, and they would both have an excellent reason to ensure that the joint venture succeeds. Moreover, neither company has to worry about losing customers by promoting the other business because they offer different services within the same niche.

What are the responsibilities in a joint venture?

It's necessary to state the responsibilities of each party. While a verbal agreement is sufficient, it's better to have all pertinent information in writing. In this phase, you decide exactly how your business executes and what each member is required to do. A business then proceeds to set up meetings with the other members and discuss each company's specific goals for its venture. After that, they document the contribution efforts of each member. For example, they may develop a plan that states one business is responsible for 30% of shipping costs while the other pays 70% of production costs.

Throughout the entire venture, maintaining solid communication with the other members is crucial. The initial plan they create can help get everyone started off properly yet employing great communication skills throughout helps to ensure everyone is doing what they're supposed to during each phase. It might be good to set up regular meetings to discuss the venture's updates and suggest improvements.

Related: What are communication skills?

Example of a joint venture

Below is an example of a joint venture:

Redstar Clothing, an American business, decides that they would like to begin selling their products in the United Kingdom. One option is to go to the UK, scout for a store location, set up a supply chain, learn about the local laws and regulations and hire employees. This strategy takes a significant amount of time and initial resources to implement. The other option is to form a joint venture with an existing company within the UK.

The company decides to contact English Apparel, a clothing department store that operates in London. They propose a joint venture in which Redstar Clothing would assume the production costs for their products and the shipping costs to transport the clothing to London. English Apparel would then sell the products in their stores and split the profits with Redstar Clothing. Redstar Clothing now gets to expand into a new market at a fraction of the cost and English Apparel receives a portion of the sales on products they didn't pay to produce, resulting in pure profit.

Please note that none of the companies mentioned in this article are affiliated with Indeed.