Building Better Businesses: an Exploration of the Joint Venture

There are many different ways companies can choose to come together and collaborate for achieving the purpose of a common goal. For some companies that want an arrangement that is more formal than a strategic alliance but do not wish to completely surrender their autonomy over their existing business, a joint venture is often the best approach. This guide will explore the ins and outs of the joint venture, explaining how joint venture agreements are created, and examining the advantages and disadvantages to this form of business collaboration. To see a comprehensive guide comparing and contrasting all of the most popular forms of business partnerships, see the guide Working Together: A Comprehensive Guide to Business Collaborations.

What is a Joint Venture?

A joint venture, created using a Joint Venture Agreement, involves two companies investing their funds to create a third, jointly owned company as a new subsidiary of both of the original companies. In creating the new company, the two companies that invested funds will continue to be in operation and will act as the parent companies of the new company created by the joint venture. The parent companies then typically agree to split any profits the joint venture brings in. By creating a joint venture, the new company has access to the assets, knowledge, funds, and infrastructure from both of the parent companies. This allows the new company to have a head-start in a competitive market as it doesn't have to begin from the ground up. However, since the parent companies remain separate, they are able to continue conducting their original business as they had been before without their structure or dealings being altered by their combination of forces. This is often considered the best of both worlds for many small businesses that want to venture into new markets with the assistance of another business while maintaining the company that they've already created.

Example: In 2008, the joint venture of NBC Universal Television Group and the Disney ABC Television Group had the objective of joining forces to create an online video streaming platform. The two companies came together to create the subsidiary company, HULU. This new company began providing quality streaming content to consumers and became one of the leaders of streaming entertainment in the market.

A joint venture, though similar in some ways, is not the same as a partnership, created using a Partnership Agreement. The main difference between a partnership and a joint venture is that a joint venture is limited to one particular project while a partnership is longer lasting and generally pursues a number of different projects. Joint ventures can also include corporations or entities while partnerships are only made up of two or more individual people. Joint ventures are usually only formed for a specific amount of time while a partnership is built for the long term. Joint ventures are generally dissolved once the specific goals of the venture are reached, so the length of time varies but is usually around five to seven years long.

How to Create a Joint Venture?

Generally, a joint venture consists of each of the following characteristics:

The parties undertaking the joint venture remain legally independent and separate companies with separate management and structures, with the exception of the company they create together for the purpose of this collaboration
The parties set out to accomplish a specific, mutually beneficial goal
Both parties contribute resources, share ownership of any money made by or money owed by the joint venture via their new company, and share in the making their planned business become a reality
The joint venture is temporary (but can be short or longer-term), dissolving once the goal is reached

Overall, the key to this arrangement is that both parties contribute to it and share in the opportunities and risks. This being said, however, the contributions don't need to be equal. For instance, one party might take the lead on the manufacture of the product, while the other party might be responsible for creating and managing a distribution channel. One party might offer 70% of the money, while the other might bring just 30%. However, as long as the parties are on the same page about their responsibilities and goals for the new company, they can create a successful joint venture.

The best way to ensure that the parties have a mutual understanding of the arrangement is through the creation of a joint venture agreement. Those who enter into a joint venture need a contract that spells out the parameters of their involvement. This agreement describes the purpose of the arrangement and sets up everything both parties need to start their shared venture. This includes profit and loss details, ownership allocations, and a termination clause. Other parts of the agreement can include how the venture is staffed and structured, the scope of the venture, and what determines the success of the venture. Finally, the agreement specifies how the parent companies will split profits and losses and how they will pay any taxes that are due.

The creation of a joint venture often involves parties sharing potentially sensitive information with each other, such as trade secrets related to how their individual businesses operate. To protect themselves, it's often recommended that the parties included in a joint venture all agree to sign Non-Disclosure Agreements that protect the specifics of their venture and their own trade secrets from being revealed by any of the parties.

What are the Pros and Cons of Joint Ventures?

There are many benefits to this type of business relationship, with the main advantage being that each of the parent businesses is able to use their shared resources to acquire additional market share without having to fund the full amount to accomplish the project alone. This sharing of resources facilitates companies' expansion into new markets, allowing for lower-risk business growth. Joint ventures are also incredibly flexible. The parent companies are bound to each other only via their new company and each business is able to retain its own unique identity and autonomy. Each may carry on business activities unrelated to the joint venture.

Though there are many benefits, there are also some challenges and disadvantages associated with joint ventures. Engaging in a joint venture may limit a company's opportunity to interact with other organizations, especially if the joint venture agreement contains non-competition or non-disclosure clauses. This can end up stifling the parent companies. Participants in joint ventures may also face increased liability. While most businesses entering joint venture agreements are small businesses with a limited liability structure, each participant is equally responsible for legal claims arising from the joint venture.

Final Takeaways

A joint venture can be a great option for businesses that wish to collaborate on a project but do not want to surrender their autonomy over their existing company.

A joint venture involves two companies investing their funds to create a third, jointly owned company as a new subsidiary of both of the original companies while also maintaining the two original companies
The new company has access to the assets, knowledge, funds, and infrastructure from both of the parent companies
The parent companies are able to continue the work they had already been doing since their original structures remain in place
A joint venture may limit a company's opportunity to interact with other outside organizations, especially if they've signed non-disclosure or non-competition clauses as part of the deal

About the Author: Malissa Durham is a Legal Templates Programmer and Attorney at Wonder.Legal and is based in the U.S.A.