If you and your company are looking to join forces with another company for a specific purpose or to accomplish a goal, then you may wish to consider the joint venture advantages and disadvantages to determine if it may be the right business structure for you. This article will discuss the advantages and disadvantages of joint venture agreements and the types of joint venture agreements you may utilize to accomplish your business goals.
Joint Venture Definition
A joint venture (JV) — is a business structure that is utilized by two or more entities (commonly small businesses or business entities) with a common purpose that is tied to a specific business activity or business purpose. Sometimes the parties to a JV will actually create a new business entity to which all the parties involved in the JV contribute assets. An agreement is reached between all the parties to the JV as to how the business will be managed. The JV entity can be a partnership, limited liability company (commonly referred to as an LLC), or a corporation, depending on the needs of the JV partners and the level of risk each JV partner is willing to bear.
However, there is no requirement in a JV that a separate entity is created by the business partners. Instead, each entity or individual remains a single entity or individual that all cooperate together on the goals set out in the joint venture agreement. The JV agreement is essentially a contract between all the business partners participating in the JV that outlines how the JV will be managed, how profits and losses are shared, and other details of the JV.
Many times, the joint venture definition spelled out in the JV agreement is for a single project or single purposes, such as the production of a product or the completion of a research activity. However, JVs may also be set up to handle multiple projects.
JVs can be set up between similar companies or entities large and small. The purpose of the JV can be for as small or as grand a project as the partners wish. Some real-life examples of a JV include:
The brand MillerCoors is an example of a JV. The partners in the JV are Molson Coors Brewing Company and SABMiller. This JV operates in the United States and Puerto Rico.
Major car manufacturers Toyota and Ford Motor Company formed a JV for research purposes. While the two are normally competitors, they formed a JV focused on the goal of developing a hybrid truck.
Famous internet search engine company, Google, joined forces in a JV with NASA to create the very popular Google Earth application.
Forming Your JV
If you decide a JV is a way to go, all you will need to establish the JV is a written agreement, or contract, which is referred to as the JV agreement. You will want to ensure your JV agreement clearly outlines the full description of the purpose of the JV, the manner in which the parties will handle all profits (or losses), and how each party will contribute to the decision making and management of the JV. While it is possible to form a JV without a written agreement, it is not a good idea to do so. Should things go unexpectedly or if one partner changes its mind about how it wants to handle any aspect of the JV, having a written agreement in place that clearly spells out the rights and responsibilities of the parties can help avoid confusion and costly litigation.
The IRS does not recognize JVs as a separate taxing entity than those of its partners. Most JVs include the setup of a separate business entity, where the partners in the JV own a percentage as set forth in the JV agreement. The structure of the JV entity, if a separate one is formed, will determine how the taxes for the JV are handled and paid to the IRS.
If you set up a separate entity for your JV, that entity will pay taxes on its income according to whatever type of structure was used to establish it. For instance, if you setup you JV entity as an LLC, it would pay taxes just like any other entity. The degree the partners will contribute from their shares of the JV entity to the taxes owed should be set forth in your JV agreement.
If no separate business entity is established for your JV, the agreement must clearly set forth how the tax will be apportioned between all the partners. It is important to spell this out clearly so that all entities involved with the JV understand and acknowledge their tax responsibilities.
Joint Venture VS Partnership: Advantages and Disadvantages of Joint Venture
While JVs and partnerships have many similarities, a JV is not actually a true partnership. A partnership consists of an actual business entity that is formed by the partners. By contrast, a JV is simply the agreement of partner entities (regardless of their business type) to join together for the purpose of reaching a shared goal or completing a shared project. If a separate business entity is created to accomplish the purpose of the JV, it is not necessarily established as a partnership (though it can be).
In a partnership, the taxes owed by the partnership are always paid by the individual partners. But a JV can establish a business entity that pays its own taxes rather than passing the tax obligation through to the individual partners.
To answer the question of partnership vs joint venture, it is best to meet with an experienced attorney to discuss the joint venture advantages and disadvantages, as well as the types of the joint venture. The partnership vs joint venture question is best answered when you take into account a number of factors, including the goals and needs of the partners.