Both a joint venture and a partnership firm involve two or more parties working together on a project or business. However, there are some key differences between the two. Joint ventures are going to increase in the near future.
According to a survey conducted by McKinsey, joint-venture activity will increase over the next five years. 90% of respondents to the survey from different companies believe that joint ventures are a better option than Mergers and Acquisitions.
This blog post will explain the meaning of a joint venture, its key advantages, and how it differs from a partnership. By the end, you should have a clear understanding of these business structures and which one might be best for your needs.
What is a Joint Venture Company?
A joint venture company is when two or more separate companies come together for a specific project or business opportunity. Each joint venture company has something important to the venture, like capital, expertise, equipment, or customers from two different businesses. The companies that joint venture, agree to work together and share the profits, losses, and control of the new business.
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A joint venture is usually formed for a single project or opportunity that has a clear start and end date. Joint venture examples could be two construction firms joining forces to bid on a large building project or a technology company teaming up with an automaker to develop new auto parts.
The key points that define a joint venture are:
- Two or more existing parent companies come together for a defined project or business opportunity.
- A contract sets out each party’s contribution, share of profits/losses, and control and what will happen at the end of the project.
- It is a separate legal entity from the parent companies.
- Control and management are usually shared jointly by the partners.
- Profits, losses, and assets are shared as agreed upon in the contract.
Joint ventures are commonly used in industries like real estate development, construction, resource extraction, and technology and manufacturing collaborations. By pooling resources and skills, companies can take on larger projects together than they could alone.
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Reasons Why Company Form Joint Venture
To Make the Most of Resources
In a joint venture, both companies can use their strengths to reach their shared goal. For example, one company might have a strong manufacturing setup, while the other might have better ways to distribute the products. By working together, they can make the best use of these resources.
To Save Money
When two companies work together in a joint venture, they can produce goods at a lower cost per item by taking advantage of economies of scale. This is especially useful when new technologies are expensive to adopt. Additionally, by teaming up, they can save money on things like advertising, business supplies, and labor.
To Combine Skills
When two companies or groups form a joint venture, they bring different skills and knowledge to the table. By working together, each company can benefit from the other’s strengths and expertise.
To Enter Foreign Markets
Companies often use joint ventures (JVs) to team up with local businesses when they want to enter a foreign market. If a company wants to sell its products in another country, it can partner with a local business through a JV. This allows the company to take advantage of the local business’s existing distribution network.
In some countries, there are rules that make it difficult for foreign companies to enter the market on their own. In such cases, forming a JV with a local business might be the only practical way to do business there.
What is Partnership?
A partnership firm is a relationship between two or more persons/entities who join to carry on a trade or business. Partnerships are formed by an agreement to make profits jointly on a continuing basis.
Advantages of a Joint Venture
Some key advantages of establishing a joint venture rather than other business structures include:
- Access to a wider range of skills, expertise, equipment, and other resources that individual partners would not have alone. This allows larger or more complex projects to be undertaken.
- Shared financial contributions – the capital investment, assets, funding, and risk are split among partners rather than one bearing full responsibility. What are multiple owners? How To Apply For Loan If you have multiple owners?
- Ability to undertake projects requiring a sizable financial commitment by bringing partners together.
- Shared market knowledge by combining the customer bases, distribution networks, product ranges, and geographic coverage of partners to access new markets.
- Parent companies retain independence by maintaining their separate operations while collaborating on specific opportunities via the joint venture.
Disadvantage of Joint Venture
Joint venture contracts often restrict the outside activities of the companies involved while the project is ongoing. Each company might need to sign agreements that prevent them from working with other vendors or business partners during this time.
Additionally, if a separate business entity is not created for the joint venture, the companies involved could be held responsible for liabilities, just like in a partnership. Even though the companies share control in a joint venture, the distribution of work and resources might not always be equal.
How is a Joint Venture Different From a Partnership Firm?
| Basis of Comparison | Joint Venture | Partnership Firm |
| Definition | A joint venture is a business undertaking by two or more parties that otherwise retain their distinct identities. It is formed to undertake a specific venture or project for a limited period of time. | A partnership firm is a relationship between two or more persons/entities who join to carry on a trade or business. Partnerships are formed by an agreement to make profits jointly on a continuing basis. |
| Ownership | A joint venture is a separate legal entity where two or more parties come together to form a new business entity. Ownership is shared through shares of the new entity. | The partnership firm is not a separate legal entity. The owners have joint ownership of business assets and liabilities. |
| Legal Formalities | Setting up a joint venture involves more legal formalities, such as registering and signing joint venture agreements. | Fewer legal formalities are involved in setting up a partnership. |
| Division of Profits | Profits are shared based on equity shareholding in joint ventures. | Profits are shared equally among partners or as per the profit-sharing ratio agreed at the time of partnership. |
| Taxation | The joint venture is taxed as a separate entity. Profits distributed to partners are taxed in their hands. | A partnership firm is not taxed separately. Profits are distributed to partners and taxed in their individual capacity. |
Takeaway
A joint venture provides a strategic option for different companies to leverage their collective strengths for high-investment projects through a formal legal agreement. However, at times when the project is big enough, joint ventures might require funding from external parties.
Indifi aims to solve this by providing loans tailored to the specific needs of joint ventures and other combinations. With Indifi’s flexible funding, more businesses will find the power to explore collaborative opportunities that were previously thought impossible.
FAQs
- What is a joint venture?
A joint venture explained a business agreement between two or more separate companies to work together on a defined project, sharing profits, losses, and resources.
- What are the key things that define a joint venture?
It is formed for a project by existing companies, has a contract outlining contributions and management, has a separate legal entity, and has a limited life.
- How is a joint venture different from a partnership?
A partnership has no fixed end, while a joint venture has a defined project timeline; partnerships have less formal agreements than joint ventures.
- What are some advantages of a joint venture?
It allows access to more skills and resources to take on larger projects, shares financial investment and risk, and retains parent company independence.
- What types of industries commonly use joint ventures?
Industries like construction, resources, manufacturing, and technology frequently use joint venture capitalize on combined strengths.