Joint Venture (JV) Agreements Explained With Examples
There are a number of ways to run a business project. Sometimes, business entities enter into agreements to cooperate on a single project, but don’t wish to formally merge or become partners on a permanent basis. There are options for working with other businesses beyond B2B sales, including different kinds of partnerships that facilitate the joint investment and profit sharing of multiple organizations. Joint Ventures are one of these options.
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What is a Joint Venture (JV)?
A joint venture (JV) can take many forms, but, in basic terms, a it is an agreement between two parties to enter into a business relationship which involves sharing both expenses and the profits, for a limited time. Joint ventures normally do not create new, unique business entities: they are designed to be temporary agreements. JVs can be entered into by individuals or businesses, and they can be governed by terms as simple as a verbal agreement and a handshake, or as complex as legally binding contracts.
Generally, joint ventures are defined by a single, clear objective that all parties involved are working toward.
Joint Venture vs Partnership
The difference between a JV and a partnership is quite simple. A joint venture is an agreement entered into by two or more separate entities that does not create a new entity. Partnerships, on the other hand, are business entities created by two or more entities forming into a single, new organization.
A partnership is the creation of a new and unique entity, whereas a joint venture is multiple distinct businesses or individuals working together toward a defined goal. Likewise, while a JV involves cooperation between businesses, they do not become a cooperative business; it is a contract, not a business structure.
Joint Venture Agreement
One of the key advantages of a joint venture agreement is that it can be entered into by parties of any number, size, and business classification. A large business could enter into a JV with an individual who holds specific expertise they need. Very often, this takes the form of agreements between experts with specific or local knowledge, or businesses with certain capabilities, and investors providing capital. A common example would be a real estate developer entering into a JV with an investor to build a large block of apartments.
Joint Ventures are extremely versatile ways of entering cooperation. The specific agreements will vary depending on the number of entities involved, the scope and size of the project, the timeline, and the industry. It’s this versatility that makes them attractive, as well as the fact that multiple entities can cooperate while maintaining independent. A joint venture can be set up as its own entity, such as an LLC, or it can simply remain an agreement.
Joint Venture Taxes
Joint ventures take many forms, and so the taxes applied to them can vary too. If the parties involved decide to create an entity specific to the JV, such as an LLC, then the taxes would be applied as they would for any other such business. If, however, the parties involved do not set up a separate entity and the JV is just an agreement, the answer is again that the taxes will greatly depend on the agreement itself: how the parties involved have chosen to split expenses and profits will determine who ends up responsible for what percentage of the taxes.
For this reason, setting up a JV as its own separate business entity can be advantageous, and often simpler.
Why Form a Joint Venture?
The key advantage of joint ventures is that they allow entities of different sizes, classifications, locations, and expertise to work together, and combine their resources on a specific project. They are popular with investors who provide funding for projects in expectation of return, and who often turn to more localized and specialized businesses to perform the management and execution of the project. In turn, it gives businesses and people with specialized skill sets access to sources of funding. Another advantage to JVs is allowing businesses within different industries to embark on projects that cross the boundaries of their individual specializations, allowing for new innovations.
JVs allow businesses to cooperate across industries and markets without having to significantly restructure. Because JVs are not recognized as their own entity for tax purposes, they allow businesses to effectively choose how they want the project to be taxed by deciding what kind of business entity, if any, the JV will be.
Real Estate Joint Venture
Real estate JVs are extremely common. Real estate development requires a lot of money, as well as significant local experience. Real estate is a perennially popular investment, and so there is no shortage of investors looking to enter the market, but who still need local assistance. Investors with money connect with local businesses or individual experts to undertake a development project, effectively broadening the range of an investor’s potential market by giving them access to developers across the country. It also gives smaller local developers access to much more funding than they would otherwise be able to accumulate.
International Joint Venture
International JVs (IJVs) are popular because they allow businesses to enter the market of another country without all of the associated risks of actually owning a business on foreign soil. The businesses involved gain access to new markets and can leverage one another’s resources and experience. They get the benefit of cooperating with a business that is already experienced in the new market.
Joint Venture Examples
- NASA and Google joined forces in order to create Google Earth, a complete, interactive, 3D global map based in part on satellite imagery. Their combined efforts power a number of services we use on a daily basis, such as satellite based maps of our local area.
- Hulu has joint venture relationships with a number of television and film creators in order to offer content on its platform. Using joint ventures, it can partner up with many different companies without fundamentally changing the business each time.
- There are a number of airline JVs, such as Star Alliance, that allow airlines to coordinate schedules and customer service to offer more flexibility with flight plans and more destinations.
- Nissan and Renault recently entered into a JV in order to develop electric vehicles for the Chinese market, to take advantage of the market interest for electric vehicles in that country.
- McDonalds and Starbucks both engaged in JVs with Chinese companies in order to expand into the Chinese market, though each company is taking different approaches. McDonalds is handing over control of their in-country stores to the Chinese companies in return for access to the market. Starbucks, however, is buying out its JV partners in China in order to maintain more control of its operations there.
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Ben Steele is a writer, theatre(re) professional, and nonprofit administrator. He was born in England, spent his teen and early 20s in Canada, and now lives in America. Please excuse his occasionally confused voice and the odd recalcitrant u after an o.
This post was updated January 17, 2019. It was originally published January 18, 2019.