Joint Venture Partners
A joint venture (often abbreviated JV) is an entity formed between two or more parties to undertake economic activity together. The parties agree to create a new entity by both contributing equity (at the start of a business, owners put some funding into the business to finance assets), and they then share in the revenues, (In business, revenues or revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover.) expenses, and control of the enterprise. The venture can be for one specific project only, or a continuing business relationship.
The phrase generally refers to the purpose of the entity and not to a type of entity. Therefore, a joint venture may be a corporation, limited liability Company, partnership or other legal structure, depending on a number of considerations such as tax and tort liability.
A corporation is an institution that is granted a charter recognizing it as a separate legal entity having its own privileges, and liabilities distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business.
A Limited Liability Company or a company with limited liability (abbreviated L.L.C. or LLC or W.L.L.) is a flexible form of business enterprise that blends elements of partnership and corporate structures. It is a legal form of Business Company, in the law of the vast majority of United States jurisdictions that provides limited liability to its owners. Often incorrectly called a “limited liability corporation” (instead of company), it is a hybrid business entity having certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are).
An LLC, although a business entity, is a type of unincorporated association and is not a corporation. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation. It is often more flexible than a corporation and it is well-suited for companies with a single owner.
A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business. Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to the partners (i.e. there is no dividend tax levied). However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a corporation.
Joint ventures are not uncommon in the oil and gas industry, and are often co operations between a local and foreign company (about 3/4 are international). A joint venture is often seen as a very viable business alternative in this sector, as the companies can complement their skill sets while it offers the foreign company a geographic presence.
Why Joint Ventures?
As there are good business and accounting reasons to create a joint venture (JV) with a company that has complementary capabilities and resources, such as distribution channels, technology, or finance, joint ventures are becoming an increasingly common way for companies to form strategic alliances. In a joint venture, two or more “parent” companies agree to share capital, technology, human resources, risks and rewards in a formation of a new entity under shared control.
Reasons for forming a joint venture
- Internal reasons
- Build on company’s strengths
- Spreading costs and risks
- Improving access to financial resources
- Economies of scale and advantages of size
- Access to new technologies and customers
- Access to innovative managerial practices
- Competitive goals
- Influencing structural evolution of the industry
- Pre-empting competition
- Defensive response to blurring industry boundaries
- Creation of stronger competitive units
- Speed to market
- Improved agility
- Strategic goals
- Transfer of technology/skills
Important Factors to be Considered before a Joint Venture is Formed Screening of prospective partners
Joint development of a detailed business plan and short listing a set of prospective partners based on their contribution to developing a business plan
Due diligence – checking the credentials of the other party (“trust and verify” – trust the information you receive from the prospective partner, but it’s good business practice to verify the facts through interviews with third parties)
Development of an exit strategy and terms of dissolution of the joint venture
Most appropriate structure (e.g. most joint ventures involving fast growing companies are structured as strategic corporate partnerships)
Availability of appreciated or depreciated property being contributed to the joint venture; by misunderstanding the significance of appreciated property, companies can fundamentally weaken the economics of the deal for themselves and their partners.
Special allocations of income, gain, loss or deduction to be made among the partners
Compensation to the members that provide services