What is a joint venture?

Everything you need to know about this business structure
A joint venture is a temporary strategic partnership (short, middle or long term) of an organization, association or alliance of people or groups of companies that keep their individuality and legal independence, but which act together under the same management and rules, to pursue a certain commercial activity, where investments, control, responsibilities, staff, risks, expenses and profits are shared. This dynamic is referred to as a joint company, joint investment, or a business collaboration.
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Features of the joint venture contract

In a joint company, the partners usually operate their businesses or companies independently. A joint company entails the creation of a new company, this time with a partner, whose profits or losses will affect the accounts of each company according to the legal form used to structure the joint company, with the ultimate aim, based on the principle of synergy, to integrate systems towards a new objective. Therefore, the main characteristics of a joint venture agreement are:

  • It is an unnamed contract of business collaboration.
  • The companies keep their own individual identities, which is the opposite of what would happen in a merger scenario. The companies already exist.
  • Through this contract, the parties look for a common purpose.
  • There is a contribution to losses, profits, duties and investment.
  • The object of the joint venture varies, and does not necessarily require a monetary contribution; the contribution will be defined by the needs leading to the business collaboration.
  • The contributions that each party must make will consist of money, assets, technology, services, strategies, etc.
  • An ad hoc basis, basically intended for a project, although not necessarily short in duration, as it will be designated by virtue of the principle of autonomy of will, but will always be of limited duration.
  • Contributions and association of the interests of the parties.
  • There is the possibility of generating reciprocal representation with the other party.
  • There is joint control of the business collaboration.
  • There is an agreement, which consists of a statement of common will, intended to regulate the rights in the agreement.
  • The common objective, which must be indicated in the agreement.

The importance of these features with reference to this contract lies in the types of Joint Venture that may exist, which is why three major categories can be identified: joint venture of strategic alliances, joint venture of co-investment and contractual joint venture.

Main advantages and disadvantages

In terms of the main advantages and disadvantages of the strategic collaboration, the main advantages are the sharing of risks and costs and thereby reducing them, creating more efficient competition, reaching or conquering new markets, increasing financial power, accessing new resources or economies of scale, giving greater possibilities of competition, having the option of increasing competitive advantages, extending the number of clients, saving money by sharing operating costs, saving money by sharing advertising and marketing costs, saving time and business resources by sharing workload, using know how and handling greater information, and gaining new business associates.

An advantage from a tax / accounting perspective is that the parties can maintain independent accounting, although they could also not do so and just record the operations corresponding to this contract on their own books, which allows greater opportunities to distribute expenses efficiently and secure profit.

The main disadvantages of a business association are the possible risks of conflicts of interest between the contracting parties, the duplication of tasks, the dependence of the partner for important decisions, the adaptation to a different culture or to markets that are unknown by one of the contracting parties. In the case of a business association by two parties from different countries there is a major possibility of poor integration and communication among the partners if they not take right corrective actions and strategic decisions, which could end up causing losses and divergence of strategic objectives.

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Types of joint ventures

  • Joint venture of strategic alliances: In this type of joint venture, it is not necessary to make an economic contribution. Instead, the contributions made by the parties are the sum of their separate characteristics put toward achieving a collective aim according to the needs of the contracting parties.
  • Joint venture of co-investment: In this type of joint venture, the main feature is the parties' provision of money or assets, generating single management for the purpose of increasing the profit that each party accrues, through the inclusion of new markets and economies of scale.
  • Contractual joint venture: In this type of joint venture, the parties involved carry out a joint activity, establish collaboration agreements that stipulate clauses to govern the activities that each party will carry out, how to distribute profits and risks, the use of auxiliary agreements and satellite contracts. In short, there is a strict regulation of the undertaking.
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