What is a joint venture?
What is a joint venture? Whether you own a multi-million dollar business or are a small business owner, it’s likely the question has crossed your mind, given the financial gains a joint venture partnership has the potential to generate. Among the many advantages and benefits of joint venture arrangements is that they allow participants to pool resources, thus maximizing profits with minimal or no new investment. Take the time to understand this type of business relationship, including joint venture examples, and you’ll find the clarity you need to make strategic business decisions for your company’s long-term health.
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What is a joint venture partnership?
A joint venture is a business arrangement in which two or more companies agree to collaborate on a specified project by pooling resources (expertise, personnel and technology, for example) for a predetermined period of time. Participant companies also contractually agree to split the profit the venture creates. As a result, joint ventures are potentially advantageous for companies in need of expanded resources with minimal (or no) infusion of capital.
By way of joint venture examples, let’s say Company A wants to create a new furniture line, but it lacks the manufacturing production technology to do so. Company A then approaches Company B, which does have the necessary equipment, and proposes a joint venture partnership. The two firms contract to produce X product for Y amount of time, sharing profits and losses per Z contractual terms.
The advantages of joint venture arrangements in this example are clear: The collaboration allows Company A to create its desired innovation without an outlay of capital, while Company B gains a percentage of profits without incurring development costs.
Joint venture vs. partnership
Whether you should form a joint venture or partnership is a common question. Although joint venture partnership arrangements are just that – two entities partnering to complete a shared venture – the technical difference between “joint ventures” and “partnerships” is significant enough to touch on for clarification. Strictly defined, a business “partnership” is the ongoing collaboration by two or more entities whose activities are complementary (i.e. business owners), for the purpose of running a profitable business. For example, two attorneys might form a partnership in which each provides legal counsel for the firm (of which they share ownership). Meanwhile, a “joint venture partnership” is defined as a collaboration between two parties contracting to complete a single defined project with a contractually agreed-upon sharing of profits and losses. Joint venture vs. partnership arrangements do potentially carry differing tax, liability and fiduciary obligations. For the purposes of discussing the advantages and benefits of joint venture arrangements, we’ll use the terms “joint venture” and “joint venture partnership” interchangeably.
Joint venture advantages and disadvantages
The advantages of joint venture arrangements are numerous. The benefits of this type of business relationship center on the acquisition of (shared) resources without an (excessive) outlay of capital. This sharing of resources facilitates companies’ expansion into new markets, allowing for relatively low-risk, scalable business growth.
Another benefit of joint venture arrangements is their flexibility. Participants are not required to form a new business entity in order to create the venture’s collaborative product. Furthermore, upon expiration of the joint venture partnership contract, neither party is bound beyond the terms of the contract. Each business retains its unique identity and autonomy, and each may carry on business activities unrelated to the joint venture. As such, joint venture arrangements streamline the process of business innovation while minimizing its risks.
A conversation about joint venture advantages and disadvantages must consider the potential weaknesses of this type of business relationship, which can be mitigated or prevented with careful planning. In considering joint venture advantages and disadvantages, consider the possibility that, in forming a joint venture, you may limit outside opportunities to interact with other organizations, particularly when your joint venture contract contains non-competition or non-disclosure clauses or limits the use of non-specified vendors, for example. In addition, joint venture participants may face increased liability. While most businesses entering joint venture agreements are limited liability companies (small businesses), each participant is equally responsible for legal claims arising from the joint venture, regardless of its level of involvement (or profit) from the venture. Relatedly, depending on the terms of the joint venture contract, participants may contribute resources unevenly, which can become problematic if the profit-sharing arrangement does not compensate adequately in the end.
Careful planning and understanding of what is a joint venture can prevent complications like these so that your joint venture partnership is a profitable one.
Joint venture examples
One of the more well-known joint venture examples is the “Caradigm” venture between Microsoft Corporation and General Electric (GE) in 2011. The Caradigm project was launched to integrate a Microsoft healthcare intelligence product with various GE health-related technologies. In 2016, Microsoft sold its 50% stake in the project, effectively ending the venture and facilitating GE’s sole ownership of the Caradigm product.
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