joint venture

A partnership or conglomerate, formed often to share risk or expertise: a joint venture between the film companies.

The cooperation of two or more individuals or businesses--each agreeing to share profit, loss and control--in a specific enterprise.

Investopedia Says:
This is a good way for companies to partner without having to merge. JVs are typically taxed as a partnership.

Related Links:
Learn what corporate restructuring is, why companies do it and why it sometimes doesn't work. The Basics Of Mergers And Acquisitions

Business structure formed by two or more parties for a specific purpose. Joint ventures are similar to partnerships, but are usually limited to one or two projects. In the financial services industry, joint ventures have been widely employed for marketing products or services that one of the parties, acting alone, would have been legally prohibited from doing. Prior to financial modernization legislation enacted in 1999, banks often formed joint ventures with life insurance companies to market annuities and insurance to bank customers.

Federal Antitrust Laws generally treat financial joint ventures as permissible as long as they are pro-competitive, meaning a proposed venture does not interfere with activities of other organizations.

An agreement between 2 or more parties who invest in a single business or property. See also Limited Partnership, Tenancy in Common.
Example: Abel and Baker form a joint venture to explore for minerals on Cobb's land. Abel and Baker use a Tenancy in Common arrangement for ownership of the mineral rights.

A joint venture is a business enterprise under-taken by two or more persons or organizations to share the expense and (hopefully) profit of a particular business project. "Joint ventures are not business organizations in the sense of proprietorships, partner-ships or corporations," noted Charles P. Lickson in A Legal Guide for Small Business. "They are agreements between parties or firms for a particular purpose or venture. Their formation may be very informal, such as a handshake and an agreement for two firms to share a booth at a trade show. Other arrangements can be extremely complex, such as the consortium of major U.S. electronics firms to develop new microchips…. A joint venture is, in effect, a form ofpartnership that is limited to a particular purpose." Joint ventures have grown in popularity in recent years, despite the relatively high failure rate of such efforts for one reason or another. Creative small business owners have been able to use this business strategy to good advantage over the years, although the practice remains one primarily associated with larger corporations.

Most joint ventures are formed for the ultimate purpose of saving money. This is as true of small neighborhood stores that agree to advertise jointly in the weekly paper as it is of international oil companies that agree to work together for purposes of oil and gas exploration or extraction. Joint ventures are attractive because they enable companies to share both risks and costs.

TYPES OF JOINT VENTURES. Equity-based joint ventures benefit foreign and/or local private interests, groups of interests, or members of the general public. Under non-equity joint ventures (also known as cooperative agreements), meanwhile, the parties seek technical service arrangements, franchise and brand use agreements, management contracts, rental agreements, or one-time contracts, e.g., for construction projects. Participants do not always furnish capital as part of their joint venture commitments. There are, for example, non-equity arrangements in which some companies are more in need of technical services or technological expertise than they are capital. They may want to modernize operations or start new production operations. Thus, they limit partners' participation to technical assistance. Such arrangements often include some funding as well, albeit limited.

Legal Structure of Joint Ventures

As Lickson observed in A Legal Guide for Small Business, joint ventures are governed entirely by the legal agreement that brought them into existence. "Unless the joint venture is formalized by creation of a corporation or partnership, it never ripens into a taxpaying, legal entity on its own. Instead, the joint venture functions through the legal status of the venture participants, known as co-venturers or venture partners," Lickson wrote. "Since the joint venture is not a legal entity on its own, it does not hire people, enter into contracts, or have its own tax liabilities. These matters are handled through the co-venturers. Corporate law, partnership law, and the law of sole proprietorship do not govern joint ventures; contract law governs joint ventures." And as Marc J. Lane noted in the Legal Handbook for Small Business, "since the venture ends at the conclusion of a specific project, issues of continuity of life and free transferability become moot."

Why Joint Ventures Fail

Small business owners should not engage in joint ventures without adequate planning and strategy. They cannot afford to, since the ultimate goal of joint ventures is the same as it is for any type of business operation: to make a profit. Experience dictates that both parties in a joint venture should know exactly what they wish to derive from their partnership. There must be an agreement before the partnership becomes a reality. There must also be a firm commitment on the part of each member to the project and to one another. One of the leading causes for the failure of joint ventures is that some participants do not reveal their true business agendas, or mislead their partners about their ability to uphold their agreed-upon responsibilities.

Many small business consultants counsel clients to approach joint ventures cautiously. They acknowledge that such partnerships can be most valuable in nourishing a company's growth and stability, but also point out that smaller businesses usually have far less margin for error than do multinational corporations, or even mid-sized companies. Some experts recommend that business owners considering a joint venture with another establishment (or establishments) launch a small joint venture first. Such small projects allow companies to test the relationship without committing large amounts of money. This is especially true when companies with different structures, corporate cultures, and strategic plans work together. Such differences are difficult to overcome and frequently lead to failure. That is why a "courtship" is beneficial to joint venture participants.

Other factors that can have a debilitating impact on joint ventures include marketplace developments, lagging technology, partner's inability (rather than reluctance or refusal) to honor their contractual obligations, and regulatory uncertainties. Another problem with joint ventures concerns the issue of management. The managers of one company may be more adept and/or decisive with their decisionmaking than their counterparts at the other company. This can lead to friction and a lack of cooperation. Projects are doomed to failure if there is not a well-defined decisionmaking process in place that is predicated on mutually recognized goals and strategies.

Benefits of Joint Ventures

Among the most significant benefits derived from joint ventures is that partners save money and reduce their risks through capital and resource sharing. Joint ventures also give smaller companies the chance to work with larger ones to develop, manufacture, and market new products. They also give companies of all sizes the opportunity to increase sales, gain access to wider markets, and enhance technological capabilities through research and development (R&D) underwritten by more than one party. Until relatively recently, U.S. companies were often reluctant to engage in research and development partnerships, and government agencies tried not to become involved in business development. However, with the emergence of countries that feature technologically advanced industries (such as electronics or computer microchips) supported extensively by government funding, American companies have become more willing to participate in joint ventures in these areas. In addition, both federal and state agencies have become more generous with their financial support in these areas. Government's increased involvement in the private business environment has created more opportunities for companies to engage in domestic and international joint ventures.

Further Reading:

Johnson, Howard E. "Reducing the Risks in Joint Ventures." CMA Management. December 2000.

Lane, Marc J. Legal Handbook for Small Business. AMACOM, 1989.

Lickson, Charles P. A Legal Guide for Small Business. Crisp Publications, 1994.

Lynch, Robert Porter, The Practical Guide to Joint Ventures & Corporate Alliances. John Wiley and Sons, 1989.

Moeller, Bud. "Becoming a Corporate 'Partner of Choice.' " Corporate Board. November 2000.

Nueno, Pedro. "Alliances and Other Things." R&D Management. October 1999.

A collaborative undertaking by two or more persons or organizations for a specific project (or projects) having many of the legal characteristics of a partnership.

An association of two or more individuals or companies engaged in a solitary business enterprise for profit without actual partnership or incorporation; also called a joint adventure.

A joint venture is a contractual business undertaking between two or more parties. It is similar to a business partnership, with one key difference: a partnership generally involves an ongoing, long-term business relationship, whereas a joint venture is based on a single business transaction. Individuals or companies choose to enter joint ventures in order to share strengths, minimize risks, and increase competitive advantages in the marketplace. Joint ventures can be distinct business units (a new business entity may be created for the joint venture) or collaborations between businesses. In a collaboration, for example, a high-technology firm may contract with a manufacturer to bring its idea for a product to market; the former provides the know-how, the latter the means.

All joint ventures are initiated by the parties' entering a contract or an agreement that specifies their mutual responsibilities and goals. The contract is crucial for avoiding trouble later; the parties must be specific about the intent of their joint venture as well as aware of its limitations. All joint ventures also involve certain rights and duties. The parties have a mutual right to control the enterprise, a right to share in the profits, and a duty to share in any losses incurred. Each joint venturer has a fiduciary responsibility, owes a standard of care to the other members, and has the duty to act in good faith in matters that concern the common interest or the enterprise. A fiduciary responsibility is a duty to act for someone else's benefit while subordinating one's personal interests to those of the other person. A joint venture can terminate at a time specified in the contract, upon the accomplishment of its purpose, upon the death of an active member, or if a court decides that serious disagreements between the members make its continuation impractical.

Joint ventures have existed for centuries. In the United States, their use began with the railroads in the late 1800s. Throughout the middle part of the twentieth century they were common in the manufacturing sector. By the late 1980s, joint ventures increasingly appeared in the service industries as businesses looked for new, competitive strategies. This expansion of joint ventures was particularly interesting to regulators and lawmakers.

The chief concern with joint ventures is that they can restrict competition, especially when they are formed by businesses that are otherwise competitors or potential competitors. Another concern is that joint ventures can reduce the entry of others into a given market. Regulators in the Department of Justice and the Federal Trade Commission routinely evaluate joint ventures for violations of antitrust law; in addition, injured private parties may bring antitrust suits.

In 1982 Congress amended the Sherman Anti-Trust Act of 1890 (15 U.S.C.A. § 6a)— the statutory basis of antitrust law — to ease restrictions on joint ventures that involve exports. At the same time, it passed the Export Trading Company Act (U.S.C.A. § 4013) to grant exporters limited immunity to antitrust prosecution. Two years later the National Cooperative Research Act of 1984 (Pub. L. No. 98-462) permitted venturers involved in joint research and development to notify the government of their joint venture and thus limit their liability in the event of prosecution for antitrust violations. This protection against liability was expanded in 1993 to include some joint ventures involving production (Pub. L. No. 103-42).

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