Concept of Joint Ventures
A temporary kind of business activity carried on by more than an individual with a view to earning profit in a pre-agreed manner without giving a firm name to the business is known as a joint venture. It is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. It is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance. Each party (business or individual) keeps its individual legal status. It is a temporary partnership between two or more persons for completing a particular adventure. The relationship between them is ceased as soon as that particular venture is completed. Each party contributes assets and shares risks and agree to share income and expenses. Members of the joint venture maintain their independence.
The persons who enter into the joint venture agreement are called co-ventures. A joint venture is formed by a contract, which defines the scope of the joint venture’s activities, as well as the roles, rights, and obligations of each party to the joint venture. The joint venture agreement will be automatically terminated after completing the venture. The profits or losses are shared between the co-ventures according to their pre-agreed agreement. In the absence of agreement, the profits or losses are shared equally among themselves. It can be a private company, a public company or even a foreign company.
Businesses form joint ventures for several reasons:
- To combine resources – A bigger entity may have more clout in an industry or more resources to ensure the success of a venture.
- To combine expertise – In technical businesses, one company might have expertise in one part of a venture while the second company might have expertise in another part.
- To save money – Two companies might consider a joint venture to save money on advertising, maybe at a trade show or in a trade publication.
- To enter a foreign market – In this case, a foreign company forms a joint venture with a U.S. company that is in the market the foreign company wants to enter.
- To manage rental property. A joint venture may form a partnership to own and rent properties.