All you need to know about Joint venture structures

Saptaswara Chakraborty| North Eastern Hill University| 15th June 2020   

Introduction

The world today is based on partnership and strategic investments. Each company would want to obtain the maximum output from an exclusive deal with the loss being reduced to a minimum. Often two companies may be interested in obtaining the particular desired objective, and during such a time, a slightly more preferred alternative is to enter a joint venture system. Over the last few years, there has been a significant rise in the joint ventures with the alliances ranging from both the contractual alliance to an equity alliance. For an equity alliance, the partners contribute to creating a new company and a contractual alliance where the partners collaborate without creating a new company. With proper management and technical knowledge for carrying out such a venture, this method has the capability of being beneficial in areas such as managing risks in specific markets, sharing the cost of such a large scale investment and in areas that require entrepreneurial leaderships.

What is a joint venture?

A joint venture or a JV is an agreement between two or more parties where they cooperate in order to run a business or to obtain a commercial objective. There may be various reasons for such a partnership, the most common being to achieve a similar objective. The cooperation as has been mentioned earlier can be of two types: the first being a contractual and the second being the equity-based, but the possibility of an evident partnership depends on the underlying facts and with the objective that both the parties would want to achieve. In certain circumstances, a joint venture is usually entered into by start-ups in order to achieve the common objective of acquiring the market and starting up a new business. In a joint venture, the participants are responsible for profits, issues and costs associated with it. Across the globe, the joint venturing, market has gained immense success as it serves as a pass to access the resources, technologies and talent in order to deliver a cutting edge performance.

Types of Joint Venture

A joint venture is of two types, and the most common forms of joint venture structure are corporate/equity and contractual alliance. The following are the most common form of Joint Ventures. They are:

• Company Joint venture- Under such a venture, the parties create a separate company under The Companies Act, 1956. In such a venture, both the parties would equally be sharing the shares and the assets of the new company.
• Partnership- This is regarded as the halfway or the hybrid between the company and a contractual alliance. Under such a partnership, both the parties have agreed to share the profits and the assets carried on by them. However, the only disadvantage of it is that it has limited capital, lacks separate identity, unlimited liability, etc. Hence the majority of the business ventures are more likely to adopt the method of company joint venture as the share of it would be divided equally.
•  Unincorporated joint ventures- This may be considered as the most common form of a venture. Such an agreement is purely based on a contractual basis, including mainly the cooperation agreement, or a strategic alliance. Such a business is often held on the ground of it being in furtherance of a common objective or a purpose which has the capability of yielding a profitable amount. This is most commonly found when both the parties do not intend on engaging in a long term relationship rather one that is mainly goal-driven.

Advantages of Joint venture

The very purpose of such a venture is for it to work as an alliance that yields benefits for the partners venturing into it. Establishment of such a venture with a trusted partner provides a rather fast way of leveraging complementary resources, sharing of each other’s capabilities and access to new markets. While discussing its advantages, there are certain factors that must be considered in order to think as to why such a venture is profitable. They are :

• Leveraging resources– The process of globalisation has set off the mark for a more enhanced form of doing business. Cross-border business projects now are all the more demanding and the most effective solution to meet up to it is through by entering into a joint venture.
• Sharing liability– A joint venture also helps or provides for an opportunity to manage the risks associated with it jointly. Such a venture reduces the risks and the liabilities of the individual partners.
• Combined expertise– Two companies or parties forming a joint venture might have a unique background, skillset and expertise. But when they are combined, the through a joint venture, such skill proves to be of immense benefit for the company.

Conclusion

After the global business proliferation, the need for a worldwide joint venture system holds of great importance. Such a move would help in bridging the possible gaps in the global business platforms as it would bring minds from across to work on particular problems whose end objective is the same.