Joint venture (JV)
When commercial enterprise combines their resources to gain a tactical and strategic advantage in the market by contract, then it is known as a joint venture (JV). Companies often enter into a joint venture to pursue specific projects. The JV may be a new project with similar products or services, or it may involve creating an entirely new firm with different core business activities.
A contract between companies is signed to kick off a JV between all concerned parties. The profit and loss from the venture are shared by the participants.
Types of joint ventures
There are two major types of joint venture that two or more companies might participate in. These joint ventures might affect one particular product or an entire product or service line.
- Personnel-based joint venture
This type of partnership covers both the people themselves and the expertise they bring to the table. Several staff members from companies X and Y are placed on a project.
- Equipment-based joint venture
This type of venture involves technology or machinery. For example, company X lacks the manufacturing technology to produce its new Displays line. It partners with company Y, which has the necessary equipment but lacks Glass. The advantages of a joint venture agreement in this example are clear: the collaboration allows company to create its desired innovation without an outlay of capital, while company Y gains a percentage of profits without incurring development costs.
Joint venture examples
HAL has JVs with Rosoboronexport, Aviazapchast and Mikoyan-Gurevich (MiG) of Russia, British Aerospace and Rolls Royce Holdings Ltd of UK, Elbit Systems, Israel, Merlin-Hawk and Edgewood Ventures of the USA, Snecma of France,
Some other examples;
Vistara + Singapore Airlines
PNB + Metlife
Starbucks + Tata
What are the risks of joint ventures?
No business venture comes without risk. The main risk of a joint venture is that when something goes wrong, both parties are held accountable, rather than only the party who was at fault. 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.
So are joint ventures 50:50? Not necessarily. Each party retains ownership of their property, and depending on the terms of the joint venture contract, you and your partners may contribute resources unevenly. This can lead to problems if the profit-sharing arrangement doesn’t adequately compensate one side or the other.
How do taxes work in a joint venture?
What is a joint venture from a tax perspective? In India a JV is assessed in the status of an AOP (association of persons). If the venture operates as a separate business entity, it will pay income taxes just like any other type of business. In the agreement, the parties involved specify how they will split profits and losses and how they will pay any taxes that are due.
Advantages of joint ventures-
1. Shared expenses (more resources) – each party shares a common pool of resources, which can bring down costs on an overall basis.
2. Shared investment (cost saving) – each party in the venture contributes a certain amount of initial capital to the project, depending upon the terms of the partnership arrangement, thus alleviating some of the financial burden placed on each company.
3. Barriers to competition – one of the reasons for forming a joint venture is also to avoid competition and pricing pressure. Through collaboration with other companies, businesses can sometimes effectively erect barriers for competitors that make it difficult for them to penetrate the marketplace.
4. Technical expertise and know-how – each party to the business often brings specialized expertise and knowledge, which helps make the joint venture strong enough to move aggressively in a specified direction.