When two businesses join forces, it’s called a joint venture. There are a few things to be aware of before you team up with another business entity, including structure, management, and taxation. Keep reading to find out more about the pros and cons of joint ventures, as well as how they work.
Understanding joint ventures
Businesses often collaborate on projects, with both parties contributing resources to achieve a particular goal. A joint venture refers to the commercial arrangement put in place to accomplish this task, whether it’s a new project or expansion into a wider market. Joint ventures can be arranged for a fixed period, or they may be indefinite.
No matter how its structured for tax purposes, ventures are treated separately from each business’s own interests. However, each party is responsible for its own side of the profits, losses, and associated expenses. This should all be clearly spelled out in a joint venture agreement to avoid any confusion.
How does a joint venture agreement work?
You can set up a joint venture with any legal structure, from limited liability companies (LLCs) to corporations. The type of structure you choose will determine how your joint venture pays taxes. For example, if it operates as an LLC, associated profits and losses would be stated on the owner’s personal tax returns. However, corporations are treated as separate entities.
Typical UK structures for joint ventures include:
Company limited by shares: A separate entity with limited liability, this option offers a familiar structure with its own corporate identity. However, there is the potential for double taxation if tax is applied both at the corporate level and on each party involved.
Contractual venture: This type of structure offers greater flexibility, making it easy to start up and take apart when the project has concluded. All parties retain their ownership of assets and are taxed directly.
Limited liability partnership: Each party is taxed directly on profits, but the venture is treated as a separate legal entity. The combination of transparency and a clear corporate identity makes this a popular option.
Whichever structure you choose, the joint venture agreement should clearly state its aims and intent. This includes the overall objectives of the venture as well as each partner’s obligations, initial contributions, and rights to profit. A few additional elements to the joint venture agreement might include:
Structure of the joint venture
Technologies and products involved
Arrangements to finalise the project once complete
The more specific you can be within this initial agreement, the lower the potential for litigation or other issues down the line.
Joint venture advantages and disadvantages
There are many reasons why separate entities might wish to join forces, whether it’s combining resources or expertise. Here’s a closer look at some of the main joint venture advantages and disadvantages.
Advantages of joint venture
With a strong agreement in place, there are plenty of advantages of joint ventures to consider.
Risk can be spread out between partners to minimise individual liability
Gain access to wider expertise and knowledge
Gain access to additional resources
Grow your business faster, particularly in new markets
Gain access to your partner’s customer database
Join forces for research purposes
High degree of flexibility
Disadvantages of joint venture
At the same time, there are also disadvantages of joint venture agreements to be aware of. Like any new business venture, there is some risk involved, particularly if:
Resources aren’t distributed evenly
There’s a communication breakdown between partners
The joint venture has unclear objectives
Expertise isn’t shared equally
There are major differences in management styles
One party loses interest and wants out before completion
This is why it’s so important to vet your business partners carefully before forming any partnership. Take time to build your relationship, ensuring there’s a match with company cultures and management styles for your joint venture to achieve lift off.
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