Joint ventures are useful for businesses that are seeking to expand into markets in which they lack expertise. By combining forces with another business with complementary strengths, they can achieve mutually beneficial objectives.
A joint venture is a business arrangement between two or more parties where they agree to share resources to achieve a specific purpose. It can be for a fixed term or an indefinite period.
Whilst the parties remain as separate business entities, a joint venture can create a new legal institution depending on the structure it takes on.
There are two main reasons why businesses enter into joint ventures. Ultimately, it allows your business to achieve goals that would otherwise be impossible.
A joint venture pools your joint venture partners’ and your resources and expertise together. This effectively removes factors that may have been hindering you from achieving the objective had you operated solely.
Through a joint venture, businesses can move into new markets quickly by drawing on each other’s expertise. This eliminates the costs associated with developing your own processes or products from scratch. Overall, this leads to reduced expenditure of entering a new market.
Furthermore, the risks of the project are shared amongst the participants of the joint venture. This means that if the venture fails, all parties will share the costs. However, note that there’s no requirement for the stakes to be equally distributed amongst the partners.
Common structures of joint ventures include:
A joint venture can also arise from contractual agreements such as Distribution agreements, Sales agency agreements and intellectual property licences.
Typically, joint ventures are structured as limited companies or LLPs since they create a separate legal entity. This means that the joint venture can own assets, enter into contracts and sue or be sued. This limits the personal liabilities of the participating parties.
The tax advantage of using a general or limited partnership structure is that each partner is taxed individually. However, there are disadvantages to both structures. Participants in general partnerships are subject to unlimited liability, while those in limited partnerships enjoy limited liability. But they must take a passive role in the business or risk becoming general partners with unlimited liability.
To learn more about the different business structures, read Choosing your business structure.
There are no formal legal requirements for the formation of a joint venture.
Joint venture partners usually enter into a Collaboration agreement or a joint venture agreement that sets out the rights and obligations of the parties. This can include references to the operation and management of the joint venture, the parties’ responsibilities towards losses suffered and their rights to the profits.
In most cases, a joint venture will be incorporated as a limited company. To set it up, you must register the company with Companies House.
Once the objective has been achieved, the joint venture can be terminated by mutual agreement. This means that all joint venture partners need to agree to bring the joint venture to an end.
In limited companies, you can also exit by selling your shares, selling the joint venture company as a whole (eg by using a Share purchase agreement) or winding it up. Usually, the joint venture agreement will include provisions that deal with termination. They may dictate how assets are to be sold, any notice periods and any pre-emption rights (ie the first right to buy requiring leaving shareholders to first offer their shares to the remaining shareholders).
In partnerships, the Partnership agreement covers what happens when a partner wishes to leave.