What is a Joint Venture and How Does It Work?

What is a Joint Venture and How Does It Work?

Image by Tim Liedtke © The Balance 2019

Do you have a business idea and you want to work with another company to promote and sell it? You may want to consider a joint venture. This article focuses on the tax and legal issues involved with joint ventures.

What is a Joint Venture?

A Joint Venture (JV) is a cooperative enterprise entered into by two or more business entities for the purpose of a specific project or other business activity. Each business keeps its individual legal status. Joint ventures are often entered into for a single purpose – a production or research activity. But they may also be formed for a continuing purpose.

What a joint venture might look like:

  • Each party contributes assets and shares risks and agree to share income and expenses.
  • It might be informal (a handshake) or formal.
  • It may be short term or long term.
  • In most cases, the individual entities retain their legal status

Both companies have some proprietary (ownership) basis for this shared interest. For example, two companies with online patents for accounting apps might form a joint venture.  

Often the joint venture creates a separate business entity, to which the owners contribute assets, have equity (ownership), and agree on how this entity may be managed. The new entity may be a corporation, limited liability company, or partnership.

Don’t confuse the joint venture with a tax status called a Qualified Joint Venture (QJV). The QJV applies to married couples filing a joint return who can elect not to be treated as a partnership for federal tax purposes.

Why Form a Joint Venture?

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. For example, Company A might be good at creating software, while Company B has experience creating the hardware that’s needed for a venture.
  • 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.    

Examples of Joint Ventures

Joint ventures can combine large and small companies on big and little projects. Here are some examples:

MillerCoors is a joint venture between SABMiller and Molson Coors Brewing Company to see all their beer brands in the U.S. and Puerto Rico.

In 2011, Ford and Toyota agreed to work together to develop hybrid trucks.

Mining and drilling are expensive propositions, and often two companies in these industries will combine as a joint venture to mine or drill in a particular area.

Forming a Joint Venture

You can form a joint venture informally with just a handshake, but it’s always best to have something in writing. A joint venture, even if it’s between two small businesses, should have at a minimum this sort of written agreement.

All that’s needed to form a joint venture is a written agreement (a contract) between the parties. The agreement should spell out the details of the purpose, how the two (or more) parties share in profits and losses, and how the parties share in making decisions about the joint venture.

The Joint Venture Agreement

A joint venture agreement provides the details of the agreement between the parties, including

  • Parties to the agreement
  • Management
  • Percentage ownership
  • Distributive share of each party
  • Bank account
  • Resources (usually a list)
  • Employment (employees and independent contractors working on the venture)
  • Administrative records
  • Financial statements.  

How a Joint Venture Pays Taxes

When a joint venture is formed, the most common structure is to set up a separate business entity. Then the parties each own a specific percentage of the entity. If the joint venture is a corporation, for example, and two businesses have equal shares in the business, they structure the company so each partner entity has an equal number of shares of company stock and equal management and board of directors members.

The joint venture isn’t recognized as a taxing entity by the IRS. So the business form of the joint venture determines how taxes are paid.

If the joint venture is a separate business entity, it pays income taxes and all other taxes like that business form. For example, if the new joint venture company is an partnership, it pays taxes as a partnership.

Because the two parties have decided on how to split profits and losses, they will use that split to decide how each party receives profits, handles losses, and contributes to paying any taxes that are due.

What a Joint Venture is NOT

Not a partnership. A joint venture may have some similarity to a partnership, but it’s not. A partnership is a single business entity formed by two or more people. A joint venture joins several different business entities (each of which may be any type of legal entity) into a new entity, which may or may not be a partnership. Partnership income taxes are paid by the owners individually.

Not a consortium. You may have heard the term “consortium” used to explain a joint venture. A consortium is a looser arrangement between several different and distinct business entities.  

Consortiums are often formed in the non-profit sector. For example, the Five College Consortium in Massachusetts is a corporation that shares resources and operates joint transportation systems and departments.

The Benefits of Joint Ventures

Any two businesses of any size can work together on a joint project, while still maintaining the rest of their business apart from each other.

Read more from The Balance SMB about the advantages of joint ventures and how they work.

Don’t try to form a joint venture using free online contract forms. Get help from an attorney who specializes in joint ventures to make sure your contract is legal and binding.

What is a Joint Venture and How Does It Work? watch video now:

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What is a Joint Venture and How Does It Work?

What is a Joint Venture and How Does It Work?

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