Do you know the difference between a joint venture and a business partnership?
WE HAVE WRITTEN BEFORE about what makes joint ventures successful. Indeed, joint ventures are an appealing way to start a business because they enable two or more parties to create a business entity, in which they each share in the ownership, governance and the business returns.
But they also share in the risks.
That’s why you need to understand your obligations to the business and all the potential risks before you enter into a joint venture.
Elements to consider in a joint venture
A joint venture is a business entity created by two or more parties. As we mentioned, each party shares in the ownership, risk, government and returns of the business. The key elements of a joint venture that you need to work out include:
- Number of parties
- Contribution of each party
- Structural form — i.e., limited or publicly traded company
- Valuation of initial contributions and ownership split between parties
- Governance and control
- Talent and HR — i.e., will the joint venture employ its own staff or use staff from parent companies?
- Exit strategy provisions.
Much of those elements will be worked out in the shareholder’s agreement, which will also outline how the JV will operate. Other elements to consider in the shareholder’s agreement include:
- The number of directors
- The control of the company
- Management decisions
- Transferability of shares
- Dividend policy
- Termination of the agreement.
When is a joint venture a partnership?
We have written about what constitutes a business partnership before too. Although joint ventures and partnerships both appear quite similar, the defining feature of a partnership is that each party has come together to conduct a business. Partnerships are not created for a specific project, while joint ventures are (as in the case of the Sony Ericsson joint venture).
Joint ventures are typically created for a specific project where each party contributes different skills or capital, but ultimately retain their independence. A good example would be tradespeople — a builder and a plumber, say — who start an asbestos removal company as a joint venture.
The builder, who has the asbestos removal licence, would carry out the work and manage the day-to-day operations, while the plumber contributes capital, brings in leads, and shares in the decision-making process, profits, governance and tax obligations, etc. Typically, the most successful joint ventures are those with a 50:50 split.
Want to read more?
For more about business structures, see our comprehensive 4-part blog series: Business Structures Explained.
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