• Joint ventures bring multiple parties together to combine their resources in pursuit of a specific business goal.
• There are some fundamental differences between joint ventures and partnerships.
• Joint venture agreement details the goal of the venture, the financial responsibilities of each of the partners and how profits will be distributed.
Joint ventures bring the resources and expertise of multiple parties together to combine their resources in pursuit of a specific business goal. Although composed of two or more business entities, joint ventures function independently of other business interests that partners in the joint venture may have. Each associate in the venture is entitled to a share of the profits, just as each is responsible for losses and costs — in accordance with the terms of the joint venture agreement they sign.
This, then, raises the question, what is a joint venture agreement?
Also referred to as JV agreements, these agreements are usually structured as either limited liability companies, or limited partnerships. The agreement details the goal of the venture, the financial responsibilities of each of the partners, and how profits will be distributed. The management structure, ownership percentages and exit strategy are included as well. Ownership percentages can be in any proportion agreed upon by the participants in the venture.
In most joint ventures there is a general partner and limited partner(s). While all entities contribute capital, the general partner is usually tasked with managing the project, as well as implementing the plan. General partners are usually required to provide a capital investment as well. In exchange, this individual can be compensated through fees and a share of the profits as spelled out in the JV agreement.
Key elements of a JV agreement include:
• Purpose of the venture
Additional elements may be included, depending upon the specific nature of the agreement.
There are several strategic advantages to be gained from forming a joint venture.
Most importantly, combining resources can bring disparate means together to make a goal more readily accomplished. For example, one partner might be well-versed in production, while the other might have a particularly robust distribution apparatus.
Cost savings can often be achieved through JV agreements as well. Taking advantage of economies of scale could broaden a profit margin more than each entity functioning separately could manage. JVs also help minimize risk, as one party needn’t bear it alone. Flexibility is increased, while both commitment and exposure are decreased. Each entity maintains its own identity and can easily transition back to individual operation when the purpose of the venture has been completed.
Working with someone who has already met certain regulatory and/or licensing requirements means one less hurdle to clear. Joint ventures can also help mitigate competition, by working directly with a competitor to the good of both entities.
There are a few downsides to JVs to consider as well. The potential for disputes is always present when two strong management teams come together. This could result in a less-than- optimal parting of ways, resulting in wasted time, resources, and capital. The possibility of legal issues and liability exposures when working with another entity should be considered as well.
Further, a JV may prove limiting in other areas of operation for one of the entities. For example, an exclusivity agreement executed as a result of entering the JV could preclude continued current relationships if one exists with a competitor of one of the partners in the venture. Moreover, use of resources is sometimes divided in a less-than-equal manner, which could lead to concerns down the line.
The main difference between joint ventures and partnerships is time. JVs are formed for a specific purpose and for a limited period. Meanwhile, a partnership is formed for ongoing business opportunities.
Consortiums are also sometimes referred to as joint ventures. However, consortiums do not create a new business entity. Instead, it represents an informal agreement between multiple entities.
Simply put, joint ventures are usually for a single project, where partnerships are usually open-ended.
Every business entity experiences taxation. Members of an unincorporated JV will handle their taxes on their own. Taxes are handled collectively in the case of incorporated JVs, which is the most common scenario.
Parties entering into a JV agreement create a new entity separate from their other interests. Thus, the venture will be taxed according to the type of business it represents. It’s important to note that the IRS does not formally recognize joint ventures, so the partners will need to determine how best to manage tax liability.
This detail is usually spelled out in the JV agreement. If it is formed as a C corporation, the JV will pay a 21% flat tax on profits, and shareholders will be taxed on dividends. Unincorporated JVs, like LLCs, are taxed on a pass-through basis. This means that income and losses are reflected on the tax returns of each of the members of the JV, because it does not complete a business tax return. In situations in which all the JV participants are corporations, each member reports joint venture income on their individual corporate returns.
In addition to taxes, there are regulations to consider at every stage of government — federal, state, and municipal. Employees tasked with serving the JV must be handled in accordance with the laws pertinent to the place in which the joint venture will be located — regardless of where the companies from which they are “borrowed” are based.
Licensing concerns must be examined and met as well. International JVs will also have to comply with the laws of each nation within which they have operations.
Investors may consider investing in real estate through joint ventures. This provides a ready path to accessing large-scale real estate investment opportunities, without having to put together a team or marshal an outsized capital investment. Considered one of the prime alternative investments, real estate can provide a means of diversifying an investment portfolio.
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Joint ventures can provide significant investment opportunities for both businesses and individuals. They can provide access to expertise and resources. Costs and risks are shared. And they can be formed and dissolved on a project-by-project basis. Real estate joint ventures, in particular, can be attractive opportunities for individual investors. Platforms such as Yieldstreet also offer a variety of attractive pathways into large-scale real estate investing.
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