A joint venture is a short-term partnership between one or more business entities. The businesses pool resources for a predetermined purpose, then they share the profits in accordance with a legal agreement.
To find out if a joint venture is the right move for you, it’s important to understand what it is, how to form one, and when it’s appropriate to do so.
Definition and Examples of a Joint Venture
A joint venture is a temporary business arrangement between entities, which can be large corporations, small businesses, or individuals. These entities combine their resources, such as money, property, skills, or labor force, and work toward a specific purpose outside of usual business. Though the companies remain independent from one another, the entities share the profits from the venture. Once the venture is considered complete or terminated, the entities part ways.
Alternate names: Strategic partnership, coalition
The U.S. Small Business Administration (SBA) defines a joint venture as an entity consorting to engage in and carry out specific or limited-purpose business ventures for joint profit over a two-year period. The SBA uses this definition when determining a small business’s eligibility for government programs and preferences.
According to the California law firm Stimmel, Stimmel, and Roeser, the critical elements of a joint venture typically have the following characteristics:
- Communal investment in the purpose of the venture
- Equal directorship among all parties involved, as it pertains to the venture
- Equal control and management of assets
- Equal sharing in losses and profits among all parties involved
There is no singular legal definition of a joint venture. The terms are determined via legal negotiations between the business parties.
Hulu, for example, was founded as a joint venture in 2007 between News Corporation, NBC Universal, Providence Equity Partners, and the Walt Disney Company. Hulu is a separate company from its partners. However, other joint ventures might be one-off projects.
A common example of a joint venture occurs when a company wants to expand into an international market. If a U.S. handbag company wants to expand into China, for instance, it may form a joint venture with a Chinese handbag company, said April Walker, lead fanager for tax practice and ethics with the American Institute of CPAs, in a phone interview with The Balance.
Hypothetically, the U.S. company might bring a new product or technology to the resource pool, while the Chinese company already has critical relationships in the country and a market foothold. Both companies would get a share of the profits by selling the U.S. product. Then, the companies disband once the project is over.
According to Walker, real estate joint ventures are also common. For example, a real estate operator might form a joint venture with a property capital provider to create a shopping center, she said.
How a Joint Venture Works
If two or more business entities want to form a joint venture, they typically enter a private, negotiated legal agreement. The agreement defines transaction terms such as financial obligations for each party, breakdown of the profit share, an end date to the venture, and more.
For example, if the handbag company cited above wanted to enter a joint venture with an international handbag company, both businesses’ legal teams would draw up a mutual contract that is subject to the respective country’s laws. A joint venture can include relatively flexible language, such as project termination terms if the venture is not profitable or if it is abandoned by the parties.
There is no requirement for joint ventures to become separate business entities from the original companies; however, they could. For example, the parties in a joint venture might choose to designate it as a limited liability corporation to mitigate financial liability.
Do I Need To Pay Taxes on a Joint Venture?
For tax purposes, the IRS defines a joint venture as a legal partnership. The parties in a legal partnership must file a partnership return, or Form 1065. The venture itself is not taxed, but all parties have to report their income from the venture and file their personal taxes separately. Foreign partnerships require further filings including Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.
Some joint ventures can apply for exclusion from federal income taxes. For example, co-owners of an investment property could be exempt, so long as they’re not selling services on the property.
Alternatives to Joint Ventures
- General partnership: This is similar to a joint venture in that multiple parties enter a legal agreement for joint ownership. However, a general partnership typically includes ownership of a separate company entity rather than a project, and the association is indefinite.
- Limited partnership: This is a type of partnership with general partners and limited partners. The limited partners have limited personal liability and do not participate in managing the partnership itself.
- Mergers: Mergers combine two separate businesses into a single new legal entity.
- Acquisition: One company gets fully absorbed by a parent company, and no new entities are formed.
- A joint venture is a short-term partnership between two or more business entities or individuals.
- Partners pool resources for a joint venture, then share profit and losses.
- Members of a joint venture outline their own terms in a contract.
- Parties have equal control of the joint venture.