The term “joint venture” refers to a joint venture a collaborative arrangement with two or more businesses usually for the aim of establishing the business of a brand new venture. Each business contributes its assets to the joint venture and decides how to split between expenses and income.
If you’re thinking about creating a joint venture with your company and another entity, you should be aware of how it could work specifically in terms of taxation and management.
What is a Joint Venture?
Every entity involved in the group, and this may be groups of people, companies, or corporations, maintains its own legal entity. A joint venture could be created by agreements that outline the resources, including properties, money, and other assets which each partner will contribute to the joint venture. The contract also specifies the manner in which the joint venture is run and how the responsibility for it — and the profits and losses it generates will be split.
A joint venture may include two businesses with different specializations in collaborating to develop the latest product or to provide innovative services. A company seeking to enter an untapped market could create a joint venture with the company which is located within or has an established presence in the area or country. For instance, BMW Group and Brilliance China Automotive Holdings Ltd. created an alliance called BMW Brilliance Automotive Ltd. to produce and sell BMW automobiles in China.
What is a Joint Venture Work?
If the JV leads to the creation of a newly-created entity, the new company can be organized as a limited liability company and/or partnership.2 In the event that it is a company for instance and the two businesses that founded it desires the same control of it they’d usually structure the JV to ensure that each of the founding companies has an equal share of the stock of the corporation and also shares the same management responsibilities, as well as representation in the company’s board.
Joint ventures between companies are created for a variety of reasons for example:
- To integrate the resources of both companies: The JV entity might have more influence in the industry or have more resources to guarantee its success than the business by itself.
- To bring together expertise: For technology businesses such as, for instance, one business might have a talented group of designers, another could have a significant patent or trademark, while a third could excel in marketing.
- To cut costs: Two small companies may consider forming the possibility of forming a joint venture to cut costs on advertising and marketing, perhaps at a trade fair as well as in a trade magazine. In addition, two companies that are involved in the mining of rare metals and drilling in fossil fuels — both of which can be costly, could create a JV in order to begin drilling or mining in a specific area.
It is the Joint Venture Agreement
If all parties are completely confident in each other the joint venture can be created with an informal handshake. However, any business entity that does choose to enter into the possibility of forming a JV should be sure to define the terms of the partnership in a legally binding contract that was prepared with the help of a lawyer.
The joint venture contract usually contains the following elements:
- Parties to the contract
- The management structure of the JV as well as the JV’s members
- The parties’ proportions of ownership
- The distributive portion–the proportion of loss or profit is allocated to each party.
- The account at the bank that JV will make use of
- A resource list
- The independent contractors and employees who will be working in the venture
- How will administrative records and financial statements are to be created and maintained
- Which laws in the state of origin will apply for the JV 4
How does a Joint Venture Pays Taxes
When the joint venture has an independent business entity, it’ll be liable for its own tax on income in accordance with the type of business, such as a partnership, it was formed in the form of. If it’s a non-incorporated joint venture, any earnings have to be recorded by the companies that have signed the JV contract. 3
It is a Joint Venture vs. a Consortium
A consortium is a different kind of agreement that binds several entities. The major difference between a JV and a consortium JV JV one of the main differences is that a consortial arrangement is typically thought of as a looser arrangement that allows entities to remain clearly distinct. The partners work on projects together, such as construction companies that are building a tower but don’t have an influence over one another.