A joint venture agreement is a business enterprise undertaken by two or more individuals, corporations, or governmental entities to share the expense and profit of a particular business project. Unlike a proprietorship or a corporation, a joint venture is an agreement between parties for a particular purpose and usually a defined time frame. Under California law, joint ventures are nearly identical to general business partnerships. One key difference is a business partnership generally involves an ongoing, long-term business relationship, whereas a joint venture is based on a single business transaction.
The most important factor with a joint venture is that there be a single, definable objective. Joint ventures may be very informal, such as a handshake or two chefs sharing a booth at a food convention. Others may be extremely complex, like a consortium of electronics companies joining to develop a new computer chip. Individuals or companies choose to enter joint ventures in order to share strengths, minimize risks, and increase competitive advantages in the marketplace. Many are entered into for the ultimate purpose of saving money. A well-known example of a joint venture is MillerCoors which was formed in 2007 by Molson Coors and SABMiller. By merging their operations in the U.S. and Puerto Rico, the companies were able to start saving $500 million in annual costs and they gained control of 29% of the American beer market, among other benefits.
Joint ventures are also widely used by companies to gain entrance into foreign markets. Foreign companies enter into joint ventures with domestic companies already present in the markets the foreign companies would like to enter. Another benefit of entering into a joint venture is that it allows the parties to reduce their risks through capital and resource sharing. Joint ventures can also serve is to give smaller companies the chance to work with larger companies to develop, market and manufacture new products.
Joint venture agreements are governed by the legal agreements that bring them into existence. It is critical that the contracts clearly define how the costs and benefits of the joint venture will be shared by each partner. Some may wish to formalize the venture by creating a new joint venture company. More commonly joint venture agreements do not involve the formation of a new entity. Since the joint venture is not a legal entity, it does not hire employees, enter into contracts, or have its own tax liabilities. These are handled by the co-venturers and are governed by contract law. Joint ventures are not subject to corporate law, partnership law, or the law of sole proprietorship.
The parties involved in a joint venture agreement are subject to personal liability for the debts incurred in the venture. Each party is jointly and severally liable, meaning each is responsible for the entire amount of the debt until the debt is satisfied. If the parties involved in the joint venture are business entities, the assets of the business entities would be subject to satisfy the debts of the venture. Joint ventures are not permanent, and are terminable both in case of fulfillment or failure of the achievement of the targeted objectives.
Famous joint venture companies:
- Siemens AG of Germany and Nokia Corp of Finland formed a JV called Nokia Siemens Networks U.S. in 2006. In 2011, the company was rated as the fourth largest manufacturer of telecom equipment.
- Japanese electronics Sony teamed up with Swedish electronic expert Ericsson in 2001. This 50-50 joint venture, Sony Ericsson, was intended to develop and establish their brand as the most attractive and dominant mobile handset in the world. The JV has resulted in the development, marketing, and production of some best handheld mobile phones today.
- In December 2011, Microsoft and General Electric formed a health IT company with the mutual objective to improve patient experience and the economics of health and wellness through providing health systems with required systemwide data and intelligence. The joint venture is called “Caradigm,” from “care” and “paradigm,” because the two companies envisioned a paradigm shift if the care delivery system.
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