A:

A joint venture is a common method to combine the business prowess, industry expertise and personnel of two otherwise unrelated companies. This type of partnership allows each participating company an opportunity to scale its resources to complete a specific project or goal while reducing total cost and spreading out the risk and liabilities inherent to the task. In most cases, a joint venture is a temporary arrangement between two or more businesses, and a contract is formed under which the terms of the joint venture project are detailed for each participant. Once the joint venture is completed, all parties receive their share of the profit or loss and the agreement that established the joint venture is dissolved. Although there are advantages to forming a joint venture, companies entering into this type of arrangement face some disadvantages as well.

Limited Outside Opportunities

It is common for joint venture contracts to limit the outside activities of participant companies while the project is in progress. Each company involved in a joint venture may be required to sign exclusivity agreements or a non-compete agreement that affects current relationships with vendors or other business contacts. These arrangements are meant to reduce the potential for conflicts of interest between participant companies and outside businesses and keep the focus on the success of the new joint venture. Although contractual limitations expire once the joint venture is complete, having them in place during the project has the potential to impede on a partner's core business operations.

Increased Liability

The majority of companies that enter into joint ventures are established as a partnership or a limited liability company and operate with an understanding of the risks of liability associated with their chosen business types. The contract under which a joint venture is created exposes each participating company to the liability inherent to a partnership unless a separate business entity is established for the purpose of pursuing the joint venture. This means each company is responsible for claims against the joint venture on an equal basis despite its level of involvement in the activities that prompted the claim.

Uneven Division of Work and Resources

Participating companies in a joint venture share control over the project, but work activities and use of resources relating to the completion of the joint venture are not always divided equally. It is common for one participant business to be expected or required to contribute technology, access to a distribution channel or production facilities throughout the duration of the joint venture, while another partner company is only tasked with providing personnel to complete the project. Placing a heavier weight on one business creates a disparity in the amount of time, effort and capital contributed to the joint venture, but it may not mean an increase in the share of profit for the overburdened partner. Instead, unequal distribution of work and resources can lead to conflicts among participating companies, and result in a lower success rate for the joint venture.

Although forming a joint venture is a viable business strategy for some companies focused on a common objective, it has its caveats. Companies considering entering into a joint venture should compare the advantages of cost savings through pooling resources to the disadvantages innate to this type of business arrangement.

RELATED FAQS
  1. Do joint ventures need an exit strategy?

    Understand why an exit strategy is important for a business partnership such as a joint venture, and learn the options partners ... Read Answer >>
  2. What is the difference between the equity method and the proportional consolidation ...

    Discover the differences between the equity method and the proportional consolidation method of joint venture accounting, ... Read Answer >>
  3. How is venture capital regulated by the government?

    Learn about some of the ways in which the U.S. government and the Securities and Exchange Commission regulate venture capital. Read Answer >>
Related Articles
  1. Insights

    Virtual Joint Venture: A New Model For US Businesses to Enter China?

    Learn about virtual joint ventures and how these agreements may promote the entrance of American companies into China's vast markets.
  2. Tech

    Morgan Stanley, UBS to Boost Chinese JV Stakes

    Morgan Stanley and UBS Group AG are looking to raise their stakes in their separate Chinese securities joint ventures to 49%.
  3. Small Business

    Who are Venture Capitalists?

    Venture capital investment firms can provide the seed money for high-risk, start-up companies. People called venture capitalists run these firms, and make the investment decisions.
  4. Small Business

    Fed Raising Rates Affects Startup Funding

    With interest rates having nowhere else to go but up, the Fed’s impending interest rate raise will likely begin to reverse the flow of startup funding.
  5. Investing

    UPS and China's SF Express Announce Joint Venture

    UPS’s joint venture with China’s biggest package delivery company promises to strengthen its footprint in the world’s fastest growing market.
  6. Personal Finance

    Should You Open a Joint Checking Account?

    Joint finances may not be romantic, but it's an issue that serious long-term couples will have to confront at some point.
  7. Small Business

    How Venture Capital Will Change in 2016

    Venture capitalists face a tech bubble on the horizon, along with an influx of new non-traditional investors via Wall Street and crowdfunding platforms.
  8. Financial Advisor

    Baidu and CloudFlare's Virtual Private Venture Explained (BIDU)

    Learn about China's Great Firewall and the advent of new virtual joint ventures between businesses in China and the United States.
  9. Personal Finance

    Top 9 venture capital interview questions

    Ace your venture capital interview by learning how to answer the most common questions that such interviewers ask.
  10. Small Business

    Startups Destroyed By Venture Capitalists

    While the title may sound counter-intuitive, venture capitalists have been responsible for causing or accelerating the downfall of their startups. Here are a couple of examples.
RELATED TERMS
  1. Joint Liability

    Joint liability denotes the obligation of two or more partners ...
  2. Venture Capitalist

    A venture capitalist is an investor who provides capital to startup ...
  3. Venture Capital Funds

    Venture capital funds invest in early-stage companies and help ...
  4. Jointly and Severally

    Jointly and severally is a legal term describing a partnership ...
  5. Joint Stock Company

    A joint stock company is an organization that falls between the ...
  6. Venture Capital Trust - VCT

    A venture capital trust is a type of publicly listed closed-end ...
Trading Center