What is a Joint Venture Agreement?
Posted on 23rd June 2022 at 09:18
A Joint Venture Agreement is a contract between two or more persons or companies who undertake to execute together a particular business proposition or project. They do this by putting together their resources and expertise to achieve their goals, including business expansion, developing new products or moving to new markets, particularly overseas. It is a method to combine business competence, industry expertise and personnel of two otherwise unrelated companies, enabling each participant company or person to utilise its resources. A Joint Venture allows each participant access to the help of other participants without having to spend an excessive amount of capital. A Joint Venture Agreement also limits the outside activities of the participants while the project is in progress. A Joint Venture Agreement should set out the terms and conditions like the structure of the Joint Venture, its objectives, financial contributions of each entity, ownership of the intellectual property created by the Joint Venture, management and control of the Joint Venture, etc.
However, some risks associated with a Joint Venture, i.e. it could be complex if the objectives are not clear and communicated to everyone involved. A problem can arise if there is Poor integration and cooperation due to different cultures and management styles.
Joint ventures are designed in the following ways, and each of them has advantages and disadvantages mentioned below:
Setting up a limited liability company: It is a separate legal entity that can enter into contracts in its own name. The owners can easily transfer their interests to a third party at the end of the venture. The shareholders have limited liability for the company’s debts. It can grant the security of a loan in the form of a floating charge, thereby can raise large finance. The disadvantage of this type of company is that it must file annual accounts every year, available to the public.
Setting up a limited liability partnership: It offers excellent flexibility than a limited liability company in sharing profits and allowing additional partners to join the venture later. The disadvantage of LLP is creditors may sometimes require personal guarantees from individual partners, and obtaining external investment may prove difficult.
A joint venture in a contract: There is no statutory framework. Parties can take advantage of greater flexibility by simply detailing the terms of the agreed venture into the contract or partnership agreement. Its disadvantages are that there is no limitation on liability for any of the parties.
The primary consideration for deciding on the structure is tax. Particular structures call for different tax obligations. For example, for LLP joint venture, each partner is taxed individually. However, in the case of a limited liability company, both the company and the shareholders are liable to pay tax on any profits and dividends.
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