Joint Venture: Everything Entrepreneurs Need to Know

Definition

"Joint Venture" (JV) is a beautiful and adventurous term. This accurately describes the cooperation itself. A joint venture involves the collaboration of at least two different partner companies. Both companies are legally and economically independent of each other and are never part of a common group. The newly formed joint venture company is also legally independent. The two participating companies are the shareholders of the established subsidiary, but continue to exist as independent entities. Examples of well-known joint venture associations include Fujitsu, Siemens and BMW Brilliance Automotive Ltd.

Legal Basis

Joint ventures are not a legal form of business entity. Therefore, the legal basis is provided by a written joint venture agreement. This agreement outlines the details of the cooperation that both companies have agreed upon. This includes aspects such as financing, shared business objectives, statutes, information about the management of the company, and detailed provisions regarding profit distribution.

The legal form determines which law must be applied in accounting. The choice of legal form at the time of establishment is open to the shareholders. Common forms of establishment include corporations, Ltd's (limited liability companies), or PLCs (joint-stock companies). These forms are logical choices because they offer limited liability. For these entities – as well as for partnerships – the provisions of the Swiss Code of Obligations (CO) apply.

If the founding companies have foreign corporate headquarters, it is necessary to ensure that all country-specific regulations are also considered. It's better to have a joint venture agreement drafted too thoroughly than too negligently. Keep in mind that disagreements between the parties are likely to arise in the future. Therefore, ensure proper protection and have the contract reviewed by a specialized lawyer.

Additional Requirements for Establishing a Joint Venture

The basic requirements for establishing a successful joint venture are essentially the same as those in a good partnership. After all, it is a business projection of marriage. There should be good, respectful communication between both partners, which should be fostered. Also, ensure that your visions and goals align.

Forms of Joint Ventures

Equity Joint Venture

An Equity Joint Venture (EJV) is formed when the partner companies establish a legally independent third company. They share leadership, responsibility, and the associated economic risk. An Equity Joint Venture is the most common form of joint venture.

The actual shares can be distributed evenly or in different proportions. When the distribution is equal, it is called a parity joint venture. A majority joint venture exists when one of the partner companies holds more shares. One of the advantages of a majority joint venture lies in the potential for shorter decision-making processes. However, it is important to clearly define roles, communication, and veto rights within the contract.

Contractual Joint Venture

The uniqueness of a Contractual Joint Venture (CJV) lies in the fact that the companies do not establish an actual third company. Instead, the underlying contracts form the basis of the cooperation. A Contractual Joint Venture is the less common form of this type of cooperation. This is mainly because there is no limitation of liability. However, the advantage is that there are no formation costs and ongoing costs are lower.   

Motivations for a Joint Venture

What makes the establishment of a joint venture attractive for – often even highly competitive – companies? Overall, the combination of shared expertise and the shared economic risk exerts a great appeal.

Especially for companies involved in research, development, or production of innovative products or process technologies, a joint venture can be an opportunity to implement large projects that would not be financially feasible for individual firms. If both companies already have an established position and a solid reputation in the market, a media focus on new developments is guaranteed. But even SMEs can gain a clear competitive advantage through a joint venture.

Advantages and Risks of Joint Ventures

If you are considering whether a joint venture is the appropriate form of cooperation for you, it is important to carefully consider the advantages and disadvantages.

Advantages

One major advantage is the ability to make larger investments that your company alone cannot afford. This can mean significant progress in the market, without ever bearing sole liability.

Financially, you can also benefit from a possible shared production facility and the shared use of state-of-the-art machinery. This could also boost production speed, putting you ahead of competitors. Furthermore, you can utilize a shared marketing budget.

The combination of knowledge, experience, and skills from both companies can drive forward and market new ideas and developments. In addition, the existing target group is often expanded or new markets are tapped into.

Lastly, the ability to outsource certain tasks to the existing structures of the parent companies should be mentioned as a positive example.

Risks

In addition to all the advantages mentioned, a joint venture also carries weaknesses. Often, differing visions and goals of companies and their shareholders only become apparent during the course of cooperation. If these are not captured in detail within the joint venture agreement and all eventualities are included, cooperation can quickly fail. Different corporate cultures, tensions between shareholders, or simply lacking communication can not only jeopardize projects but also the entire company.

A collaboration between competing companies also poses another significant risk: it is easy for internal information from your parent companies to leak out through the joint venture, thus exacerbating the competitive situation in the market.

Conclusion

If both parties pursue the same goals, a joint venture can become a win-win cooperation. At the same time, establishing and managing them is a very complex matter that carries high risks. Before deciding to establish a joint venture, be sure to consider alternative forms of cooperation, such as the also popular franchising or hybrid models.

No matter which form of cooperation or type of joint venture you choose, one thing is certain: you should never forego an experienced expert when founding one. GetYourLawyer can help you find one. Submit your request online and receive quotes from specialized lawyers who match your needs and plans.