What is a Joint Venture? How do you form one? We’ll go over the basics, and help you decide whether forming a JV is the right move for you.
A Joint Venture is formed when two or more businesses agree to work together, sharing resources and profits.
Typically, businesses form a joint venture agreement to pursue a specific project. When they do, they keep doing their things on the side.
Example: Let’s say you’re a baker, and your friend runs a bike courier company. You form a joint venture—Donuts on Wheels, a bicycle-powered donut cart.
While Donuts on Wheels is out on the street, serving sweet glazes, you’re still running your shopfront. And your friend is still running her bike courier company. But you each devote some of your resources to Donuts on Wheels and share the profits.
Reasons to form a Joint Venture Agreement
There are three (sometimes overlapping reasons) for businesses to form joint ventures.
1. Leverage Resources
A JV Agreement can take advantage of the combined resources of both companies to achieve the goal of the venture.
2. Combined Expertise
Two companies or parties forming a joint venture might each have unique backgrounds, skill sets, and expertise. When combined through a JV, each company can benefit from the other’s expertise and talent within their company.
3. Cost Savings
By using economies of scale, both companies in the Joint venture can leverage their production at a lower per-unit cost than they would separately. This is particularly appropriate with technology implementation, which is costly to implement. Other cost savings as a result of a JV can include sharing overhead costs such as warehouse rental or advertising.
How to form a Joint Venture Agreement
To avoid misunderstandings between you and your partner down the road, you’re better off with a more robust approach.
Singapore does not impose any restrictions on the types of joint ventures. Nonetheless, venture capitals generally take either:
- JV Company; or
- JV Agreement.
Corporate joint ventures require the formation of a separate legal entity to act as the vehicle for the collaboration. Generally, this will often take the form of a private limited company, but it can also be structured as a general partnership, limited liability partnership, or a limited partnership.
Generally, for corporate joint ventures that opt for the structure of a private limited company, the main incorporation document needed is the company’s constitution. This document typically lays out duties and obligations of the company, its board of directors and shareholders, the objective of the company.
The company will also need to comply with the regulatory framework for private limited companies, which you can read more about in our other article.
For corporate joint ventures that opt for the structure of a general partnership, limited liability partnership or limited partnership, the rights and obligations of the partners are governed by the partnership agreement.
The agreement must comply with the respective statutory legislation (whether it is the Partnership Act, Limited Liability Partnerships Act or the Limited Partnerships Act). E.g. there are statutory restrictions concerning the distribution of profit or repayment of capital by limited liability partnerships.
In contrast, contractual joint ventures do not involve the setting up of a separate legal entity.
Should you decide not to form a separate business entity for your joint venture, form a JV agreement to set up legal protections for the members. It should be drafted comprehensively and clearly states the fundamental rights and obligations of both parties.
The Joint venture agreement puts in writing exactly how the venture is going to work. This is important in case there’s a dispute between members in the future.
Important terms your Joint Venture Agreement should include:
* Purpose of the joint venture – purpose and goals
* Management of the joint venture – how decision-making takes place in the joint venture, particularly in unforeseen circumstances
* Capital contributions – respective startup funding contributions of the parties
* Allocation of profits and risks – how any profits and risks generated to be allocated between the parties
* Regulatory issues – state the obligations of the parties in complying with any regulatory requirements
* Dispute resolution – resolve any disputes efficiently and cost-effectively without needing to resort to litigation, which may be lengthy, public, expensive, and damaging to the parties’ long-term relationships
* Governing law and jurisdiction – jurisdiction in which the dispute will be heard. This clause is particularly important if the parties come from different jurisdictions
* Termination clause – procedure for terminating the JV agreement prematurely
* There are plenty of free templates online to help you get started planning your Joint Venture Agreement.
Should you form a JV?
Even though they can offer lots of benefits, and the idea of combining forces may sound exciting, you shouldn’t enter into joint ventures lightly. You should consider the following first:
- Are your business goals achievable without forming a JV?
If extending your line of credit or bringing on a new employee addresses it, you may want to take this option instead.
- Do you have the resources—time, energy, money—to form a joint venture right now?
For instance, if you’re already working twenty-eight hours a day, trying to keep your get by during the toughest time of year in your industry, you may want to postpone partnering up. It can get surprisingly complicated to partner with other entrepreneurs.
- What is the likelihood of its success?
This may seem like a no-brainer. But remember: Just because your joint venture may be a “side hustle” doesn’t mean you can cut your losses if it goes under. Consider getting a second opinion by talking to someone else in your industry, or hiring a consultant.
- Can you afford a worst-case scenario?
Do some financial forecasting and sketch out three scenarios: best, worst, and most likely. What impact will each have on your current business? Can you afford a worst-case scenario?
- How will different personalities affect the venture?
This is especially worth considering if you’re used to working on your own. Your potential partner or partners may be easy to get along with at the moment. But you need to seriously consider what impact your different personalities and ways of doing business will have on your joint venture together.
—Signing a joint venture is a great way to test the waters. But once you’re confident in your business idea—and your partner—it’s time to take the next step. Learn how you and your new business buddy can form a partnership.
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