Joint venture definition

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What is a Joint Venture?

A joint venture is a business arrangement in which two or more parties contribute resources in order to achieve a goal. They can be organized in the ways noted below. In all of these types of joint venture, there are two or more venturers that are bound by a contractual agreement that establishes joint control over the entity. The types of joint ventures are as follows:

  • Jointly controlled operations. There may not be a joint venture legal entity. Instead, the joint venture uses the assets and other resources of the venturers. Each venturer uses its own assets, incurs its own expenses, and raises its own financing. The joint venture agreement states how the revenue and expenses related to the joint venture are to be shared among the venturers.

  • Jointly controlled asset. Venturers may jointly control or own the assets contributed to or acquired by a joint venture. Each venturer may receive a share of the assets' output and accept a share of the expenses incurred. There may not be a joint venture legal entity.

  • Jointly controlled entities. This type of joint venture involves a legal entity in which each venturer has an interest. The new legal entity controls the joint venture's assets and liabilities, as well as its revenue and expenses; it can enter into contracts and raise financing. Each venturer is entitled to a share of any output generated by the new entity. A jointly controlled entity maintains its own accounting records and prepares financial statements from those records. If a venturer contributes cash or other assets to a jointly controlled entity, the venturer records this transfer as an investment in the jointly controlled entity.

Advantages of a Joint Venture

There are multiple advantages to entering into a joint venture with another party. First, the other party can bring financing to the venture that you may not have, so that it can receive sufficient investments to grow it properly. Second, the costs and any risks of the venture are now being shared with someone else, which reduces your downside risk of losses. Third, you can access the expertise of the other party, which may be substantial in the business area being addressed by the joint venture. And finally, you can access the distribution networks and customers of the other party, which may be quite a bit more extensive than yours.