Joint venture structure and usage

A joint venture is a separate entity that is supported by the resources of two or more investors. These investing entities typically set up a joint venture for a specific, well-defined purpose, such as:

  • To define a new standard for the recordation of data.
  • To investigate the uses to which a chemical compound can be put.
  • To build a website that incorporates the audio and video entertainment generated by the investing entities.
  • To sell products and services into a foreign market; this typically involves a foreign purveyor of products teaming with an entity that has local contacts, to set up a sales organization in the local market.

The investing entities may contribute substantially more than just funds to a joint venture. They may assign staff to the entity, as well as their intellectual property, facilities, leased space, and so forth.

There should be a joint venture agreement between the investors that states a number of issues related to the arrangement, such as:

  • The types of resources that each party will contribute to the joint venture
  • Who will pay in additional funds if the entity incurs losses
  • How any resulting profits will be split
  • Which parties are entitled to the intellectual property or other assets created by the entity
  • The circumstances under which the arrangement will eventually be terminated

The owners of a joint venture may have different perspectives on how the entity should be managed, so there is a risk of acrimony that can lead to the joint venture being terminated. This risk can be mitigated by clarifying up-front the goals of the parties and their views regarding what shall be done under various scenarios that the entity may confront.

The investors in a joint venture do not have to be individuals. They could also be corporations or government entities.

If a joint venture is formed for the sole purpose of completing a specific project, it is called a consortium.