The Reasons for and Types of Joint Venture

The Reasons for and Types of Joint Venture


The most common situation in which a joint venture may be formed is where there are two or more parties, none of whom wish to devote the whole of the financial and other resources required to establish the enterprise. Alternatively, the participants may have different skills or resources available and the enterprise may be considered more likely to succeed if their resources are pooled than if each party commences the enterprise separately.

You should firstly identify the likely requirements in respect of cash, resources and management that you can provide and that you require from your joint venture partners, and ensure each proposed partner is able to provide these. A brief written specification of the project identifying the responsibilities of each side will help to avoid misunderstandings if prepared at an early stage in the negotiations. More specific considerations will depend on the purpose of the joint venture:

Single Project: Where a joint venture is created to deal with a single project e.g. the development of a property or other enterprise which is likely to last only for a limited period, a simple contractual agreement may be all that is required. In that situation, the management of the project is normally carried out by the existing management of the two parties.

Partnership: Where the project is likely to continue for a longer period, a partnership may be suitable. Partnerships are simple to set up and avoid the disclosure of accounting and other information required for limited companies. The main problem with partnerships is the unlimited liability of the partners for the partnership's debts.

Joint Venture Company: The most common form of joint venture is a joint venture company. The advantages of using a joint venture company are its limited liability status and the ability to keep the company's affairs separate from the other activities of the participants. The existence of share capital in the company also simplifies the division of the parties' interests and makes transfer of those interests easier. In addition, the management of the company can, if required, be kept separate from share ownership and the company will be able to raise finance by charging its assets.

Most joint venture companies are governed by a joint venture agreement or a shareholders' agreement as well as the usual Memorandum of Association and Articles of Association. The arrangements for a joint venture company need not be complicated. You can start with a simple ready-made company and amend and expand the arrangement as the business develops and profits increase.

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