Joint Venture (JV): What Is It, and Why Do Companies Form One?

What Is a Joint Venture (JV)?

A joint venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity.

Each of the participants in a joint venture is responsible for profits, losses, and costs associated with it. However, the venture is its own entity, separate from the participants’ other business interests.

Understanding a Joint Venture (JV)

Although a joint venture is a partnership in the colloquial sense of the word, it can be formed using any legal structure—corporations, partnerships, limited liability companies (LLCs), and other business entities can all be employed.

Despite the fact that the purpose of a JV is typically for production or research, one can also be formed for a continuing purpose. JVs can combine large and small companies to take on one or several projects and deals.

Here are the four main reasons why companies form JVs.

1. To Leverage Resources

A joint venture can take advantage of the combined resources of both companies to achieve the goal of the venture. One company might have a well-established manufacturing process, while the other company might have superior distribution channels.

2. To Reduce Costs

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 technological advances that are costly to implement. Other cost savings as a result of a JV can include sharing advertising, business supply, or labor costs.

3. To Combine Expertise

Two companies or parties forming a joint venture might each have different backgrounds, skill sets, or expertise. When these are combined through a JV, each company can benefit from the other’s talent.

4. To Enter Foreign Markets

Another common use of joint ventures is to partner with a local business to enter a foreign market. A company that wants to expand its distribution network to new countries can enter into a JV agreement to supply products to a local business, thus benefiting from an already-existing distribution network.

Some countries have restrictions on foreigners entering their market, making a JV with a local entity almost the only way to do business in the country.

How to Set Up a Joint Venture

Regardless of the joint venture structure, the most important document will be the agreement that sets out all of the rights and obligations of each party to the venture.

The objectives, the initial contributions of the parties, the day-to-day operations, the right to the profits, and the responsibility for losses are all set out in the JV agreement. It is important to draft it with care to avoid risking litigation down the road.

Advantages and Disadvantages of a Joint Venture

Advantages

A joint venture gives each party the opportunity to exploit a new business opportunity without bearing all of the cost and risk. Joint ventures, by nature, are riskier than “business as usual,” and coopetition and sharing the risk is a wise move.

If the right participants are involved, the joint venture also starts out with a broader base of knowledge and pool of talent than any one party possesses on its own.

For example, a joint entertainment venture set up by an animation studio and a streaming content provider can get off the ground quicker—and probably with a better chance of success—than either participant could alone.

Disadvantages

Embarking on a joint venture requires relinquishing a degree of control. The vital decisions are being made by two or more parties.

The companies involved must go into the project with the same goals and an equal degree of commitment.

Extreme differences between the participants’ company cultures and management styles can be a barrier to success. Will the executives of an animation studio be able to communicate in the same language as the executives of a digital streaming giant? They might, or they might line up in opposing camps.

Setting up a joint venture multiplies the number of management teams involved. If one party undergoes a significant change in its business structure or executive team, the joint venture can get lost in the shuffle.

Paying Taxes on a Joint Venture

When forming a joint venture, the most common thing the two parties can do is to set up a new entity. As the JV itself isn’t recognized by the Internal Revenue Service (IRS), the business form between the two parties helps determine how taxes are paid.

As the JV is a separate entity, it will pay taxes as any other business or corporation does. However, if it chooses to operate as an LLC, its profits and losses would pass through to the owners’ personal tax returns, as with any other LLC.

The JV agreement will spell out how profits or losses are taxed. If the agreement is merely a contractual relationship between the two parties, then it will determine how the tax is divided between them.

Joint Ventures vs. Partnerships and Consortiums

A joint venture is not a partnership. That term is reserved for a single business entity that is formed by two or more people. JVs join two or more different entities into a new one, which may or may not be a partnership.

The term “consortium” is sometimes used to describe a JV, and there are similarities. However, a consortium is a more informal agreement than a JV. For example, a consortium of travel agencies can negotiate and give members special rates on hotels and airfares, but it does not create a whole new entity.

The agencies still pursue their own businesses independently. In a JV, they would share ownership of the created entity, jointly responsible for its risks, profits, losses, and governance.

Example of a Joint Venture

In 2022, two large Japanese companies, Sony and Honda, announced a joint venture to create an electric vehicle. Sony is one of the world's most prominent electronics companies and Honda is one of the most prominent automobile companies.

The established joint venture seeks to bring an electric vehicle to market by 2026 by combining Honda's skills in mobility development, technology, and sales, with that of Sony's expertise in imaging, telecommunication, networks, and entertainment.

The joint venture is called "Afeela." The company will be taking pre-orders in 2025 with expected delivery in the U.S. in 2026.

The Bottom Line

A joint venture between companies can open the way for expansion into a new line of business by each participant at a relatively modest cost. In fact, it sounds ideal: Each company contributes its own expertise, but the cost of the venture is split among them.

It’s only ideal, though, if the companies have a shared vision and an equal commitment to the success of the joint venture.