A joint venture consists of two or more parties working together to develop a single business or project for profit while splitting the related risks. A minimum of two natural persons or legal organizations must make up the parties to the joint venture. As a business or company owner, you might be interested in breaking into more expansive and international markets, but there are some limitations and bans in some countries that stand in your way. The best course of action in this situation is to create a joint venture with businesses already operating in your target areas.
Therefore, you need the advice of experts knowledgeable about all the legal pitfalls in the area you are searching for and who will be by your side throughout the joint venture creation process. In this regard, Karimi & Associates Law Firm, with a team of experienced and expert lawyers in various legal fields, by providing specialized legal advice, accompanies and supports your interests in this process.
What Is a Joint Venture (JV)?
There is a definite and well-known description for joint ventures: A joint venture (JV) is an agreement between two or more parties to combine their resources in order to carry out a certain objective. A new project or any other type of commercial activity can be this task.
One of the most vital features of the JVs is about the members’ responsibility; Each member of a JV is accountable for the venture’s gains, losses, and expenses. The endeavor, however, exists independently of the participants’ existing business ventures. Another point of JV is about the forms which could be any type of structures like partnership, corporations such as LLC, and other business firms. JVs can bring together different businesses, small or big, to work on a single project or a number of them.
Reasons of JV Formation
There are various reasons for JV formation; Business growth, entering to new markets, increasing the benefits, reducing the costs, utilizing resources, combining the expertise, etc. All of these reasons are important and convincing enough, however the most tempting ones are clarified as follows:
JVs are formed by two or more businesses or parties with different histories, expertise, or skill sets. This is a good opportunity to gain from the other’s expertise and skills through a JV.
Entering to New Markets
JV gives a great chance for corporations to enter into global markets. It is not possible for some foreigners to enter into some markets and a JV with a local company gives a great chance to conduct business in those markets.
A corporation can enter into a JV agreement to supply goods to a local business, taking advantage of an already established distribution network, in order to expand its distribution network to new nations.
Types of JV
There are different types of JVs and 2 types of them are the most common and useful ones:
Contractual JV and Incorporated JV.
Contractual Joint Ventures
The first feature is about the parties’ independency. In other words, it is a simple alliance between two or more parties to pursue a business enterprise without incorporation of a separate entity and the parties organize their cooperation on a contractual basis.
The main characteristics of this JV are flexibility (freedom to regulate contractual relationships) and liability (parties remain directly liable). The contractual JV is recommendable for short, fixed projects. It has minimal formalities and TAX transparency. It should be considered that the exit and entrance of new participants is something regular in this kind of JVs.
Incorporated Joint Ventures
It is an alliance between two or more parties to pursue a business enterprise through an incorporation of a separate entity. Limitation of liability is its main feature. It is an established legal framework and also there is flexibility in participants’ exit and entrance.
Phases of a JV
First, you should choose the right partner, and it firmly depends on your purposes. Then start negotiation. The next step is drafting pre-contractual agreements and due diligence.
Now it is time for drafting the JV agreement. Use a roadmap to identify legal steps and allocate tasks. During the process, you might face some obstacles and problems, and a legal expert could minimize them with good foresight of the possible challenges.
First of all, it could be stated that almost all the tempting reasons for forming a JV, are the advantages of JV. If you want to use other markets’ potentials, utilize other corporations’ expertise, expand your business, or raise the benefits, JV formation could be the best way.
All these reasons are considered advantages but there is another one that could be stated as one of the most important advantages: “adaptability”. For instance, a joint venture may only last a short time and only apply to a portion of what you do, so minimizing both sides’ commitment and the risk that the organization faces.
Sometime the objectives of the venture are unclear. Although the parties can minimize this issue and its impact, but practically it can cause some difficulties. Furthermore, there is the partners’ relationship is not great and there might be some serious misunderstandings. This may sound wired but, again, practically can cause different issues.
The other disadvantage is about the inequality of the parties’ expertise and investment and there might not totally be matched.
Finally, contractual restrictions on the JV might put one partner’s fundamental business operations in danger.
JV Tax Issues
Tax issues are one of the most complicated ones in JV. It has different sections that each shall be analyzed accurately: profit extractions, assets transfer to the JV, TAX losses, tax consolidation, etc., but generally and for a brief understanding, it should be noticed that if the joint venture is a separate legal entity, it must pay taxes like any other corporation or enterprise. If it operates as an LLC, its income and losses will be reported on the owners’ individual tax returns.
As a business owner, you should analyze all the processes level by level, and difficulties must also be taken into account before the process can begin.
Iran has always been tempting to different businesses, and it can be a target market to form a JV, so if you are interested in Iran’s market, contact Karimi & Associates Law Firm through our contact section and receive specialized legal advice to conclude a perfect JV agreement and its formation from our expert lawyers.