16. What is a “joint venture”?
Joint ventures operate similarly to general partnerships, but they are specifically formed for a limited purpose or a single project. Unlike a general partnership, the joint venture does not arise by default through the activity of the joint venturers; rather, it requires the specific intent and agreement of the parties. As such, a joint venture agreement should be in writing to avoid the interpretation of the activity as a general partnership. Accomplishing a specific goal or working on a specific project is a key characteristic of the joint venture. If the joint venture is repeated, it makes it more likely that a court would interpret the relationship to be a general partnership.
• Note: The joint venturers may be individuals or business entities; however, it is most commonly used by two separate business entities to undertake a special project or commercial activity. They are particularly common when one business wishes to expand operations into a new market, such as when expanding sales to a foreign country.
• Example: ABC Corp is interested in expanding its product sales into China. China has proven to be a difficult regulatory environment and customer market for US companies. Instead of entering the China market directly, ABC Corp decides to do a test run of its product sales with 123 Corp, a Chinese company. ABC and 123 agree to jointly sell and market ABC’s product in China for a 6 month period. At the end of the period ABC Corp can decide if it wishes to enter into the Chinese market directly or pursue distributor or licensing relationships.
• Discussion: Can you identify an example of a prominent joint venture?
• Practice Question: When is operating as a joint venture an effective business strategy?