What is a Joint Venture?
A joint venture is a business that is formed when two businesses join forces and use
their diverse skill sets to achieve a shared commercial goal.
- The distinction between a joint venture and other businesses such as firms or
partnerships is that a joint venture is only held by two different people or
parties.
- One of the benefits of forming a corporate joint venture in the UAE is that no
license is necessary because the local business partner will already have a
business license.
- It's similar to a business agreement in which both partners agree to split
profits based on their ownership percentage.
- Co-ventures are business partnerships between two or more people. A joint
venture is usually formed to complete a certain project or achieve a specified
aim.
- Joint ventures also develop synergies and provide cost and benefit advantages to
the companies.
- It can be founded for a variety of reasons, such as entering a new market or
area, or entering a new business line entirely.
- There are no distinct governing bodies for joint ventures because they decided
to enter into a new arrangement.
- Setting up a joint venture is often done through a contract or the formation of
a limited liability company LLC under Federal Law No. 2 of 2015 (the Commercial
Companies Law), which allows foreigners to own 49 percent of limited liability
companies in the UAE outside of the various free zones.
The concept of Joint Venture can also be explained with the help of following
example-
THE KELLOG AND WILMAR JOINT VENTURE
The deal between Kellogg and Wilmar International
Limited is a well-known example of joint venture formation. Kellogg International
entered the market to increase its footprint in China by selling cereals and other
snack foods to Chinese consumers. Joining forces with Wilmar resulted in a
successful synergic partnership for both firms, as Wilmar International offered
Kellogg International with an extensive distribution and supply chain network, and
Kellogg was able to enter a new area as a result of this agreement and
relationship.
Features of a Joint Venture
Below mentioned are some of the exquisite features of a Joint Venture-
The parties involved have come to an agreement:
When two or more businesses join forces, they sign a contract. In that agreement,
they agree to start a business together, define the business's goal, and state that
they will be bound by it in all circumstances.
An important aspect of a joint venture is the agreement. A joint venture that lacks a
formal agreement may be deemed invalid and generate complications in the future.
In a joint venture, companies develop synergy:
Companies in a joint venture have a variety of characteristics. Certain attributes
are possessed by one firm but not by others, and vice versa. When these companies
join forces in a business endeavor, they share the unique features that they
possess.
They establish synergies for greater results in this way. Both companies benefit from
the joint venture by making use of each other's strengths.
Profit and loss sharing:
Another significant aspect of the joint venture is the profit and loss distribution.
There are hazards in every business venture. When you want to enter a new market,
the dangers are higher. You can efficiently deal with a diverse culture,
geographical disparities, and boost profit generation while minimizing the danger of
loss by entering a joint venture.
Control is shared:
You also share control of the company in addition to the profit and loss. All key
business activities, operations, and other administrative tasks are under your joint
supervision.
Expertise and resources shared:
When two or more companies involved in a joint venture. They also share their
resources, such as technology, capital, and staff. By sharing expertise and
resources, innovation becomes possible.
Joint venture has a limited duration:
Joint ventures, unlike corporate partnerships, are only active for a limited time.
Two companies form a partnership for a specified reason, and once that goal is met,
the companies can either terminate the partnership or enter into a longer
collaboration if both parties agree.
Benefits of a Joint Venture
The benefits of a Joint Venture are explained below-
Additional Resources:
In a joint venture, not only two business partners come together and invest in a
business, but they also share their resources. Therefore, they have specialized
staff and equipment and machinery required for business operations.
Aids in the development of commercial partnerships and networks:
Even if collaborative enterprises are only for a brief time. It provides you with an
excellent opportunity to form new business ties and expand your network. These
connections may prove useful in the future.
You have the option to leave the joint venture at any time:
Exiting a joint venture is easier than exiting a long-term business partnership
because it is a non-core business.
A joint venture has a lot of flexibility:
A joint venture has a lot of flexibility. As a result, it allows you to minimize your
business exposure and experiment with new business dimensions before committing to
them for a longer length of time.
Joint ventures between countries are advantageous:
A joint venture between two enterprises from different nations is known as an
international joint venture. International joint ventures are a great way to start a
business in a new country since they lower the risk of discrimination and give the
company a foothold in the market.
Reduced likelihood of failure:
Because you already have a well-known brand on your side, your odds of failure are
reduced. It will not only minimize your chances of failure, but it will also
increase the popularity of your brand in the market.
lower advertising and marketing costs:
Because the cost of advertising and marketing operations is split evenly among the
partners in the joint venture. As a result, one party's overhead is reduced.
Enhanced potential:
Even if your financial resources are inadequate. Because you have partners on your
side, you can still participate in various commercial deals.
A joint venture is only for a limited time:
A joint venture does not require a long-term commitment. It's a short-term business
relationship between two companies.
More business knowledge and insights:
When two or more business partners join forces, they share their knowledge and
expertise in order to make their company successful, which is impossible to achieve
when running a firm alone. Because you're only in a business for a short time, you
can take advantage of the opportunity to learn about and explore a new market.
How can I start a Joint Venture –
As previously said, corporations or business owners frequently organize a joint
venture to get access to new markets, obtain a competitive advantage, or access
complementary resources. As a result, if you believe this type of arrangement could
be beneficial to your company, here are the measures you'll need to follow to form
one:
Look for a partner-
To begin, clearly define your goal in order to identify a joint venture partner (or
multiple partners for larger joint ventures).
- Suppose you've invented a new product but don't have access to a large
distribution network to get it into stores. You can inquire about distributors
from other business owners and conduct independent market research. Then,
contact other distributors to gauge their interest in forming a joint venture.
- As a result, you should assess the people you'll be working with in terms of
both their abilities and knowledge as well as their cultural fit. They must, of
course, be able to demonstrate the breadth of their distribution networks.
- You should, however, consider how committed they are to the end aim. Can you put
your faith in those in charge? What is the company's financial situation, and
what are their financial goals for the joint venture? Are there any other
commitments or conflicts of interest at the firm that could jeopardize this
deal?
- When looking for a partner, expect a lot of negotiating and back-and-forth
during the process of drafting your agreement. You and your potential partner
may need to share production schedules, customer lists, and other confidential
information, and they may need to share their own information as well.
- It's a good idea to write and sign a mutual nondisclosure agreement to preserve
everyone's sensitive information.
Select a joint venture type-
The next stage is to structure your joint venture when you've secured a partner.
There are two ways to do this, as we've discussed:
- Create a separate legal body for the joint venture, such as a corporation or a
limited liability company, with each party owning a portion of the new company.
- Use a joint venture agreement instead of forming a distinct legal corporation.
An unincorporated joint venture is what it's called.
- There are advantages and downsides to both structure alternatives, just as there
are to joining a joint venture.
- The more expensive and complicated option is to form a distinct legal entity for
your joint venture. For example, if you form a corporate joint venture, the
joint venture will be responsible for submitting and paying its own taxes.
Having a separate legal corporation, on the other hand, provides extra legal
protection in the event that something goes wrong.
- Starting with a simple contractual arrangement is the quickest and least
expensive alternative. The joint venture in this scenario does not disclose any
profits and does not pay taxes on its own. Profits are passed through to the
parties' tax filings.
- If you're looking into forming a joint venture for a specific purpose where
liability isn't an issue, this is a good way to get started. On the other hand,
it's safer to form a distinct legal corporation for a more intricate joint
venture.
Make a joint venture contract-
Again, regardless of the type of joint venture you form, you need prepare a joint
venture agreement that lays out all of the details of how it will operate. To
construct your own agreement for your specific arrangement, you can start with a
joint venture agreement template, such as the one shown above. However, depending on
the type of business you're working with and the risks involved in the joint
venture, you might want to get advice from a business attorney.
As a result, your joint venture agreement should include the following information at
a minimum:
- The joint venture's objective.
- The process of formation (i.e. if the arrangement will be a separate entity or
established by contract).
- What will the parties do with their earnings and losses, which do not have to be
equal? (though an outside claimant is free to sue either or all parties).
- Contributions from each side, which do not have to be equal.
- What responsibilities each party has in order to ensure the joint venture's
success.
- Meetings are scheduled to make critical decisions.
- Each party's voting powers.
- When the joint venture will come to a close.
Overall, it's a good idea for both parties to have legal assistance during the
drafting and signing of the joint venture agreement.
Taxes should be paid-
When you're a part of a joint venture, you must pay taxes just like any other
profit-seeking business. As previously stated, the tax of your joint venture is
determined by the nature of the agreement. Any profits from the joint venture will
be taxed based on the entity type if you incorporate a separate legal entity. C
corporations, for example, pay a flat income tax rate of 21% on corporate profits,
and shareholders pay taxes on dividends as well. LLCs, on the other hand, are taxed
as pass-through businesses, which means that the profits and losses of the business
are reported on the tax returns of each owner.
- In terms of taxation, unincorporated joint ventures are identical to limited
liability companies (LLCs). The profits of the joint venture are distributed to
the parties, who must report them on their individual tax returns in accordance
with their respective share of the profits as stipulated in the joint venture
agreement.
- If the participants to the joint venture are companies, the joint venture income
is reported on each corporation's corporate tax return. An unincorporated joint
venture does not file a business tax return on its own.
Other applicable laws must be followed-
Finally, you'll want to make sure you obey any additional local, state, or federal
requirements that may apply to your joint venture.
- If you're "borrowing" employees from either side to the agreement, for example,
you'll need an employer identification number and will need to obey other labour
rules. Depending on the industry in which your joint venture operates, you may
need a business license.
- If you're thinking of forming a cross-border joint venture, you'll have to deal
with a slew of international rules that could limit your capacity to operate in
other nations.
- The application form and supporting documentation must be submitted to the DED
to complete the process.
- The DED will approve the application after authentication, and you can begin
your business.
The documents required for initial approval are-
- a completed application form
- Certificate for a trademark that has been reserved
- Photocopies of the applicants' passports and identification
- The local sponsor has provided a letter of authorization.
- Approval of the conducted business activity.
- The company's management board has passed a resolution.
- Permit to live in Dubai (for foreign applicants only)
A few documents must also be submitted to the Dubai registration by the
applicant-
- The DED has given its initial clearance.
- The documents that were submitted for approval
- a copy of the leasing agreement for the office
- A public notary's notarized copy of the association agreement
How can Dhanguard help?
Setting up a business in Dubai can be a prudent decision. Dubai offers commercial and
infrastructure amenities comparable to those found in any industrialized country, as
well as tax perks and a progressive corporate environment. We have a team of
business experts in Dubai who can assist you with the start-up of your company. The
Dhanguard approach to business formation is built on your company's vision and
goals. Please contact us if you require any assistance or have any questions about
company formation in Dubai; we would be happy to assist you.
