Home Business What is a joint venture, what are the merits and demerits?

What is a joint venture, what are the merits and demerits?

by Hira Umair
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joint venture

A joint venture occurs when companies decide to pool their technologies or resources through a joint company. Most technological or industrial alliances result in the creation of a joint venture whose capital is split 50/50. The shareholders share the risk and the profits in the event of the success of the economic project.

A joint venture can be created within the framework of international economic cooperation or at the local level in order to create synergies between several companies. In most cases, this type of agreement is concluded when a company wishes to develop its activities abroad. Via the joint venture, it will thus be able to join forces with local partners in order to penetrate the foreign market more effectively. Here are some joint venture disadvantages as well as some advantages.

What are the advantages and disadvantages of a joint venture?

The advantages of the joint venture are primarily due to its legal flexibility.

It is a collaboration agreement which can take different forms and in particular that of the joint venture which does not require registration in the commercial register. The companies sign a partnership while maintaining a certain independence, which they can fully regain once the objectives of the pooling of resources are considered to have been achieved.

From a strictly financial point of view, the union of several companies in theory makes it possible to generate economies of scale with the synergies of the respective means of production, and thus to reduce the costs which could have been prohibitive if they had had to be engaged by a simple isolated company.

Finally, the risks thus make it possible to be diluted for a substantial expected return on investment in the long term.

However, this form of cooperation has limits and drawbacks.

On the one hand, companies must be able to establish, in terms of management, a roadmap with well-defined contours and, above all, to stick to it for the duration of the contract.

A merger between several companies, whose differences in terms of corporate culture are significant, carries in itself the threat of divergences in the strategic vision likely to slow down the achievement of the profits pursued. If it turns out, during the process, that this original view is no longer shared by all the partners, the efforts and energy mobilized would have been in vain.

The collaboration contract 

Cooperation between partners can materialize through a contractual joint venture. This contract must include mandatory information such as:

• The operating methods 

• Asset management method

• The participation and contributions of both parties

• Distribution of profits

• The terms of termination or modification of the contract 

In this case, there is no legal status as such. The nature of the agreement between the two parties will remain purely contractual. 

The creation of a subsidiary 

To set up a long-term partnership, it is possible to create a common structure, in other words a subsidiary. This can take the form of a SARL, SAS or any other type of company. The profits made will therefore be taxable according to the tax rules that apply in the country of establishment. The applicable work rules will correspond to the Labor Code in force. 

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