There are several occasions when businesses face difficulties like shortage of funds or lack of technological knowledge. This generally happens during the diversification of a product line or entry into a new market. Joint ventures can play a huge role in these situations. Before we understand how joint ventures function, let’s first figure out the meaning of joint ventures.
Meaning of Joint Ventures
Joint ventures, in very simple words, are business ventures that two or more people or entities undertake for a certain period of time. They are created keeping specific and pre-determined purposes in mind. The venture generally comes to an end once those purposes are met unless the parties decide to continue working together.
These parties to a joint venture are governed by a contractual agreement they enter into. The agreement specifies things like their obligations, the rate at which they will share profits or losses, their rights and liabilities towards each other, etc.
Parties that create such joint ventures are called joint venturers or co-venturers. These parties can be either natural persons (humans) or even artificial legal persons (companies).
Transactions of such joint ventures are peculiar. This is because these entities are neither singular in nature, and nor are they treated as completely separate entities as such. They are even different from typical partnership forms of business.
Browse more Topics under Joint Ventures
- Distinction Between Joint Venture And Partnership
- Joint Venture Accounting with Separate Books
- Joint Venture Accounting with No Separate Books are maintained
Now that we are clear with the meaning of joint ventures, let us now understand the concept better using some examples.
Examples of Joint Ventures
Most joint ventures are formed when business groups or individuals lack funds or technical knowledge and expertise. People also form joint ventures to reduce their risks while entering new markets.
Let’s take the example of the airline industry. Requirements for large capital amounts and access to technology are typical characteristics of this industry. A company that manufactures aircraft can enter into joint ventures with other companies for supplying it with special parts and they both together can enter newer markets. India’s famous Hindustan Aeronautics Ltd. (HAL) is a great example of this.
Other popular Indian joint venture companies include Mahindra-Renault Ltd and Bharti-AXA General Insurance Co. Ltd, working in the automobile and insurance industries, respectively. Individuals also can create joint ventures for similar purposes. People generally create such ventures in India for construction activities, trading businesses and manufacturing industries.
Now that we have the meaning of joint ventures and some examples of them out of the way, let’s take a look at their features.
Features of Joint Ventures
A joint venture typically has the following features.
1. Specific Purposes
Parties create joint ventures keeping pre-determined purposes in mind. They generally state this purpose clearly in their agreement.
The parties to a joint venture, i.e. the co-venturers, generally execute a written agreement between them. This agreement states details like their obligations, profit/loss sharing ratios, their rights and liabilities, etc.
3. Specific Duration
Since all joint ventures are created for a specific purpose, they generally come to an end once that purpose is fulfilled. The parties can, however, continue working together as well if they mutually agree to do so.
4. Structure of the Venture
Parties can create a joint venture by exercising control on any of the following aspects:
- Operations, or
- Entity itself.
5. Profit Sharing
The parties always agree on the ratio in which they will share their profits and losses. If there is no agreement to this effect, they have to share profits equally or according to the contribution they made during their admission into the joint venture.
Solved Example for you
Question: Amit and Suraj are builders who entered into a joint venture to construct a residential apartment building. Amit purchased land worth Rs. 50 lakhs for the building and further spent Rs. 20 lakhs more for various permissions, clearances and fees. Suraj carried out the job of constructing the building at the cost of Rs. 30 lakhs. Their total profit from the joint venture was Rs. 60 lakhs, which they decided to split in terms of their contributions. Calculate their share of the profits.
Answer: Amit spent a total of Rs. 70 lakhs as his share of the total expenses, while Suraj’s contribution was Rs. 30 lakhs. Hence, the ratio of their individual contributions was 70:30, i.e. 7:3.
Since they are sharing the total profit of Rs. 60 lakhs in terms of the ratio of 7:3, Amit will get Rs. 42 lakhs and Suraj will earn Rs. 18 lakhs.