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Key Takeaways
- A joint venture is a collaborative enterprise between two businesses, with the details of the collaboration specified in a joint venture agreement.
- Joint ventures are not a specific legal structure in many countries, but instead can take the form of a partnership or a limited company.
- There is no specific tax structure for joint ventures, with tax obligations dependent on the legal business structure chosen.
Joint Venture: Legal Definition
A joint venture is a collaboration between two or more parties that typically results in a distinct business entity. They may join forces to create a new business that profits them both, or they may simply collaborate on a project that’s limited in scope. If that sounds somewhat obscure, that’s because a joint venture, or JV, isn’t a legally recognized type of business entity in most countries. Instead, the term joint venture simply indicates that some parties have pooled some of their resources and expertise to work together. They share the risks and rewards of their joint venture.
Joint ventures can be formed by collaboration between:
- Businesses
- NGOs
- Institutions
- Government agencies
In the US, the IRS doesn’t recognize the term joint venture as a specific type of business. Likewise, in the UK, the term has no statutory meaning and simply refers colloquially to businesses joining forces toward a common goal. In the EU, however, a joint venture is a specific structure defined by competition and merger statutes. In China, joint ventures have historically been defined in law. Under China’s Foreign Investment Law (effective since 2020), the older equity and cooperative joint venture frameworks have largely been phased out, although the term ‘joint venture’ is still widely used in practice.
Is a Joint Venture the same as a Partnership?
A joint venture isn’t the same thing as a partnership because a joint venture is generally not a separately recognized type of business structure. Instead, the joint venture takes on the form of other established structures such as limited companies or partnerships.
A partnership is a legal business structure made up of two or more people. In general partnerships, these partners share all the profits that the business may create and all have unlimited liability for the business’s debts. In some countries, limited partnerships and limited liability partnerships (such as China’s Qualified Foreign Limited Partnership) exist with one or more partner having limited liability. Generally, partnerships are pass-through structures. For example, In the US, a partnership doesn’t itself pay income tax. Instead, the partners receive their individual shares of the profits of the business and claim these on their personal income tax returns.
A joint venture can take the form of multiple business structures. That could include a partnership but might also be a corporation or a limited liability company. In this sense, the joint venture is separate from the business interests that created it and should be registered as its own entity. The type of entity, though, depends on the needs of the venture.
It’s important to note, though, that some so-called “joint ventures” may simply be named this way for marketing or publicity purposes and simply represent informal or semi-formal collaboration between two parties. In these cases, no new legal entities are created.
Comparison: Joint Venture vs Partnership vs Limited Company
| Aspect | Joint Venture (JV) | Partnership | Limited Company (Ltd / LLC) |
|---|---|---|---|
| Is it a legal structure? | Not usually a standalone legal form | Yes, legally recognised | Yes, legally recognised |
| Typical formation | Agreement between two entities + optional new entity | Agreement between individuals/partners | Registration under company law |
| Liability | Depends on chosen structure (can be limited) | General partners have unlimited liability | Shareholders have limited liability |
| Taxation | Depends on structure (partnership or company tax rules apply) | Generally pass-through taxation | Corporate tax applies to company profits |
| Purpose | Specific project, strategic cooperation, market entry | Ongoing business operations | Ongoing, broader commercial activities |
| Control | Shared between JV parties per agreement | Shared between partners | Defined by shareholding and corporate governance |
What Are the Benefits of a Joint Venture?
Here are some of the advantages of joint ventures:
- Entering new markets: Many joint ventures are set up between a local company and a foreign enterprise looking to get into a new market. In some cases, it is expensive and legally difficult for foreign companies to operate in a new location without joining forces with a local partner.
- Competition: Competing companies can take a break from competing and cooperate by starting a joint venture. This kind of strategic union can be beneficial for both sides and produce benefits that help their main businesses.
- Combining resources: Businesses may be able to help each other by each contributing resources that the other lacks. By pooling their resources together, they can gain the full complement they may need to achieve a business goal.
- Sharing human resources: Imagine one company has an excellent software development team while another makes incredible videos. They could join forces to leverage both of these skills and, for example, build a new business around a video creation app.
- Sharing risk: Entering into a new line of business is always risky. Joint ventures allow companies to share the risks but also reap the rewards jointly.
Joint ventures with local partners can accelerate market entry and reduce capital requirements, yet they require clear governance, profit-sharing, and exit provisions to protect your interests. MSA Asia’s joint venture setup expertise covers structure, negotiation, and ongoing governance. Reach our experts for venture planning.
Not sure if a JV is the right structure for market entry? MSA helps you evaluate options and choose the best setup. Speak with our advisors today. Message →
Yes, a joint venture can hire employees as long as it is officially registered to do so. For example, in the United States, the joint venture will have to acquire an employer identification number (EIN) and also register with the Social Security Administration. It will also need to register with similar government bodies in other countries.
Who pays taxes depends on how a joint venture becomes registered. If it takes the form of a corporation, this new entity will have to pay corporate income tax. Its shareholders, usually the two or more businesses that collectively own the corporation, will also have to pay tax on the dividends they receive. If the joint venture is registered as a partnership instead, it won’t be taxed directly. Instead, the profits flow through to the owners, who will pay taxes on them.
