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When multiple business entities make a decision to start a new business together as a cooperative arrangement, they form what is known as a joint venture. In creating a joint venture, each of the involved entities agrees to what assets they will contribute, how they are going to distribute income and share expenses, and how the new entity will move forward.
Before deciding to get involved in a joint venture, business owners need to carefully assess how they plan to proceed. It is essential that every detail of the new organization’s operations be thought out and addressed ahead of time, from its management and tax liabilities to how profits and losses will be distributed.
Forming a Joint Venture
Even though a joint venture represents a cooperative between two or more business entities, each of those original entities retails its original legal status, whether as companies or corporations or as an individual or group of individuals. Not all joint ventures involve the actual formation of a new business entity, but if a new entity is created it will be required to pay its own taxes. The tax liability will be based on the form of business that is adopted: if an unincorporated joint venture, the tax on profits will belong to the entities who originally joined the agreement, while as a corporation it will have its own tax responsibility.
A joint venture can exist solely as an agreement between the original cooperating entities. Whatever form a joint venture takes, it is best arranged via a detailed, comprehensive contract that specifies what assets each of the participating entities will contribute, how the new entity will be managed, who will be in control of important decisions and how the distribution of profits and losses will be accomplished.
Why Form a Joint Venture?
There are numerous advantages to forming a joint venture, including combining distinct talent and background from two separate entities to create a novel product or service, or taking advantage of one entity’s strength in marketing with another’s innovation. A good example of a successful joint venture can be found in BMW Brilliance Automotive, Ltd, which was formed between BMW Group and Brilliance China Automotive Holdings. The two created a new entity to sell BMW vehicles in China, leveraging Brilliance China’s geographic presence to sell BMW’s products.
Among the reasons for forming a joint venture are:
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