Types of Joint Ventures

Joint ventures are of two types, distinguished by whether or not a new jointly-owned entity is created.

(i) Contractual Joint Venture (CJV)

• No new entity is created — there is only an agreement to work together.
• The parties do not share ownership of the business but exercise some elements of control in the venture.
• A typical example is a franchisee relationship.
• Its key elements are:
  • (a) Two or more parties have a common intention to run a business venture;
  • (b) Each party brings some inputs;
  • (c) Both parties exercise some control over the business venture; and
  • (d) The relationship is not transaction-to-transaction but has the character of a relatively longer duration.

(ii) Equity-based Joint Venture (EJV)

• A separate business entity, jointly owned by two or more parties, is formed in accordance with the parties' agreement.
• The key operative factor is joint ownership by two or more parties.
• The form of the entity may vary — a company, partnership firm, trust, limited liability partnership firm, venture capital fund, and so on.
• Its features are:
  • (a) An agreement to create a new entity or for one party to join the ownership of an existing entity;
  • (b) Shared ownership by the parties;
  • (c) Shared management of the jointly owned entity;
  • (d) Shared responsibilities for capital investment and other financing; and
  • (e) Shared profits and losses as per the agreement.

The joint venture agreement …