Types of Joint Ventures

Joint Ventures are of two types — Contractual joint venture Equity-based joint venture

(i)                Contractual Joint Venture (CJV):


 In a contractual joint venture, a new jointly-owned entity is not 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 joint venture. A typical example of a contractual joint venture is afranchisee relationship. In such a relationship the key elements are:

(a) Two or more parties have a common intention – of running a business venture;

(b) Each party brings some inputs;

(c) Both parties exercise some control on the business venture; and

(d) The relationship is not a transaction-to-transaction relationship but has a character of relatively longer duration.

(ii)        Equity-based Joint Venture (EJV):



 An equity joint venture agreement is one in which a separate business entity, jointly owned by two or more parties, is formed in accordance with the agreement of the parties. The key operative factor in such case is joint ownership by two or more parties. The form of business entity may vary — company, partnership firm, trusts, limited liability partnership firms, venture capital funds, etc.

(a) There is an agreement to either create a new entity or for one of the parties to join into ownership of an existing entity;

(b) Shared ownership by the parties involved;

(c) Shared management of the jointly owned entity;

(d) Shared responsibilities regarding capital investment and other financing arrangements; and

 (e) Shared profits and losses according to the agreement. A joint venture must be based on a memorandum of understanding signed by both the parties, highlighting the basis of a joint venture agreement. The terms should be thoroughly discussed and negotiated to avoid any legal complications at a later stage. Negotiations and terms must take into account the cultural and legal background of the parties. The joint venture agreement must also state that all necessary governmental approvals and licences will be obtained within a specified period.