The joint venture is a business process, where two or more companies join their hands either formally or informally. It can be a short term or long term process. Usually, they join their companies for a purpose. Once they accomplish the task, their agreement will end. All of the joint ventures have their basis on the contract. It can be either a partnership, corporation, project, or limited liability company.
Types of Joints Ventures
Based on the purpose of the process, it has two divisions. They are incorporated and unincorporated joint ventures.
Incorporated Joint Venture
It is the establishment of a joint venture for a fixed purpose where the co-venturers exchange their shares and assets. With limited liability, these companies share their profit with their participants: the shareholders.
Unincorporated Joint Venture
Though it is a joint venture, it does not involve incorporation. It is a kind of contractual relationship. But it differs from the regular partnership of a company. Here two or more companies join hands. It is not as two or more owners work as partners in a company. It will not be perpetual. It is a short term process where the contract keeps its liabilities and rights.
There are two different acts for the incorporated and unincorporated joint venture:
The Companies Act of 1956 controls the process of an incorporated joint venture. The act provides a separate legal entity that enables independence to the companies. The statute forbids certain rights to the members or participants. They should not interfere with the company concerning its assets.
The unincorporated joint ventures are under the authority of the Indian Partnership Act of 1932. Companies have exemptions from some statutes and enactments too. But there is no independence to the joint venture from the shareholders. Partners can indulge in legal proceedings.
Establishing Joint Venture in India
Before creating a joint venture, one should understand the terms and conditions of the laws mentioned earlier.
- First of all, find the co-venturer that helps you attain your goal.
- Spend time in understanding their business.
- The understanding of the businesses and cooperation will lead to a successful joint venture.
- Decide the type of entity that you wish to make.
- Let the complexity of the business, liability protection, and capital be the deciding factors.
- Based on that, one can make either a contractual relationship, corporation or limited liability company.
- Create term sheets and letters of intent that have to be signed by the owners.
- Draft the joint venture agreement and establish the joint venture.
Joint Venture in India
A joint venture in India needs government permission if one of the partners is a foreigner, PIO (a foreigner but a Person of Indian Origin) or NRI (Non-Residential Indian). Approval must be given either by RBI (Reserve Bank of India) or FIPB (Foreign Investment Promotion Board).The government of India provides high prioritized areas and automatic approvals for some conditions:The automatic permissions can be attained in two weeks if the company involves 74% of foreign equity in these areas will have automatic approvals. But the company should apply to the Reserve Bank of India.
- If the percentage exceeds 74%, the company can get automatic permissions even if they are away from prioritized areas. But the company should apply for the government’s approval.
- If the ownership exceeds 100% foreign equity, within six weeks, they can get approval.
Neither incorporated nor unincorporated joint ventures are a taxing entity. The business structure of the joint venture decides tax payment and other related management.
- If the joint venture involves an equal share of the capital, it gives an equivalent share in stocks, management, and board of directors. The same remains with tax payment too.
- If the joint venture is a partnership: a contractual relationship, it has to pay tax considering the agreement between the two or more independent companies.
In India, joint venture agreements depend upon the regulations of government for it provides profitable schemes to the development of business.
Advantages of Joint Venture
Companies of any size can join and work together using this process. It enables new insights and provides access to human and technological resources. The temporary joint ventures prevent long term burdens and progress.
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