What are Non-Corporate Entities?
Non-corporate entity is an entity which is legal in nature. The entity does not go through the incorporation process all over. The shareholders possess definite responsibilities and rights, which normally the owners of other legal entities do not have. This type of entity can do the following:
Enter into valid agreements.
Borrow and loan money from the finance sector.
Sue or be sued in a similar fashion.
Own assets are present.
Pay taxes legally.
Hire employees for the organization.
In Detail
Non-corporation companies, like the partnerships or the sole proprietorships have no legal distinction apart from its owners. The owners of such entities do not have the equal legal protections as a corporate entity. Starting a non-corporate entity is a lot easier than starting a corporate entity, also registering a corporation comes with certain responsibilities. Also, corporations may be quite expensive to create, this too depends on the state the company is incorporated. Corporate registration also requires additional paperwork to get registered, while this non-corporate form is different from the corporate form requirement.
Joint Ventures for Non-Corporate Entities
Joint ventures or its alliances are generally structured without the formation of jointly owned entities. The Key Factors to Consider with JV Entities in order to decide whether to use a JV entity or a non-entity structure, the parties should properly analyse tax, accounting, licensing and other main factors. In the section below we will discuss the key tax factors which are important to be considered. The non tax issues of the concern are also worthy to consider, but moreover we will enunciate with the tax considerations with a JV entity which will be highly fundamental while choosing one’s system, they are:
JV files its own tax returns
The entity adopts its own accounting methods and also conducts its own tax audits
at least one of its members gives up his control of these matters or the members risk their deadlock
Joint Venture Accounting with Separate Book
The accounting of the Joint Venture can be done in any of the following ways:
When the separate set of books are to be maintained
While, when the separate set of books are not maintained.
Here we will discuss the situation when the separate set of books are to be maintained. The following accounts are made:
Joint bank account
Joint venture account
Co-venturers account
1. Joint Bank Account
The co-venturers in a JV open a separate bank account for the transactions of the venture. They make contributions to this account. The bank account is normally operated on a joint basis. Expenses are to be met from this Joint Bank Account. Sales or collections from the transactions are deposited back into the account.
2. Joint Venture Account
This type of account is prepared for measuring the venture profit. This account is then debited with all the venture expenses and is credited with the sales or collections. The excess balance from the credit side over the debit side shows the profit of the joint venture and vice versa. The Profit or Loss is then transferred to the co-venturer’s accounts in their respective profit-sharing ratio.
3. Co-Venturers’ Accounts
Personal accounts related with the venturers are to be maintained while keeping a record of their own contributions of cash or goods. The expenditure which is directly paid and the payments that are directly received by the co-venturers are recorded in this account in the same manner. The profit or loss as while made on the venture is transferred to this account in the agreed profit-sharing ratio. This account is also closed on termination of the venture.
FAQs on Joint Ventures: Features and Benefits
1. What is a joint venture in the context of business studies?
A joint venture (JV) is a business arrangement where two or more independent companies agree to pool their resources to accomplish a specific, time-bound project or business activity. The parties involved, known as co-venturers, create a separate business entity or a formal collaboration, sharing the ownership, risks, and profits of the new enterprise. It is a temporary partnership that dissolves once the venture's objective is met.
2. What are the essential features of a joint venture?
The essential features of a joint venture are:
- Agreement: A formal agreement between two or more parties is the foundation of a JV, outlining the terms, objectives, and contributions.
- Shared Profit and Loss: The co-venturers agree to share the profits and losses in a pre-decided ratio, as specified in the agreement.
- Pooled Resources: Partners contribute resources such as capital, technology, expertise, and market access.
- Specific Purpose: A JV is formed to achieve a specific, well-defined goal, like constructing a building or launching a new product.
- Shared Management and Control: All co-venturers typically participate in the management and have joint control over the venture's operations.
- Temporary Nature: The venture is usually dissolved after the completion of the specific purpose for which it was created.
3. What are the main benefits for companies entering into a joint venture?
Companies gain several strategic benefits from forming a joint venture, including:
- Increased Resources and Capital: It allows businesses to take on large projects by pooling financial and human resources that they might not have individually.
- Access to New Markets: A company can enter foreign or new domestic markets by partnering with a local firm that has an established distribution network and brand presence.
- Access to Technology: It facilitates access to advanced technology, patents, and operational techniques from a partner firm, reducing R&D costs.
- Shared Risk: The financial and operational risks associated with a new venture are distributed among the partner companies.
- Innovation: Combining the diverse skills, cultures, and expertise of two different organisations can lead to the development of new and innovative products or services.
4. How is a joint venture different from a traditional partnership?
While both involve collaboration, a joint venture differs from a partnership in key ways. A partnership is typically formed for carrying on a general business over a long period and is governed by the Indian Partnership Act, 1932. In contrast, a joint venture is formed for a specific purpose or project and has a limited duration. Furthermore, the partners in a firm are called 'partners', whereas in a JV, they are called 'co-venturers'. A JV can be formed between two companies, while a partnership is between individuals.
5. Can you provide a real-world example of a joint venture?
A classic Indian example is Maruti Suzuki India Ltd., which began as a joint venture between Maruti Udyog Ltd. (a Government of India company) and Suzuki Motor Corporation of Japan. Suzuki provided the advanced technology and manufacturing expertise for fuel-efficient cars, while Maruti provided capital and access to the vast, untapped Indian market. This collaboration revolutionised the Indian automobile industry.
6. Why might a large, established company choose a joint venture instead of simply acquiring a smaller one?
A large company might prefer a joint venture over an acquisition for several strategic reasons. A JV allows for risk sharing, which is crucial when entering uncertain new markets or developing unproven technology. It is less capital-intensive than a full acquisition and allows the large company to leverage the partner's existing brand loyalty, local knowledge, and distribution network without the complexities of a full integration. It fosters a collaborative spirit, preserving the unique culture and agility of the smaller partner.
7. What are the common risks or disadvantages of a joint venture?
Despite its benefits, a joint venture has potential disadvantages:
- Potential for Conflicts: Differences in management style, objectives, and organisational culture can lead to disputes between co-venturers.
- Complex Decision-Making: The need for joint control can slow down decision-making, as both parties must reach a consensus on key issues.
- Unequal Commitment: One partner may not commit resources or effort as equally as the other, creating imbalance and resentment.
- Sharing of Confidential Information: Partners must share proprietary information, which carries the risk of it being misused or leaked.
8. What happens to a joint venture after its primary objective is complete?
Since a joint venture is formed for a specific, temporary purpose, it is typically terminated once that goal is achieved. The joint venture agreement pre-defines the exit strategy. The termination can happen in several ways: one partner can buy out the other's stake, the venture can be sold to a third party, the entity can be listed on the stock market through an IPO, or the assets can be liquidated and distributed among the co-venturers as per their agreed ratio.
9. How are profits, losses, and control shared in a joint venture?
The distribution of profits, losses, and control is not fixed and is one of the most critical elements defined in the joint venture agreement. It does not have to be a 50/50 split. The sharing ratio is typically negotiated based on each co-venturer's contribution, which can include capital, technology, intellectual property, market access, or operational resources. Similarly, management control and decision-making rights are also clearly specified in the agreement to prevent future conflicts.
