A joint venture consists of two or more individuals or organizations that agree to start a business for the mutual benefit of all parties. Joint ventures have many of the same advantages and disadvantages witnessed in a partnership business. There are no specific documents needed to bring a joint venture into existence, but a written joint venture agreement should be present to provide rules and regulations.
One of the biggest disadvantages of a joint venture is that the structure offers no liability protection to the parties involved. This means a partner in a joint venture has a personal obligation for at least his portion of the company’s obligation, as explained by the Lawyers.com website. If the joint venture’s assets do not cover the company’s debts and obligations, partners of the business may lose their personal assets up to the point where the debt becomes satisfied. In the case of a corporation, the company may lose assets as a result of the venture’s obligations.
A joint venture forms for a limited time period. The venture comes to an end automatically when the company fulfills the purpose for which it was formed. The death or withdrawal of a partner may cause the automatic termination of a joint venture. This will put the other partners of the joint venture at a disadvantage if they want to continue the business. Also, a joint venture may terminate automatically if certain terms contained in the joint venture agreement occur. For example, a joint venture agreement may indicate that the company will dissolve automatically on a specific date.
Another disadvantage of a joint venture concerns the increased potential to have conflicts and disputes between the partners of the business. One partner may want to manage the company a certain way, while another partner may have totally different ideas about the direction the company should take. Without a written joint venture agreement in place, the company may be prone to mismanagement because partners of the business will not have clearly defined roles and responsibilities.
Partners that have conflicting goals and interests may harm the joint venture as a whole when those goals and interests are not clearly communicated upfront. When a partner refuses to fulfill her obligation to the company, the joint venture will suffer. If one company in a joint venture has a strong management staff known for good decision making while another company proves inept at making good decisions, friction and lack of cooperation between partners may end the venture, as explained by the Reference for Business website.