What is a joint venture subsidiary?

A joint venture subsidiary is one of various strategic options available for businesses seeking to enter new markets or expand their operations, with over 5,000 such ventures having been launched worldwide in the past five years. Joint ventures and subsidiaries are separate concepts, but they may be combined to offer a unique set of advantages. Learning the difference between a subsidiary and a joint venture can ensure a better understanding of business operations.

A joint venture is when two or more independent companies combine resources, expertise, and assets in order to enter into a new venture, project, or business objective. Known as "joint venture partners," these companies share costs, risks, and profits, which are typically determined by their unique contributions. From accessing new markets to reducing financial and operational burdens, joint ventures present a range of benefits for all involved parties; in fact, the 100 largest JVs alone represent more than $350 billion in combined annual revenues.

Joint venture vs. subsidiary

The key difference between a joint venture and a subsidiary lies in ownership and control. A subsidiary is owned by a single parent company, while a joint venture involves shared ownership between two or more independent companies. Subsidiaries give the parent company full control, whereas joint ventures require shared decision-making.

Here's where it gets interesting: control structures work completely differently. Joint ventures mean shared decision-making between all partners, while subsidiaries give one parent company the final say on everything.

Another key difference between the two is the risk and financial burden involved. Joint ventures allow companies to share both the financial costs and risks associated with a project. On the other hand, a wholly owned subsidiary involves more investment and risk for the parent company, as it assumes full responsibility for the subsidiary's operations.

Is a joint venture a subsidiary?

This is a complicated question. For example, in some cases, companies can choose to form what is known as a "joint venture subsidiary," which combines aspects of joint ventures and subsidiaries. A joint venture subsidiary is a subsidiary company formed by two or more parent companies through what's called a "joint venture agreement." Through this agreement, the parent companies collaborate to create an all-new legal entity, which operates as a subsidiary. However, the ownership is shared among the parent companies based on their unique contributions to the venture.

A joint venture subsidiary has several advantages, including risk sharing, complementary strengths, local market access, cost sharing, resource efficiency, shared profits, and more.

Benefits of joint venture subsidiaries

So, what makes a joint venture subsidiary worth considering? It's the perfect blend of partnership benefits with operational independence. Here are the key advantages that make this structure appealing:

• Risk sharing: Split the financial burden and operational risks between partners, making big projects more manageable.

• Local market expertise: Gain instant access to market knowledge, customer relationships, and regulatory insights from local partners.

• Resource combination: Pool intellectual property, technology, distribution networks, and talent from all partners.

• Cost efficiency: Achieve economies of scale while eliminating redundant expenses across organizations.

Formation of a joint venture subsidiary

Creating a joint venture subsidiary is a deliberate process that requires careful planning and legal guidance, as specific regulations governing joint ventures, such as those detailed by the U.S. Small Business Administration, must be followed. While the specifics vary by country, the formation generally follows these key steps:

1. Drafting the joint venture agreement: This foundational legal document outlines the purpose, scope, and duration of the venture. It details each partner's contributions, roles, and responsibilities.

2. Defining ownership and contributions: The partners must agree on the ownership split, which is often based on their respective contributions of capital, assets, technology, or expertise.

3. Establishing the legal entity: The partners work together to legally register the new subsidiary company in accordance with local corporate laws. This step formally creates the separate legal entity.

4. Appointing management and governance: The agreement specifies how the subsidiary will be managed, including the composition of its board of directors and the process for making key decisions.

Structure and governance of joint venture subsidiaries

The success of a joint venture subsidiary often depends on a clear and fair governance structure. This framework dictates how power is shared and how the new entity operates day-to-day.

Success comes down to getting the structure right from day one. Here's what matters most:

• Ownership split: Typically 50/50 or based on each company's contribution, which determines control and profit sharing. In some government programs, for example, a protégé company must perform at least 40% of the joint venture's work.

• Board representation: Each partner appoints board members to protect their interests in major decisions.

• Decision-making rules: Clear guidelines on which decisions need unanimous approval versus management-level authority.

Wholly owned subsidiary vs. joint venture subsidiary

Comparing wholly owned and joint venture subsidiaries can shed some light on the process of joint venture agreements. For example, a wholly owned subsidiary is a company where the parent company holds 100% ownership of the subsidiary's shares. This allows the parent company complete control over the subsidiary's operations and decisions.

A joint venture subsidiary, on the other hand, involves shared ownership among two or more parent companies. Although both of these structures have their benefits, which of the two is best for a business will depend on various factors such as the level of control desired, the appetite for risk, and the nature of the project as a whole.

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Choosing the right corporate structure is a critical first step in any global expansion. Whether you opt for a joint venture subsidiary, a wholly-owned entity, or another model, managing your global team compliantly is the next challenge.

Navigating international payroll, benefits, and labor laws adds a layer of complexity to any business structure. Oyster's global employment platform helps you streamline people operations, so you can focus on your strategic goals. No matter how your business is structured, you can start hiring globally and manage your team compliantly from a single platform.

FAQs about joint venture subsidiaries

Can a subsidiary be a joint venture?

Yes—this creates a joint venture subsidiary, where two or more companies jointly own and control a single subsidiary entity.

What are the main types of joint ventures?

The four main types are project-based (for specific projects), functional-based (combining business functions like R&D), vertical (across supply chains), and horizontal (between competitors).

How long does it take to form a joint venture subsidiary?

The timeline can vary significantly, from a few months to over a year. Factors include the complexity of the negotiations, the legal and regulatory requirements of the country where the subsidiary is being formed, and the speed at which the parent companies can reach an agreement on all terms.

Disclaimer: This blog and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.