What is a joint venture subsidiary?

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. 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. 

Joint venture vs. subsidiary

It’s important to know the distinctions between a joint venture and a subsidiary. A subsidiary is a company that is either wholly or partially controlled or owned by a separate company, known as its parent company. This parent company usually holds a majority stake in the subsidiary, allowing it significant influence over strategic decisions and operations. However, a subsidiary still operates as a separate legal entity, allowing it to maintain its own liabilities, assets, and structures. There are various benefits for the parent company in this arrangement, including extended market reach, diversification, and tax and/or legal incentives. 

The primary difference between a subsidiary and a joint venture is in the amount of control each parent company has. Through a joint venture, participating companies share ownership and decision-making responsibilities, including control over operations. However, in a subsidiary, it’s the parent company that exercises control, typically due to majority ownership. Thus, the parent company may dictate the subsidiary’s operations and strategic direction. 

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. 

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. 

Are there other types of business arrangements?

A joint venture can take the form of a subsidiary when participating companies establish a separate legal entity to carry out the joint venture’s operations. But there are other business arrangements aside from joint ventures and subsidiaries, all determined by their own unique factors. 

While a subsidiary is a company that is either wholly or partially owned by a parent company, and a joint venture involves collaboration between two or more independent companies, an associate is a company in which an investing company holds a minority stake. In this type of agreement, the investor typically holds 20% to 50% of voting rights, giving them a significant influence over the associate’s operations. 

The percentages involved in joint ventures, subsidiaries, and associates can differ greatly depending on the circumstances of the business arrangement:

  • Joint venture: Each parent company owns a percentage based on their contributions to the venture.
  • Subsidiary: The parent company owns more than 50% of the subsidiary’s shares, which allows it to take majority control.
  • Associate company: The parent company typically holds 20% to 50% of voting rights. 

Joint ventures, subsidiaries, and associates are distinct business arrangements that present unique benefits and challenges for those involved. Understanding the difference between them can help businesses explore new opportunities to the fullest. 

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.

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