A joint venture (JV) is created when two companies work together on a single project and is formed when a joint venture agreement is signed, contractually detailing the duties and rights of each party.
A JV agreement specifies every aspect of a joint venture. This includes information such as, the roles of each member, how the joint venture will be managed, what each member is expected to provide within the JV, and under which conditions the venture will be terminated or end. In addition, details about ownership percentages, allocation of finances, and distribution of profits or losses suffered by the venture are stated within the agreement.
Joint Venture Funds
A common misconception about joint ventures is that it earns a profit the same way a company does. Conversely, all monies earned by a JV pass through the venture to its owning members, versus being a profit of the joint venture itself. The profits are divided according to the joint venture agreement created by the owners. Any profits or losses not allocated to members must still be claimed by a member even if the funds are being transferred or paid to an outside entity.
Taxes Within a Joint Venture
Since all profits or losses must be claimed by the joint venture members, the percentage of the profit that every member earns is declared on that member's personal or corporate tax returns. The joint venture entity is not required to file taxes on any of the earnings that pass through it. Similar to general partnerships, JVs are not regarded as a business structure how a corporation is. Additionally, the JV agreement or other proof is not needed as proof of the venture's existence.