A joint venture is formed with two or more parties joining forces so that they can share risks, losses, and profits. However, within Thai law, joint ventures are not allowed, not even large joint ventures with foreign markets. There is no room for binding legislation, only an understanding between the parties, which can occur in the form of a contract that binds them. It is essential for this contract not to be tied to or registered in a Thailand government body.
Therefore, in Thailand, there are only two kinds of possible "joint ventures":
An unincorporated joint venture requires the parties to file for a tax number so that they can make joint tax submissions.
Incorporated joint ventures require parties to keep their tax filing separate.
In Thailand a joint venture is most often made between foreigners and Thai nationals. If foreign shareholders will hold the majority in a joint venture the status must be changed and it will need to register under the Foreign Business Laws of Thailand. The Foreign Business Act governs it and there may be Board of Investment benefits too. This means a different legal definition, even for a small business.
Generally speaking, a joint venture can theoretically be formed in four ways:
- A foreign investor purchases shares in a company
- A local company can also purchase shared in a foreign company
- The local and foreign investors can form a joint venture from scratch
- Public capital or bank debt can be shared
Not all of these are possible in Thailand, though, and joint ventures. Joint venture partnerships are only permitted on a contract basis, whether they are an incorporated or unincorporated joint venture.
Joint ventures are rarely permanent and are often dissolved when:
- One partner buys out the other.
- The market conditions evolve so that the joint venture is not appropriate anymore.
- There are financial or legal issues.The initial agreed-upon time for the venture has passed.
- Any or both joint venture partners do not agree with the original plan anymore.
- New goals are developed by either or both parties.
- The original aims of the joint venture agreement have been met.
- The original aims of the joint venture agreement were not met.
Sometimes a joint venture only involves a particular project or venture into new markets for a limited time. In rare cases, a business arrangement for joint venture work can be made long-term, usually when a new entity is formed from new partners. It is unlikely to come from a separate entity merging with another.
There is an option for participant companies to remain separate, but sometimes the parties involved can decide to make two companies into a new business. This is important to understand for tax purposes because how those companies pay taxes will depend on what kind of joint venture they are in.
A joint venture will always this involve a limited partnership and never unlimited liability. This constitutes some risk to the company involved in a joint venture, whether in an existing or new market.
Attempting a joint venture of any nature is a major decision. You are placing trust in some other party from some other business in its own right to share in your gains and risks. The other business will gain access to some of your capital, to some of your records, etc. In places like Thailand, a legal entity is only attainable through contracting. One company cannot entirely merge with another to form a new organization; therefore, there will always be two parties that are intrinsically separate and who must co-operate in a limited liability capacity.
A joint venture can be an extremely risky kind of business or general partnership. The nature thereof tends to be volatile, ownerships can change unexpectedly, and the parent company structure of most joint ventures can cause serious problems, even in a country like Thailand, where a joint venture depends only on a contract and is not a recognized legal entity on its own. A successful joint venture is rare if not managed by a legal team. A joint venture relationship can be difficult.
However, that being said, a joint venture has several benefits that must also be acknowledged. It grants business entities access to established distribution channels under an existing distribution agreement and established markets. There is increased access to technical expertise and greater overall capacity than a single business entity might have. There are also more resources available in a joint venture.
There are two joint venture examples that stand out as a famous example of this type of business practice and the success that can come from it: The partnership between Microsoft and General Electric and the partnership between Boeing and Lockheed Martin. There are many other joint venture examples that you can explore to learn more about the practice.
Despite this, it is essential for joint venturers to have an exit strategy, even if they are only working together on a specific project. It is risky to combine resources, not least of all because of intellectual property laws. A written agreement and integrated management team with shared invested capital and risk can be beneficial, but they are not a fail-safe. Any JV company must have an exit strategy.
Business activity should be closely monitored and accurately reported. A JV agreement should also be in place. There are several questions related to matters like how a single-owner limited liability company is run or divided, and where intellectual property claims fall, how business income is divided, etc.
Limited partners in public companies can buy market share in foreign companies, but a true joint venture business cannot exist within Thailand.
We here at Juslaws & Consult can offer support throughout any business venture, but support for a joint venture is especially important. Make sure to have legal representation at board meetings related to such difficult matters as well so that decisions can be made within the bounds of legality.
Joint Ventures can quickly escalate into nightmare situations, so please contact us for more information before you engage in one. And remember, Juslaws & Consults offers a FREE first consultation for any legal need.