Setting up a joint venture abroad

Nov, 11 2020

Setting up a joint venture abroad is a relatively new way of doing business with a foreign counterparty. When one of the business participants is a foreigner, this creates additional difficulties. The question arises how to manage a common business, how to distribute risks and profits. Creating a joint venture is one of the ways to effectively resolve all these difficult issues and resolve them to mutual benefit.

A joint venture is a form of state participation in the international division of labor. It necessarily implies the creation of a legal entity based on the property that participants from different countries contribute. The management is still shared, and none of the owners gets a decisive vote. However, the profits and risks of the business participants also share with each other. In other words, a joint venture is a way for representatives of different countries to conduct business at the international level.

The purpose of the joint venture

This way of organizing a business can have a variety of goals. If you evaluate it from the state, where the production or office of the company will be based, the company’s goals are as follows •

  • the appearance of new goods and services on the market;
  • attract innovation, technology and management expertise;
  • creating additional resources;
  • attract investors.

However, the main stakeholders are the organizers and business owners. Their main goals are to expand the export base, reduce imports due to the independent production of necessary products, and expand sales markets. Many entrepreneurs even name tax optimization among their goals, although we should not forget about the main task of any commercial enterprise: making a profit.

A separate law regulates the registration of companies with foreign investments. We are talking about legislation that affects business activities, business companies and partnerships, as well as issues of attracting foreign sources of financing.

It is the business goals that determine the organizational and legal form of the company. Also, when registering an enterprise, it is important to consider the size of the authorized capital, the number of founders, the specifics of the activity and industry. If we talk about commercial enterprises that involve foreign investment, they can be registered as a business partnership or company. However, you can arrange them differently: as subsidiaries.

Fully foreign enterprises are legal entities of the countries where they were established. A joint business can also be registered as a foreign company. This solution has its advantages: simplification of control over the work of the enterprise, no need to share profits. However, creating a business in this format also requires coordination with the legal framework of several States at once.

Creating a new company is not a cheap way to achieve your goals. It requires an in-depth knowledge of local markets. Therefore, now the most popular is the purchase of an existing company in the desired region. This allows the investor to use the existing clientele and market knowledge of the local partner. In addition, you can start a business immediately, without delay, using the established connections and authority of the purchased company. If necessary, management can be transferred to a third-party organization from the home country by signing a contract with it.

Stages of creating a joint venture abroad

  1. Definition and formulation of objectives.
  2. Search for business partners who are ready to act as co-founders.
  3. Negotiations, development and approval of the Protocol of intent.
  4. Technical and economic surveys that will form the basis of the project.
  5. preparation of constituent documents and legal registration.

Defining and formulating a goal is the first stage where it is important to consider the specifics of not only the business itself, but also the future conditions of its operation. You should first make sure that a joint venture will be a truly effective form of achieving your goals. Only then can you proceed to the next stage, which is related to the selection of a foreign partner.

Finding the right co-founder can be difficult. Therefore, this issue is not always solved on their own. Many entrepreneurs turn to intermediaries who can find suitable foreign partners and establish communication with them.

To find partners, you need to prepare detailed information about the project. It is presented to firms and entrepreneurs who may be interested in a new business format. This information usually includes:

  • project title;
  • general information;
  • main indicators;
  • overview of domestic and foreign markets;
  • approximate sales structure of products;
  • the amount of the Deposit from the foreign partner;
  • plan for the supply of equipment and raw materials and much more.

After selecting partners, you can start the process of negotiations and preparation of constituent documents for registration. Moreover, the negotiations are likely to be complex, so they may also require a professional intermediary.

What is necessary to set up a joint venture abroad

As a rule, after entering into an agreement of intent and determining the detailed parameters of the business, the parties enter into a joint activity agreement. This document sets out mutual obligations to establish a business entity or other structure. Also, at this stage, the Charter is approved, and the company is registered – this is a time-consuming process that requires legal support.

To register, you must submit a set of documents to the state authorities, which includes:

  • an application signed by all the founders;
  • two copies of notarized copies of constituent documents;
  • a notarized copy of the decision of the domestic property owner to establish an enterprise, or alternatively, a copy of the decision of the authorized body;
  • notarized copies of the constituent documents of each domestic legal entity that participates in the creation of a new business;
  • a document confirming the solvency of a foreign investor (it must be issued by a Bank or other credit and financial institution that serves the business, and a certified translation into Russian is required);
  • written proof of the legal status of the investor: for example, an extract from the trade register of the country of origin.

Joint venture structure

The law allows you to determine the structure yourself. For example, the highest management body may be the shareholders’ meeting or the Board of Directors. Another management option is through the General Director or the audit Commission, which will periodically review the reports.

A Russian investor who participates in a joint venture abroad must rely on Russian laws. They establish a permissive procedure for setting up a business in another country. Of course, you cannot ignore the legislation of the state where you register a business.

International joint ventures are only one form of business organization between two or more companies from different countries. When creating such enterprises, as well as when managing them, it is necessary to rely on the following principles:

  • equity ownership in common ownership and management;
  • allocation of risks according to the contribution to the common property;
  • conclusion of a contract that defines the company’s operating mechanism, as well as the rights and obligations of the parties.

The organizational and legal form of an international joint venture, its terms and principles of operation are largely determined by the specifics of the country where the business is located.

The number of joint ventures has been steadily increasing in recent years. The largest number of them were created in the countries of the former Soviet Union and Eastern Europe. Companies from the USA, China, Germany, and Great Britain actively cooperate with businesses in this region. But at the same time, many joint ventures are created by firms that belong to citizens of the CIS countries.

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