Successful businesses are generally the outcome of collaborative efforts. Entities having access to different set of resources, working together can lead to profitable businesses. A manufacturer for example would not be able to sell his goods without the aid of wholesalers, distributors and retailers. Business entities thus seek out opportunities to expand their reach through various collaboration arrangements.
This article looks at meaning of and differences between two types of such arrangements – joint venture and consignment.
Definitions and meanings
Joint venture:
Joint venture is a business arrangement which involves the coming together of two or more entities with a common commercial objective. All the parties to the joint venture pool in their resources to carry out the specific task and are together liable for all risks and rewards associated with the task. Each individual party entering into the joint venture arrangement is called as co-venturer.
A joint venture will generally be executed by formation of a new unique entity which can be a company, a partnership firm or an association of persons (AOP) etc. The individual identity of each of the co-venturers is retained.
The basis for executing a joint venture is a legal document which is generally referred to as joint venture agreement. A joint venture agreement is signed by all the co-venturers. The agreement lays out the detailed terms of the joint venture including its scope, timelines, profit-sharing and pooled resources etc.
The purpose of forming a joint venture is to benefit from the combined resources or abilities of the co-venturers or to achieve benefits of economies of scale of a larger joint business. As a joint venture is formed for a specific task or project, it is generally not permanent. Its identity remains till the fulfillment of the assigned task or the completion of specific project for which it was formed. However, there may be some joint ventures that continue for a sustained period when formed to perform of a continuous task.
Example
Mr. A owns a large piece of land. He is approached by a reputed builder, XYZ Inc. to develop the land into commercial office space. Mr. A and XYZ Inc. enter into a joint venture, through a separate company AZ Inc. to perform this joint business. Mr. A provides his land whereas XYZ Inc. provides its building expertise and manpower. They agree to share the profits in the ratio of 60:40.
The accounting for each joint venture business is done individually using a separate set of books of accounts. Thereafter, each co-venturer may account for his share in the business while preparing his consolidated financial statements.
Consignment:
A consignment is a commercial arrangement wherein one entity (consignor) consigns its goods to another entity (consignee), to be sold by the consignee in exchange for a commission to be paid by the consignor.
The main purpose of a consignment arrangement is for the owner/manufacturer of goods to be able to expand his distribution network to maximize sales.
There are 2 entities that enter into a consignment arrangement – a consignor and a consignee.
Consignor:
This is the entity whose goods are to be sold and who sends them to the consignee for further sale to customers. The consignor is usually the manufacturer or bulk trader of the goods.
Consignee:
This is the entity who receives goods from the consignor and who undertakes to sell them on behalf of the consignor. The consignee does not buy goods from the consignor but only receives possession of the goods. The consignee is compensated by way of an agreed commission on the total sales made by him.
Example
ABC Inc. manufacturers plastic chairs. It enters into a consignment arrangement with a distributor, XYZ Inc. XYZ Inc. periodically receives consignment of plastic chairs from ABC Inc. He approaches various institutional customers for sale of these chairs. At the end of every month, XYZ Inc. shares a statement of consignment inventory with ABC Inc. This lists out the goods sold; the goods being returned as well as the balance goods on hand. Based on this statement, the consignor raises a sales invoice and the consignee issues a commission invoice. The consignee will remit to consignor the sales proceeds after deducting his earned commission.
Difference between joint venture and consignment
The eleven key points of difference between joint venture and consignment have been detailed below:
1. Meaning
- A joint venture is created when two or more entities collaborate and pool in resources to carry on a joint business.
- A consignment is business arrangement in which a consignor sends goods to the consignee who sells them ahead in lieu of a commission on goods sold.
2. Number of participating entities
- The participating entities in a joint venture can be any number i.e., they can be two or more.
- A typical consignment arrangement will have two parties – a consignor and a consignee.
3. Nature of relation amongst entities
- The entities in a joint venture are co-venturers and have a profit sharing relation.
- The consignor and consignee have a principal-agent relationship.
4. Formation of separate entity
- A joint venture arrangement typically results in the creation of new, separate entity in which participating entities become co-venturers.
- No new entity is formed for a consignment transaction, the consignor and consignee act as such in their individual capacity.
5. Purpose
- A joint venture is created to pool in collective resources so as to carry on a joint business.
- In a consignment there is no joint business that is conducted; its purpose is to increase product sales for the consignor and to earn a commission for the consignee.
6. Scope
- A joint venture can be entered into for conducting any kind of business. It may be related to goods or services or a combination of both. Thus, its scope is wide.
- The scope of a consignment arrangement is narrow as it is restricted only to the sale of goods.
7. Permanence
- A joint venture is typically entered into for a specific task or objective. It is usually liquidated once the task is complete.
- A consignment arrangement can be a more long-lasting relation between consignor and consignee for sale of goods.
8. Accounting
- Joint venture accounting is done in the books of the new entity separately. There are also accounting standards and rules that specify the manner in which these accounts must be consolidated into the books of the co-venturers.
- Accounting for consignment transactions are done individually in the books of both the consignor and consignee.
9. Profit sharing/compensation
- The co-venturers to a joint venture generally share profits of the joint venture business in a predetermined ratio.
- Consignor and consignee do not share profits. The consignee, however, earns a percentage commission on the sales realized by him.
10. Risk sharing
- In a joint venture, the co-venturers jointly take on risks of the business (on the basis of profit/loss sharing ratio).
- In a consignment transaction, the consignor being the owner of the goods, bears all related risks.
11. Compliances
- A joint venture arrangement must comply with all legal compliances that apply to the type of entity – be it a company or a partnership.
- A consignment arrangement is subject to fewer compliances as are applicable to general business contracts.
Conclusion – joint venture vs consignment:
The common factor between joint venture and consignment is that they are both collaborative arrangements aimed at expansion of businesses. While consignment contracts are primarily limited to goods related transactions, joint ventures are found across multiple business types.
