Difference between consignment and joint venture

Difference between Consignment and Joint Venture

Consignment and joint venture are different modes of doing business. While Joint Venture is a temporary form of partnership between two or more entities, consignment involves a trade arrangement for the sale of goods. In this blog, we have differentiated between the two.

What is Consignment?

Consignment means the delivery of goods or things for sale.

In business parlance, it refers to a circumstance in which one person or firm transmits goods to another person or firm with the understanding that the products would be sold on behalf of and at the risk of the former.

The person who sends the items is known as the consignor. And the person to whom goods are sent is referred to as the consignee.

The following are the main features of consignment:

  • The consignor and consignee have a principal-agent relationship.
  • Goods are transferred from consignor to consignee.
  • The terms and conditions of the consignment are agreed upon between the consignor and consignee. The agreement is referred to as a consignment agreement.
  • The consignor retains ownership of the goods. The consignee does not become the owner even if the products are in his possession. The buyer will become the owner upon sale.
  • The profit or loss belongs to the consignor.
  • In most cases, the consignee recovers from the consignor all expenses incurred by him on the consignment and charges a commission on sales made by him.

Commission

The consignee generally receives a commission as a specified percentage of sales for selling the goods on behalf of the consignor.

There can be three types of commission.

  • Ordinary/General Commission which is allowed to all the consignees and is payable on the value of goods sold (cash sales + credit sales) by the consignee.
  • Surplus/Over-riding Commission which is an extra commission allowed over and over the normal commission. It can be allowed when the consignee sells goods at higher prices or when he is entrusted with the task of introducing a new product in the market, etc.
  • Del-credere Commission which is payable by the consignor if the consignee undertakes the responsibility of collection of debts. In that case, the consignee will bear the risk of bad debts.

What is a Joint Venture?

A joint venture occurs when two or more people or entities agree to pursue a certain business or venture and split the profits and losses in an agreed-upon ratio. A venture could be for the construction of a building, the underwriting of a specific issue of shares or debentures, the supply of a specific number of goods, and so on.

The objective of a JV is limited to carrying out a certain business plan in which the parties involved agree to contribute capital and share profits and losses.

It usually takes place in the form of a temporary partnership or contractual arrangement which is terminated once the venture is completed.

Further, the parties in a joint venture are known as co-venturers, and their liability is limited to the venture concerned.

The following are the main features of a joint venture:

  • It is a short-term special purpose partnership that can also sometimes be referred to as a temporary partnership.
  • The parties in a joint venture are called co-venturers.
  • The co-venturers can contribute funds for the purpose of running the venture.
  • The co-venturers share profit or loss of the venture in an agreed-upon ratio, and where the agreement is silent, then in an equal ratio.
  • Normally, the profit or loss of the venture is ascertained on completion of the venture.

What can be the structure of a Joint Venture?

The most common structures employed to constitute a joint venture are:

A. Company JV where the parties create a joint venture company under the Companies Act, 2013 and hold the shares of such company in an agreed proportion.

B. Partnership JV where the persons agree to share the profits of the business carried on by them.

C. Limited Liability Partnership which provides the benefits of limited liability to its partners.

D. Unincorporated Joint Ventures: This is the most basic form of association wherein a purely contractual arrangement like a cooperation agreement or a strategic alliance is entered into. The parties collaborate as independent contractors rather than shareholders in a company or partners in a partnership.

Differences between consignment and joint venture

From the above discussion, the main differences between Joint Venture and Consignment can be summarized as follows:

1. Nature of Formation

A joint venture is usually a temporary partnership business or a contractual arrangement that is terminated once the venture is completed. On the other hand, consignment represents an extension of business by a principal (consignor) through his agent (consignee).

2. Who are the Parties?

  • The parties involved in a Joint Venture are known as co-venturers.
  • “Consignor and consignee” are the parties involved in consignment.

3. Relationship between parties

  • The relationship between co-venturers is just like that of partners in a partnership firm. They contribute funds and share profits and losses in an agreed proportion.
  • The relationship between the consignor and consignee is that of “principal and agent”.

4. Profit or loss

  • The profits and losses of the joint venture are divided among the co-venturers in the proportions agreed upon.
  • Profits and losses are not split between the consignor and consignee. Only the commission is paid to the consignee. The profit on the sale of goods belongs to the consignor.

5. Rights of the parties

The co-venturers in a joint venture have equal rights. In consignment, the consignor has the rights of a principal, whereas the consignee has the rights of the agent.

6. Exchange of Information

The co-venturers exchange the required information among them regularly.

In consignment, the consignor delivers a Performa invoice to the consignee, which is a statement that appears like an invoice but is not one. The purpose of a Performa invoice is simply to inform the consignee about the details of the goods sent.

Similarly, the consignee delivers an account sales statement to the consignor on a regular basis. It details the items sold by the consignee, the cash received, the expenses incurred, the commission charged, the advance payment and balance due, and stock in hand, among other things.

7. Purpose

  • Joint ventures are formed for a short-term specific purpose. It may be for the construction of a building, the underwriting of a specific issue of shares or debentures, the supply of a specific number of goods, etc.
  • The purpose of a consignment agreement is to allow the consignee to sell the products on behalf of and at the risk of the consignor. It is done to enhance the business.

8. Ownership

The co-venturers are the owners of the joint venture. But in consignment, the consignor is the owner of the business.

9. Accounts

Accounts in a joint venture can be kept in a variety of ways. The co-venturers keep their accounts as per the agreement or manner of formation (i.e., whether it is a partnership JV, company JV, LLP, or unincorporated JV).

It is pertinent to note that the accounting for joint ventures is usually done on a liquidation basis. Since they are formed for short-term projects, hence, going concern concept is not appropriate for their accounting.

But there is only one method of keeping the accounts in consignment. Separate accounting is done by both the consignor and consignee in their respective books. Both prepare a consignment account and record the journal entries of goods sent/received through consignment.

10. Continuity

A joint venture is terminated once the specific venture for which it is constituted is completed.

On the other hand, the continuity of business in consignment is determined by the willingness of both the consignor and the consignee.

11. Advance on Consignment

Many a time, the consignor may seek a deposit from the consignee as security for goods transferred on consignment to the consignee. It can be paid in any way, including by check, cash, or bills of exchange.

There is no such advance payment in a joint venture.

Key takeaways: Comparison Table differentiating Consignment and Joint Venture

BasisConsignmentJoint Venture
NatureA dispatch of goods to the consignee for saleUsually in the form of temporary partnership business or a contractual arrangement
PartiesConsignor and consigneeCo-venturers
RelationshipPrincipal and agentLike that of partners
Profit sharingNo profit sharing; Consignee gets the commissionIn the proportions agreed upon
PurposeEnhancement of business by selling goodsA short-term specific purpose
OwnershipThe consignor is the ownerCo-venturers are co-owners
ContinuityDepends on the willingness of the partiesTerminated on completion of the project
AdvanceThe consignor may seek a security deposit from the consigneeNo such advance
Difference between Consignment and Joint Venture

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