What is a California Joint Venture?
A joint venture is created to launch a particular project or business transaction with the sole purpose of existing for a limited amount of time. After the transaction or project has been completed, the joint venture will most likely be dissolved. The joint venture may be motivated by financial or strategic reasons, to gather resources, utilize joint assets, or divide risk.
Each party in a partnership or joint venture is at risk of personal liability for all debts incurred by the business. All owners are responsible for repaying the entire debt. If one of the parties in a joint venture is a business entity, then the assets of the business entity are also at risk in order to satisfy the debts of the joint venture.
California law dictates that a joint venture is essentially identical to a general partnership. For example, neither group needs to register with the California Secretary of State or submit written documentation in order to legally operate. Moreover, neither business structure is generally subject to franchise tax or securities law. The main disadvantage of starting a general partnership or joint venture is that both face unlimited liability against the owner’s personal assets.
Characteristics of a Joint Venture.
A joint venture is similar to a general partnership in that both are subject to full personal legal liability, and both are taxed in an identical manner. The workaround to facing unlimited liability is to convert the business structure into a limited liability entity. In cases where the business is delinquent, a limited liability entity is not responsible for paying creditors from the owner’s personal assets, as long as the company was appropriately capitalized and acted lawfully.
A partnership will usually be a business that operates for a fixed or indefinite period of time. On the other hand, a joint venture is created for the sole purpose of revolving around one business transaction. It is possible for a joint venture to conduct business and be more complex than a partnership.
Structuring Joint Venture Agreements in California.
There are three main types of business structures used to set up joint venture agreements:
Limited Partnership (LP):
This business structure will protect the limited partners to the extent proper guidelines are followed. Some important items that may come into play are as follows:
- Should be fully capitalized.
- Should avoid commingling of the LP’s funds and the owner’s funds.
- Should use its own tax ID number.
- Should use its own bank account for its revenue and expenses.
Unless the business is eligible to elect a subchapter S business entity status with the Internal Revenue Service, the corporation must pay tax as a legally separate entity. A company often incorporates in order to limit the owner’s responsibility for the corporation’s financial obligations and debts. This is because a corporation exists separately from the owners. Therefore, personal assets, such as houses and cars, are not at risk if a corporation has difficulty meeting its financial obligations. Some important items that may come into play with corporations are as follows:
- Corporations have more corporate formalities to follow.
- Corporations do shield its shareholders from personal liability, assuming corporate formalities are followed.
- Corporations can be set up as C corporations or S corporations.
- Corporations are subject to an annual minimum franchise tax and filing fee in California.
Limited Liability Company (LLC)
LLCs have many benefits. Many small business owners find that LLCs are easier for taxes, income tracking, lawsuits, and business write-offs. The LLC business structure combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation, creating the best of both worlds for business owners. Some important items that may come into play with LLC’s are as follows:
- LLC’s have less corporate formalities compared to corporations.
- LLC’s offer more flexibility in management than corporations.
- LLC’s are subject to an annual minimum franchise tax and filing fee in California.
- LLC’s are subject to Gross Receipts Taxes in California, in addition to the minimum franchise fees each year.
Joint Venture Attorneys
If you need legal assistance with a joint venture in California, Real Estate Law Corporation has highly experienced joint venture attorneys that serve business owners and real estate investors in the greater Sacramento area and all over California. To schedule a free consultation with one of our attorneys, simply call us at (916) 848-0080, or use the contact form below.
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