As we said earlier, a joint venture is not an entity, but the reason for the entity. A joint venture can be individuals, corporations, LLCs or even limited partnerships. There are tax advantages to all of these types of holdings. How you should hold your joint venture depends upon the size of the project and how long you plan to be involved in the project.
Corporation
A corporation is a separate entity. It can open a bank account, pay taxes and go bankrupt. Because a corporation is its own entity, it is the safest way to start a business. By funneling everything into the corporation, you limit the liability of the other parties.
Two corporations or other types of business can form another corporation. A corporation will need people, however, to be officers of the entity. You also need a registered agent. The registered agent is usually the attorney who fills out the articles of incorporation and will keep up with the annual reports.
There are two types of corporations – a C corporation and an S corporation. You will most likely charter your joint venture under an S charter in that you will not be selling stocks. An S corporation, or a Sub S, as it is often called, is limited to the number of shares of stock it can issue. An S corporation can only issue 100 shares of stock.
The stockholders are the real power in the corporation. The stockholders do not have to be the same people who are officers of the corporation. They can be businesses or individuals. Their ownership of the corporation is not made public – the officers and registered agent are public information.
A corporation has tax benefits that are not afforded to individuals. That and the fact that by putting everything into a corporation puts a limit on the liability of those involved in the corporation makes it an attractive entity to consider when you are considering how to hold a joint venture.
LLC
An LLC is a limited liability company. Like a corporation, you have to file the LLC with the state. The filing fees are usually higher for an LLC, but this type of company offers the same protection as a corporation in that it is its own entity, but without the cumbersome paperwork that is involved in maintaining a corporation. A corporation is obligated to have regular meetings and keep minutes of the meetings. An LLC does not have the same obligation and is an easier type of entity to maintain. Because it gets the same type of tax breaks and offers the principals the same protection as a corporation, this type of entity is often preferred over a Sub S corporation. You cannot sell stock in an LLC.
Limited Partnership
Some people confuse a limited partnership with a joint venture. A limited partnership is an entity between two or more individuals for no specified period of time or for a particular project. A joint venture is similar to a limited partnership in that it is a legally binding agreement between two or more individuals, but whereas the limited partnership is not limited to a specific project or endeavor, the joint venture is. And the joint venture can be comprised of many different types of entities.
Sole proprietorship
You can set up shop and open up your own business as a sole proprietor without having to file any paperwork with the state or even talk to an attorney. The free enterprise system allows anyone to just start a business as a sole proprietor. You will have to claim income taxes on this business, but can do so on your individual income tax statement. You will have to file a Schedule C for a sole proprietor business. You can enter into a joint venture as a sole proprietor, but be aware that you are offered no personal protection. If the joint venture files bankruptcy, you may be also finding yourself in bankruptcy court. The same goes if the joint venture is sued. If you own your business as a sole proprietor, you will want to make sure that the joint venture is held in a protective entity such as a corporation or LLC.
If the joint venture is held as a sole proprietorship, then any liability for the joint venture will fall upon the entities or individuals that make up the joint venture.
Individual ownership
If you are not worried about liability and are in a small joint venture with another individual, you can each take ownership of anything in the joint venture as individuals. If, for example, you form a joint venture with someone to purchase a foreclosed house, you can each take ownership of the property as tenants in common. Any assets that the joint venture owns should be held by each of you as tenants in common.
Prior to joint ventures, corporations, limited partnerships and LLCs, it was not unusual for people in business with one another to manage their business by making sure that all assets and liabilities were held as tenants in common. Tenants in common means that both parties are owners of the asset. Unlike joint tenants, when property or other assets is held as tenants in common, and one of the tenants dies, the heirs of the deceased party will be entitled to their share of the assets. With joint tenancy, the other partner would be able to claim the assets as their own.
Before our society became so litigious, it was not unusual for parties to strike out a verbal agreement and hold assets and property as tenants in common. Today, however, you are better off to gain the protection of a protective entity such as a corporation, limited partnership or LLC when you are entering the business world.
