Can an LLC Be a Joint Venture?

By Edward A. Haman, J.D.

Can an LLC Be a Joint Venture?

By Edward A. Haman, J.D.

Can a limited liability company (LLC) be a joint venture? The simple answer to this question is yes. In fact, the LLC is the most common type of business entity used for joint ventures. However, this question can be interpreted in two ways, so it might be best to rephrase it as two questions:

  1. Can an existing LLC be part of a joint venture?
  2. Can a joint venture be set up as an LLC?

Both of these questions are answered below in more detail.

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Business Entity Basics

Understanding joint ventures requires an understanding of business entities.

It is important to understand the legal meaning of the word “person," as it is used in connection with business entities. A common legal definition of “person" is: “an individual, corporation, organization, or other legal entity." This makes the law applicable to all legal entities, not just to individual humans. The terms “individual" and “natural person" are commonly used to when referring to a human, rather than a business entity. In this article, the term “individual" refers to a human, whereas the term “person" refers to both individuals and the various types of business entities.

Four basic types of business entities are available:

  • Sole proprietorship, where a single individual owns the business in their own name
  • Partnership, where two or more persons own a business as partners
  • Corporation, formed according to state law, with owners who are called shareholders
  • LLC, formed according to state law, with owners who are called members

Corporate shareholders, as well as LLC members, may be individuals or other business entities. In other words, a shareholder or a member may be an individual, partnership, LLC, or corporation.

Joint Ventures

You will notice that a joint venture is not a legal entity in the list above. “Joint venture" has no formal legal definition. It is a term commonly used when two or more of the types of business entities listed above join together to conduct a new business activity. Each entity in a joint venture has its own independent business operation, and enters into the joint venture for a specific project or endeavor. Each entity—commonly called an “original entity"—continues to exist as a separate entity.

A sole proprietor and a corporation can form a joint venture. A partnership and an LLC can form a joint venture. Two LLCs can form a joint venture. Two corporations and a partnership can form a joint venture. These are just a few examples of many possible combinations.

Once two or more business entities decide to form a joint venture, they need to decide how to structure the joint venture. This could be some type of partnership or corporation, but is more commonly an LLC. It is also possible for the companies to engage in a joint venture by negotiating a contract for the cooperative endeavor without forming a new business entity. Such a contract is commonly known as a joint venture agreement.

LLC as Part of a Joint Venture

If your company is set up as an LLC, it may join with one or more other business entities in a joint venture. This can be accomplished with a joint venture agreement, or by organizing a new business entity as a partnership, LLC, or corporation.

With a joint venture agreement, your LLC and the other entities create a legally binding contract that sets forth the details of your agreement.

Your LLC and the other entities could also form a new corporation or LLC for the joint venture. This would make your LLC a member of the new joint venture LLC, or a shareholder in the new joint venture corporation. The advantage to this is that your LLC would have some liability protection for its assets that are not contributed to the joint venture. The disadvantage is the extra expense involved in creating and operating a new LLC or corporation.

Joint Venture LLC

Regardless of how your company is structured, it can join with one or more other business entities and form a new LLC to operate a joint venture. The persons—individuals or business entities—collaborating in the joint venture would form an LLC. Each such person would be a member of the LLC.

For example, if two existing LLCs form a joint venture LLC, each LLC would be a member of the new joint venture LLC. Or, if an existing LLC and an existing corporation form a joint venture LLC, the existing LLC and the corporation would be members of the new joint venture LLC.

A special type of joint venture can be created by spouses who operate a business together. This is known as a qualified joint venture, and is designed to simplify the couple's record keeping and tax filing. Married couples may organize their qualified joint venture as an LLC.

An LLC may be part of a joint venture, and a joint venture may be organized as an LLC. However, determining how to best organize a joint venture requires evaluation of the nature of the business endeavor, liability protection for the original entities, the desired relationship between the original entities, and tax considerations.

 

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.