LLCs or Joint Ventures: Choosing the Right Business Structure

This blog is part 4 of a series exploring various business structures and what makes each structure unique. Specifically, it will examine the characteristics of LLCs or joint ventures. Sole proprietorships, partnerships, and corporations are covered in separate blogs.

As an owner, you may have wondered at some point if the business structure currently in place was the right choice. Those looking to start a business have probably wondered about which structure would best fit their needs as well. Determining the right structure for your circumstances can lead to better performance and higher returns down the line. For example, shifting to a more complex framework than your business’s current structure could allow you to take advantage of certain legal protections or tax options. It could also help generate a higher collection agency valuation, depending on the state of your business’ operations. Ultimately, the decision depends on the type of business you are running, its size, and your goals for the business. Could LLCs or joint ventures be right for your company?

Limited Liability Company (LLC)

This is a relatively new business structure allowed by state-specific statute. LLCs are popular because owners, who are referred to as members in this case, have limited personal liability for the debts and actions of the business. They are relatively easy to form as well, though the standards can vary from state to state. In every case, the members must compose and submit articles of organization to the state government in the LLC’s principal place of business.[1] These articles specify the rights and obligations of each member, as well as certain business details like the duration (if the LLC is meant to be temporary).

Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs, and foreign entities. However, a few types of businesses like banks and insurance companies cannot be LLCs.

Joint Venture

A joint venture is a special kind of business structure that is most closely associated with partnership. In a joint venture, two or more distinct parties come together to create a new business entity. Unlike in other forms of partnerships, however, the founding parties retain their respective branding and individuality while operating the joint venture. In addition, joint ventures are generally formed to complete only a few projects, meaning they tend to operate on a short-term basis.

The joint venture agreement sets forth the distribution of roles, responsibilities, rights, and profits.[2] The agreement also specifies the legal structure of the business – a joint venture may be a partnership, corporation, or any other kind of structure. This will determine how the business is taxed since the IRS does not recognize the joint venture as a taxable structure. If a joint venture is organized as a C corporation, for example, then it pays corporate taxes and its shareholders pay personal income taxes on dividends. Typically, joint ventures are formed as partnerships, so taxation is passed directly to the owners.

Certain business structures may be more appealing than others in various situations. Making the determination of whether your business’s current structure best fits your circumstances and goals is an important element of strategic planning. However, this can be a complex, multifaceted process.

Fortunately, Kaulkin Ginsberg can help you navigate those choppy waters. We have worked with small, mid-sized, and large privately-owned companies, Fortune 500 corporations, and financial investment firms on their mergers and acquisition (M&A) strategies for thirty years. Whether you’re seeking professional sell-side representation, assistance forming a partnership or joint venture, a transaction assessment, or a collection agency valuation, Kaulkin Ginsberg will guide you through the process. For more information, or to schedule a confidential discussion of your business goals, contact us at hq@kaulkin.com.

Works Cited

[1] Fernando, Jason. “Limited Liability Company (LLC).” Investopedia, 28 February 2021, https://www.investopedia.com/terms/l/llc.asp.

[2] “Joint Venture: An Overview.” Legal Information Institute, Cornell Law School, https://www.law.cornell.edu/wex/joint_venture.

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