Jurisdictions within the United States allow for the creation of a limited liability company structure to run the operations of a business. There is no restriction on the number of owners who are eligible to become LLC members before or after legal formation. For this reason, the LLC may be an appropriate entity choice for a joint venture that has multiple investors.
Becoming a Member
At the time of formation, any number of members may hold an interest in the LLC. Once legal formation is complete, the authority to admit new members rests with all current members. An LLC often has an operating agreement that all current and future members must adhere to. The agreement may stipulate current or future property and service contribution requirements to acquire a membership interest, the number of votes necessary to admit a member and the limitations on a member’s authority. For example, New York’s LLC law expressly defers to an LLC’s operating agreement to determine how a member may acquire an ownership interest in the business. If the agreement does not stipulate these requirements, or does not exist, most states only require a unanimous member vote to admit a new member.
Read More: Can an LLC Be a Member of Another LLC?
One of the key advantages of creating an LLC for a joint venture is that each individual member has no personal liability for the debts and obligations of the LLC or for the actions of other members whose activities are beyond the scope of normal business operations. In the event an LLC is unable to pay debts or satisfy contractual obligations, members are not personally responsible if LLC assets are insufficient. However, many states impose personal liability on the individual member who causes damage to others as a result of gross negligence or an illegal act such as fraud. Even where the LLC is liable for those acts, that member is in turn also liable to the LLC for the expense or loss it incurs due to that member's actions.
An LLC created as a joint venture receives a default designation as a partnership for federal income tax purposes. Partnership taxation rules impose pass-through principles and limit each member’s tax liability to his proportionate share of LLC earnings. The LLC must file an annual partnership tax return; however, each member receives a Schedule K-1 and reports his share of taxable business income. Members must report all K-1 amounts on a personal tax return and pay the appropriate tax. In the event a member fails to comply with tax reporting or payment requirements, the other members are not responsible for the deficiency. Partnership taxation is also advantageous in that it is not subject to the double taxation a corporation is subject to.
Although most jurisdictions do not require it, it's a good idea for a joint venture LLCto have an operating agreement in place that defines each member’s scope of authority in making decisions affecting the business and procedures for settling disagreements efficiently. Having an effective operating agreement allows members to focus on running a profitable business rather than managing each other.