Individuals and companies often cooperate in various ways to pursue different types of business opportunities. Some opportunities call for an ongoing relationship between the partners, as in the case of creating a business such as an LLC. Other opportunities are more temporary, such as a specific one-time project, and call for creating a joint venture.
Limited Liability Company
A limited liability company is a type of legal entity formed by filing documents with the state business registrar. It is characterized by its pass-through tax status, in which the company does not pay income tax as an entity, and limited liability it affords its members (owners). Although a multi-member LLC is a legal entity with its own basic structural formalities, in many practical respects, it often behaves as a general partnership.
A joint venture is a temporary partnership between two or more persons or companies that wish to combine their resources for a particular project. Joint ventures are created by a private agreement between the parties and does not require a formal registration filing with the state or any governmental agency.
Read More: Difference Between Joint Venture & Multi-member LLC
To help prevent and resolve disputes within a multi-member LLC, members usually enter into an operating agreement. Among other things, the operating agreement addresses issues such as how to admit a new member, what happens if an existing member wants to dissociate from the company, or operational procedure if the company is closed down. This is somewhat different from an agreement establishing a joint venture for several reasons. Joint venture agreements address the respective commitments and obligations of the parties, such as how resources and risks will be shared and how long the project will last. Notably, amendments to this type of agreement are common due to the short-term nature of most joint ventures.
As an independent legal entity, LLCs have flexibility in their tax treatment by the IRS, and depending on expectations and circumstances, it can decide to be taxed as a partnership or a corporation. However, since a joint venture is not a legal entity, the joint venturers simply report their share of profits and losses on their individual income tax returns.
By law, members of an LLC are protected against personal liability for any claims against the business. This means that each individual member's risk is limited to the amount of his investment. However, since a joint venture is not an independent legal entity and is just a cooperative agreement between persons or businesses, individual parties to a joint venture are not protected against liability stemming from its business or project. Because of this, many joint ventures are set up as an LLC, which provides the degree of protection the parties desire.
Jeff Clements has been a certified public accountant and business consultant since 2002. He has also worked in private practice as an attorney. Clements founded a multi-strategy hedge fund and has served as its research director and portfolio manager since its inception. He holds a Juris Doctor, as well as a master's degree in accounting.