California Joint Venture Law
California joint venture law is nearly identical to the laws governing general partnerships.3 min read
Updated July 31, 2020:
California Joint Ventures Forms
A joint venture is created to launch a particular project or business transaction with the sole purpose of existing for a limited amount of time. Once the transaction or project has come to fruition the joint venture will most likely be dissolved. The joint venture may be motivated by financial or strategic reasons, to gather resources, utilize joint assets, or divide risk.
Each party in a partnership or joint venture is at risk of personal liability for all debts incurred by the business. All owners are responsible for repaying the entire debt. If one of the parties in a joint venture is a business entity, then the assets of the business entity are also at risk in order to satisfy the debts of the joint venture.
California law dictates that a joint venture is virtually identical to a general partnership. For example, neither group needs to register with the Secretary of State (SOS) or submit written documentation in order to legally operate. Furthermore, neither business structure is generally subject to franchise tax or securities law. The main disadvantage of starting a general partnership or joint venture is that both face unlimited liability against the owner's personal assets.
What Are the Characteristics of a Joint Venture?
A joint venture is similar to a general partnership in that both are subject to full personal legal liability, and both are taxed in an identical manner. The workaround to facing unlimited liability is to convert the business structure into a limited liability entity. In cases where the business is delinquent, a limited liability entity is not responsible for paying creditors from the owner's personal assets, as long as the company was appropriately capitalized and acted lawfully.
A partnership will usually be a business that operates for a fixed or indefinite period of time. On the other hand, a joint venture is created for the sole purpose of revolving around one business transaction. It is possible for a joint venture to conduct business and be more complex than a partnership.
Structuring Joint Venture Agreements in California
There are three types of business structures for joint venture agreements, they are:
- Limited Partnership (LP): This business structure will protect the stockholders or members to the extent they've appropriately contributed capital to the corporation or company. Additionally, the LP:
- Is fully capitalized (i.e., there's enough capital to pay for the organization's obligations).
- Shuns commingling (i.e., the stockholders or owners use corporate resources or funds for business-related expenses).
- Uses its own tax ID number and business checking account (i.e., the organization is complying with its own corporate formalities and legal existence).
- Corporation: Unless the business is eligible to elect a subchapter S business entity status with the Internal Revenue Service, the corporation must pay tax as a legally separate entity. A company often incorporates in order to limit the owner's responsibility for the corporation's financial obligations and debts. This is because a corporation exists separately from the owners. Therefore, personal assets, such as houses and cars, are not at risk if a corporation has difficulty meeting its financial obligations. There are other associated benefits, such as investing appeal and tax savings.
- As a limited liability entity, a corporation must follow corporate formalities and possess sufficient capital in order to maintain their limited liability status.
- The California SOS charges a minimum franchise tax and filing fee. The minimum franchise tax for the initial year of incorporation is calculated based on net income, and all following years are subject to an $800 minimum.
- Limited Liability Company (LLC): LLCs have many benefits. Many small business owners find that LLCs are easier for taxes, income tracking, lawsuits, and business write-offs. The LLC business structure combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation, creating the best of both worlds for business owners.
- An $800 minimum franchise tax is due following the first quarter of each fiscal year.
- An LLC can write off many expenses that an individual can't do so themselves. However, the owner can't write off their own car on their taxes. However, the LLC can own a car. Additionally, the LLC can depreciate it yearly and lower its reported net income. When the income passes through to the members, the car expense will already be deducted.
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