Your company that is located in New Jersey has finally made the decision to approach another company that has something that your company needs in order to reach its marketing goals - access to a receptive customer base in the Midwest. The joint venture documents are in place and you feel confident about the decision.
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However, determining the proper legal structure of this joint venture seems to be difficult because each company is located in a different jurisdiction (your company on the East Coast, partner in the Midwest). After conducting thorough research, both parties must determine the geographic location and what type of legal entity should be formed. In most cases, the selected structure will be between a partnership, corporation, or limited liability company. Continue reading to learn what legal entity structure is best for your newly formed joint venture.
General Partnership/Limited Liability Partnership
- General Partnership - All partners involved in general partnerships are responsible for the debts and obligations incurred by the venture. It does not matter whether you or a partner caused the action; you are responsible for their actions.
- Limited liability partnership – All partners have a limited liability meaning that each partner is responsible for the amount that they have contributed to the venture. LLP's avoid double taxation and give the managing partners the opportunity to manage a portion of the partnership.
Corporations (C and S Corp Structures) - Corporations are the first choice for most joint ventures. The liability of shareholders for the corporation's debt is limited to the capital investment. However, net income of a corporation is subject to corporate tax in the jurisdiction it is located. Shareholders take part in management.
Differences Between C & S Corporations:
- C Corporation owners may be more attracted to joint ventures that are partnering with companies in foreign countries as C corporations are allowed to have foreign residents as shareholders. C corporation owners are also not responsible for business debts, have an unlimited amount of shareholders, more credible and have low audit risks.
- S corporation owners usually find it easier to raise capital than other types of legal entities; have lower self-employment taxes as well as the ability to avoid double taxation. S corporations only pay taxes on wages, not dividends. However, S corporations only allow the company to have up to 100 shareholders.
Limited Liability Company - A limited liability company combines elements of a partnership and corporation. LLC's generally have the same protection from liabilities as corporations do. All members are active managers. Members are able to minimize the amount of taxes. Profits are not considered earned income to managing members and are not subject to self-employment taxes.