(Business Entities) Joint Ventures and Space Aliens – Do They Really Exist?

When I graduated law school in 1990, Joint Ventures (JV’s) were really hot. Seemed they were everywhere, in every business sector from entertainment to healthcare to real estate development. To me just saying the words “joint venture” is kind of sexy and cool. I mean who wouldn’t want to “joint venture” with someone else? When I graduated law school I couldn’t wait to “joint venture” with someone else … even though I was not quite sure what it entailed. What is a “joint venture” anyway?

Well, under state law, a joint venture is similar to a partnership and there is little practical distinction between the two entities. Uggh! As a business entity partnerships are so …. yesterday.

A joint venture is like a partnership in that its members associate as co-owners of a business enterprise, agreeing to share profits and losses. However, a joint venture is usually formed for a transaction or a series of transactions, thus being more limited in both scope and duration, while a partnership ordinarily engages in a continuing business for an indefinite or fixed period of time. This distinction is not ironclad as a partnership may be formed for a single business transaction and for a defined period of time. Well, so maybe the excitement is in forming the JV?

Not really. A joint venture, like a partnership, is formed under California law by an agreement between the parties, which may be oral or written, and may be implied from the acts as well as the statements of the participant. Whether a joint venture exists depends on the intention of the parties. Really. Where is the “sizzle” I wondered.

There are three basic elements of a joint venture:

1. The members must have joint control over the venture (even though they may delegate it);
2. They must share the profits of the undertaking; and
3. The members must each have an ownership interest in the enterprise.

Some courts have not upheld the authority of one joint venturer to bind the venture, and to impose liability on the other joint venturers, when the venture’s undertaking is limited in scope and it would be inequitable to do so. (Ok, so JV’s do exist). Other courts, however, have made no such distinction and have applied the mutual agency theory of a partnership to bind joint venturers. (Ok, so JV’s don’t exist – come on; make up your mind guys.)

Thus, for practical purposes, there is no significant distinction between a joint venture and a partnership, except, perhaps, for that given it by tradition. (Hey – maybe JV’s are like space aliens in that they kind of do and don’t exist!)

What Sayeth the Tax Man?

A joint venture is defined for tax purposes as a joint transaction of two or more persons for the purpose of making a profit, without any “actual corporate or partnership designation.” The difference between a joint venture and a partnership is (wait for it, wait for it ….) that the former relates to a single transaction, while the latter involves a general and continuing business of a particular kind. (I got it!) However, because a joint venture is taxed as a partnership by both the federal and the state taxing authorities, there is no significant distinction between the two entities for tax purposes. (I don’t got it.)

Tell you what. I think if I ever meet a space alien I will name him “Joint Venture!” I imagine, however, the irony will be lost on him …