California Joint Venture Summary

A California Joint Venture does not limit the personal liability for debts, liabilities, obligations, or legal judgments against the individual California Joint Venturers, but a California Joint Venture does avoid the complexity and expense of the more sophisticated business entities.

The advantages of California Joint Ventures include:

• Filing a Statement of Partnership Authority with the California Secretary of State is optional;

• There are no required annual governance or other “corporate” formalities;

• Allowing more than one owner without subjecting the business to the California Franchise Tax.

The disadvantages of California Joint Ventures include:

• Joint and several liability for California Joint Venturers for all debts, liabilities, obligations, and legal judgments;

• Partnership taxation, including self-employment tax for California Joint Venturers;

• Each California Joint Venturer is an agent with the ability to enter contracts or create liabilities, often leading to ownership and management disputes.

Formation of a California Joint Venture by San Diego Corporate Law includes an attorney-drafted Joint Venture Agreement, drafting and filing of a Statement of Partnership Authority on California Secretary of State Form GP-1 with the California Secretary of State, and obtaining a federal EIN for the California Joint Venture.

California Joint Venture Details

When two or more persons associate to conduct business as co-owners for a business or commercial undertaking for a set period of time or a single business undertaking for an undetermined period of time, a California Joint Venture is formed. Although a California Joint Venture may be formed by filing a Statement of Partnership Authority on California Secretary of State Form GP-1 with the California Secretary of State, such a filing is not always required (but may be filed even if not strictly required). The key to establishing a California Joint Venture is the intention of the California Joint Venturers to engage in a common business purpose for profit, as demonstrated in Pellegrini v Weiss 165 CA4th 515, 525 (2008). It can be assumed that a California Joint Venture exists solely by the actions of the co-owners, regardless of the intent of the co-owners. While an oral agreement to conduct business is sufficient to form a California Joint Venture, the use of a written California Joint Venture Agreement is strongly suggested. In a California Joint Venture, each California Joint Venturer is jointly and severally liable for all debts, liabilities, obligations, and legal judgments against the California Joint Venture.

California Law Applicable to Joint Ventures

California Joint Ventures are primarily governed by the provisions of the California Corporations Code applicable to California General Partnerships. California General Partnership law is governed by the Revised Uniform Partnership Act of 1994, found in California Corporations Code §§ 16100-16962.

California Corporations Code § 16202 outlines the conditions that constitute a partnership and can be applied to California Joint Ventures. California Corporations Code § 16404 details the rights and duties of partners, including sharing profits and losses which is a fundamental aspect of California Joint Ventures. California Corporations Code § 16501 describes the liability of California Joint Venturers, essential for understanding the potential risks of entering a Joint Venture. These sections of the California Corporations Code provide a legal framework for understanding and establishing a California Joint Venture.

Restrictions on the Identity of California Joint Venturers

Pursuant to California Corporations Code § 16101(9), (13), California Joint Venturers may be any combination of an individual, corporation, business trust, estate, trust, general partnership, limited partnership, limited liability partnership, limited liability company, association, joint venture, government, governmental subdivision, agency, or instrumentality, or any other legal or commercial entity.

Formation of California Joint Venture

When two or more individuals or authorized entities carry on business as co-owners for a specific business transaction or set period of time, a California Joint Venture is formed. California Corporations Code §§ 16101(9), 16202(a). No government filings are required; however, a California Joint Venture may file a Statement of Partnership Authority on California Secretary of State Form GP-1 with the California Secretary of State. California Corporations Code § 16113(a). The fee for filing a Statement of Partnership Authority with the California Secretary of State is $70.00. California Government Code § 12187(a). A California Joint Venture Agreement may be recorded in the county where the California Joint Venture is located. California Corporations Code § 16303(b). Forming a California Joint Venture also involves structuring joint venture agreements to draft a California Joint Venture Agreement that details the agreed-upon terms and conditions between the California Joint Venturers.

Duration of California Joint Venture

California Joint Ventures exist for a limited duration or for one specific transaction. California Corporations Code §§ 16202(b), 16502. In most cases, when forming a California Joint Venture, the parties will agree upon the duration of the California Joint Venture, unless there is not a set period of time and the California Joint Venture is instead based upon one specific transaction without any time limitation.

Personal Liability of California Joint Venturers

California Joint Venturers have joint and several liability for all debts, liabilities, obligations, and lawsuits against the California Joint Venture that were incurred after becoming a California Joint Venturer. California Corporations Code §§ 16306(a)-(b). A judgment against a California Joint Venture is not satisfied from the separate assets of a California Joint Venturer unless there is also a separate judgment against the California Joint Venturer individually. California Corporations Code § 16306(c)-(d). California Joint Venturers have fiduciary duties of loyalty and care to all other California Joint Venturers in a California Joint Venture. California Corporations Code § 16404.

Anonymity of California Joint Venturers

The names of California Joint Venturers are not public record unless a Statement of Partnership Authority is filed, a fictitious business name statement application is filed, or the California Joint Venture Agreement is recorded with the county in which the California Joint Venture is located.

Management of California Joint Ventures

California Joint Ventures are managed by the California Joint Venturers, although a California Joint Venture may have employees. Under the theory of mutual agency, each California Joint Venturer is an agent of the California Joint Venture and can bind the California Joint Venture in the ordinary course of business. California Corporations Code §16301(1).

The concept of mutual agency in a California Joint Venture, where each California Joint Venturer can bind the California Joint Venture in the ordinary course of business, does have the potential to lead to more ownership and management disputes. This is largely due to the flexibility and less rigid nature of the arrangement. In more structured business entities, decision-making powers and responsibilities are usually clearly defined and distributed, reducing the likelihood of disputes. However, in a California Joint Venture, the lines of authority can be blurred, leading to potential disagreements over management decisions or direction for the California Joint Venture.

Capitalization of a California Joint Venture

Working capital for a California Joint Venture usually comes from cash and property contributions made by California Joint Venturers or secured loans or unsecured loans from California Joint Venturers. California Joint Ventures are usually not attractive investments for third-party investors due to the joint and several liability of California Joint Venturers for debts, liabilities, obligations, and legal judgments against the California Joint Venture as well as the difficulty of transferring the ownership interests of a California Joint Partnership. Unless the California Joint Venture Agreement provides otherwise, California Joint Venturers receive equal shares of profits and are jointly and severally liable for equal shares of any losses. California Corporations Code § 16401(b).

Securities Issues for a California Joint Venture

An ownership interest in a California Joint Venture may be deemed a security under federal or California securities laws under specific circumstances.

Federal Securities Issues for California Joint Ventures

Under the federal Howey test, as laid out in SEC v. W.J. Howey Co., 328 U.S. 293 (1946), an investment contract (a form of security) exists when there is an investment of money in a common enterprise with an expectation of profits to be derived primarily from the efforts of others. In the context of a California Joint Venture, the key consideration often centers on the degree to which California Joint Venturers rely on the managerial and entrepreneurial efforts of others for profits. If a California Joint Venturer invests money and expects to obtain returns primarily from the work of others, the ownership interests of the California Joint Venture may be classified as a security.

California Securities Issues for California Joint Ventures

California law applies a more expansive test known as the risk capital test, which focuses on the risk undertaken by an investor in relation to the managerial efforts of others. If an investor risks capital in a California Joint Venture with a primary dependence on the managerial efforts of others for a return on the investment, the investment in the California Joint Venture is likely to be deemed a security under California law.

Taxation

A California Joint Venture is subject to various forms of taxation, both at the federal level and to the State of California.

Federal Income Taxation of a California Joint Venture

For federal income tax purposes, a California Joint Venture is treated as a partnership. This means that the California Joint Venture itself is not directly subject to income tax. Instead, the income, deductions, gains, losses, and credits of the joint venture flow through to the California Joint Venturers on a pro rata basis according to their ownership interests. These income, deduction, gain, loss, and credit amounts are reported on Schedule K-1 of Form 1065, U.S. Return of Partnership Income, and the California Joint Venturers must report their respective share of these income, deduction, gain, loss, and credit amounts on their individual tax returns.

As a result of this pass-through taxation, the California Joint Venturers are liable for paying the tax on their share of the net income of the California Joint Venture even if no distributions of net profit are made. While this can lead to a significant tax burden, the California Joint Venturers may also take advantage of losses and deductions that the California Joint Venture incurs (subject to certain restrictions and limitations, including without limitation passive activity and at-risk rules).

Federal Self-Employment Taxation of a California Joint Venture

Federal self-employment taxation plays a vital role in the context of a California Joint Venture. Since the California Joint Venture is viewed as a partnership for tax purposes, California Joint Venturers are generally considered to be self-employed rather than employees of the venture. As a result, they are subject to the federal self-employment tax, which covers Social Security and Medicare taxes.

The Self-Employment tax rate currently stands at 15.3%, comprising 12.4% for Social Security and 2.9% for Medicare. While there is a statutory maximum income the Social Security portion applies to (and this income cap usually increases annually), there is no limit to the amount of income subject to the Medicare portion of the tax. California Joint Venturers can deduct the employer-equivalent portion of their self-employment tax in calculating their adjusted gross income, but this deduction only affects their income tax, not their net earnings from self-employment or their self-employment tax.

When a business entity joins a California Joint Venture as a California Joint Venturer, the federal self-employment tax implications can vary, largely depending on the type of business entity acting as the California Joint Venturer.

If a California Joint Venturer is a California Corporation or California S-Corp (or a business entity taxed as a corporation or S Corporation), it is typically considered a separate taxpayer from its shareholders and not subject to self-employment taxes. However, in the case of a California LLC, California General Partnership, California Limited Liability Partnership, or for General Partners of a California Limited Partnership, the owners of the California Joint Venturer that is in one of these business entities are typically subject to self-employment taxes on their share of business income.

California Income Tax of a California Joint Venture

In terms of California income taxation, a California Joint Venture is also treated as a partnership under California tax law and thus follows the pass-through taxation model. The joint venture itself is not directly taxed on its income. Instead, the California Joint Venturers are required to report their pro rata share of the income, deductions, gains, losses, and credits on their individual California tax returns. This information is typically reported on California Schedule K-1 (565), Partner’s Share of Income, Deductions, Credits, etc.

Federal and California Employment Taxation of a California Joint Venture

For a California Joint Venture with employees, the California Joint Venture is responsible for withholding federal income tax, as well as Social Security and Medicare taxes from the wages of its employees.

Beyond federal obligations, a California Joint Venture with employees must also withhold California state income tax and pay California unemployment insurance tax. The latter is used to fund unemployment compensation for jobless workers and goes into the California Unemployment Insurance Fund. Employers are required to pay into State Disability Insurance (SDI), which provides partial wage replacement benefits to eligible workers who are unable to work due to a non-work-related illness, injury, or pregnancy, and may also have to pay into the Employment Training Tax (ETT), which funds training programs for employees in targeted industries.

California Sales and Use Taxation of a California Joint Venture

California sales and use tax also apply to California Joint Ventures. If the California Joint Venture is involved in retail sales or leases tangible personal property in California, they will generally need to register with the California Department of Tax and Fee Administration (CDTFA) for a seller’s permit and regularly file sales tax returns. The sales tax rate varies across different localities within California but is typically added to the sales price of taxable sales of goods and certain services. On the other hand, use tax is owed on goods purchased outside of the state but used within California, particularly when no sales tax was paid at the time of purchase. Tax responsibilities of the California Joint Venture extend to collecting this use tax from consumers and remitting it to the State of California.

Ownership Changes

Unless otherwise provided in the California Joint Venture Agreement, California Joint Venturers must vote unanimously for the admission of new partners. California Corporations Code § 16401(i). Unless otherwise provided in the California Joint Venture Agreement, a California Joint Venturer may freely assign their economic interest in the California Joint Venture without dissolving or dissociating the assignor from the California Joint Venture. California Corporations Code §16503. However, the assignee is entitled only to the economic interest in the California Joint Venture and does not become a California Joint Venturer without the approval of the other California Joint Venturers.

Termination

A California Joint Venture is dissolved and wound up on dissociation of a partner unless within ninety days of the dissociation unless a majority interest of the partners agree to continue the partnership. California Corporations Code § 16801(2). The California Joint Venture Agreement may vary the termination provisions.

Pricing Assumptions

The organization of a California Joint Venture for $2,175.00 assumes a Statement of Partnership Authority is filed, a single class of California Joint Venturers is created in the first draft of the California Joint Venture Agreement, and all proposed California Joint Venturers accept the first draft of the California Joint Venture Agreement. Negotiated amendments to the California Joint Venture Agreement drafted hourly. Price will decrease without the filing of a Statement of Partnership Authority. Negotiated amendments to the California Joint Venture Agreement available for additional fees. Pricing does not include recording the California Joint Venture Agreement with a county, which service is available for additional fees and costs.

When ownership interests are deemed to be securities under California Law, the drafting and filing of a California Limited Offering Exemption Notice with the California Department of Financial Protection and Innovation may be required. Drafting and filing of a California Limited Offering Exemption Notice for $625.00 assumes the total value of ownership interests is less than or equal to $25,000, which is a $25 filing fee with the California Department of Financial Protection and Innovation. This filing fee increases to $35 up to and including ownership interests valued at $100,000, $50 up to and including ownership interests valued at $500,000, $150 up to and including ownership interests valued at $1,000,000, and $300 $50 up to and including ownership interests valued in excess of $1,000,000.

When federal securities exemption filing for ownership interests is required under Regulation D of the Securities Act of 1933, as amended, a Form D may be filed for $3,000.00 under SEC Rule 504, 506(b), or 506(c).

Class C Expedited (24-hour) filing service of Form GP-1 from the California Secretary of State for $650 when available. The actual filing time delivered by the California Secretary of State is not guaranteed, and the filing fee is non-refundable.

Additional services are available on an hourly basis or by quotation upon request.

California Joint Venture Additional Resources