Multiple LLC / Joint Effort Question

April 7, 2008 7:08 AM

Can two LLCs work together on a joint venture without forming a third?

A friend and I (both software developers) are considering an online business venture, and the original thought was to form an LLC under which to do this work. However, having both considered forming LLCs of our own in the past for various side projects, we are wondering now if it would be possible for us to each form our own LLC and have this new venture be a joint effort of the two companies. This would allow us to each pursue individual freelance work on our own and have our own companies in place to handle it. So is this possible without forming a third LLC owned by the two individual ones? And if so, how would financial issues, such as receiving a payment from a client, be handled (i.e. who is the check written to)?

Or are we better off just forming a single LLC between the two of us for this venture, and each forming our own separate LLCs for our personal projects? (or each forming our own LLCs and then forming a third owned by the two?)

Alternatively, if an LLC is owned by two individuals with a 50/50 distribution, and one individual has the opportunity to do a solo side-project, can it be done under the LLC without the profits being split?

posted by mehum to work & money (4 comments total)

Time to read up and decide which is right for your particular needs.
posted by caddis at 7:28 AM on April 7, 2008

While it may be possible, I would highly recommend biting the bullet and starting up the third LLC. The last thing you need is for something going wrong in either of your individual careers that spreads to the company. For example, in the unfortunate event that you are sued by your client, you don't want assets in your partnership LLC to be at risk.
posted by AaRdVarK at 7:30 AM on April 7, 2008 [1 favorite has favorites]

Can two LLCs work together on a joint venture without forming a third?

Yes, via a contractual joint venture. The terms of co-operation and the respective contributions, rights, duties and liabilities of each party will be spelled out in the joint venture agreement.

And if so, how would financial issues, such as receiving a payment from a client, be handled (i.e. who is the check written to)?

Either of the LLCs can take on the responsibility of collecting and accounting for revenue receipts. This will of course be stated in the JV agreement.

Or are we better off just forming a single LLC between the two of us for this venture, and each forming our own separate LLCs for our personal projects? (or each forming our own LLCs and then forming a third owned by the two?)

Consider the nature of your collaboration. Is it a for a specific project with a defined lifespan? How complex will this business venture be? What type of registration and licences may be needed? Will there be a need to acquire and hold property? Do you intend to enter in contracts with third parties? Will there be the creation of intellectual property? Taxation considerations?

Um, I'm not a lawyer.
posted by hellopanda at 7:39 AM on April 7, 2008

Most people will say "it depends". Think of it this way -- you could have been doing business on your own without the LLC, but presumably you wanted to have the LLC for various reasons (logistics, asset protection, etc). It's the same way with the (new) joint venture -- are the benefits worth it? The jump from no incorporation to a single entity is a lot bigger than from a single entity to the joint venture.

On the side project question, again, it depends. If you have an understanding that the purpose of the entity is to do web software design and you do a "separate" web software design project, then there's an argument that you've misappropriated a corporate opportunity (and also a likely argument that you breached a fiduciary duty to the corporation). Bad stuff. But if it's in a separate line of business then you may be safe. There are numerous and varied cases on what constitutes the same "line of business" and when these duties arise -- so YMMV hugely depending on the exact agreement and state.

If you just have one partner then full disclosure / waiver is usually easy.

TINLA and IANYL.
posted by QuantumMeruit at 7:52 AM on April 7, 2008