USA Law and Practice Contributed by: Olesya Bakar, William “Bill” Jackson, Daniel E. Levisohn and Steven D. Lear, Holland & Knight LLP
the greater ability to minimise self-employment tax on the earnings of the corporation. S-Corps Unlike a standard corporation, but similar to an LLC or a partnership, S-Corps generally have pass-through taxation. They lack the flexibility of an LLC or an LP because there can only be one class of stock, with each shareholder having the same economic rights to receive dividends that are proportional to its own - ership interest. Unlike an LLC or a partnership, own - ership of an S-Corp is limited to no more than 100 shareholders. In addition, each shareholder must be a citizen or legal resident of the United States, and an individual (or certain trusts and estates or tax-exempt entities). An S-Corp may be beneficial for a smaller, simple JV where the type and number of owners is not restricted and there are pro rata distributions, or where self-employment tax minimalisation is desired. An S-Corp lacks a certain degree of flexibility with respect to tax considerations in connection with restructurings or the recapitalisation of its investments, and a JV that loses its S-Corp status because of impermissible actions may face severe tax penalties. Contractual JVs A contractual JV is a JV among two or more venturers that is solely set forth in a contractual arrangement without forming a separate entity that is owned by the venturers. These arrangements are often effective when there is a specific strategic rationale driving the relationship. For example, a contractual JV may be appropriate for certain industries – such as the airline industry – where the venturers often are not making a capital investment into a common enterprise but rather are creating a strategic contractual alliance in their operations and profit sharing. Typically, these arrangements are easier to exit as there’s no sale of assets or dissolution of the JV entity. Instead, the ven - turers part ways and terminate the alliance. Another common example of a contractual JV is a profit participation agreement. In this structure, the profit participant (eg, the seller of real property) is provided the contractual right to receive a negotiated portion of the profits or cash flow of the buyer entity rather than becoming an owner of that entity. This structure is desirable to the buyer because, except
as negotiated in the profit participation agreement, the profit participant does not receive the statutory, common law and operating agreement protections that are afforded to an owner of a JV, including rights to inspect the books and records of the entity. 2.2 Strategic Drivers for JV Structuring The primary drivers for choosing a type of vehicle or a contractual JV are typically the following: • limitation of liability to all of the venturers; • flexibility to determine and implement economic terms; • tax structuring considerations and efficiency; • governance structure; and • exit rights. In most cases, unless there is a special need to have a partnership, a corporation or contractual JV, an LLC likely will be the preferred choice for a JV. 3. JV Regulation 3.1 Legal Framework and Regulatory Bodies In addition to the federal, state and local laws that govern a particular business conducted by the JV, the following are some key regulatory considerations affecting JVs. State Entity Law Regardless of where it will conduct business, a JV entity may be formed under the laws of the particular US state (“jurisdiction”) of its choosing or the District of Columbia. In general, the statute of the jurisdiction governing the specific type of JV entity will regulate that entity, except to the extent, if any, that the statute allows the governing documents of the JV to modify the statutory provisions. LLC and LP statutes provide default rules for the relationship of the venturers and the formation, governance, operation and dissolution of the entity that apply where the governing documents are silent on a specific topic. Each LLC and LP statute, how - ever, provides for certain enumerated “non-waivable” provisions that cannot be varied by contract. The non- waivable provisions provide a baseline of statutory
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