What is the tax implication for a joint venture vs. a partnership?

What is the tax implication for a joint venture vs. a partnership?

By Eric P. Rothenberg, Esq.

Partnerships and joint ventures share many similarities. However, there are significant differences business owners should be aware of when allying with another enterprise. Both are forms of legal structures used by business owners to combine resources, talents, or skills with another person or business. Business owners often mistakenly use the terms partnerships and joint ventures interchangeably.

A partnership can be described as a voluntary association of two or more people who jointly own and carry on a business for profit, such as law firm partners who work together to provide legal services for gain. A joint venture, on the other hand, is typically a business undertaking by two or more people engaged in a single defined project. An expressed or implied agreement, a common purpose that the group intends to carry out, shared profits and losses, and each member’s equal voice in controlling the project are common traits of a joint venture. What this means is that each joint venture undertakes a specific portion of the business and is entitled to their portion of the profits based upon them controlling their own costs and they do not undertake the risk that the other joint venturer doesn’t control costs or doesn’t bring in the costs as promised. By way of example, if you are a general contractor bidding on a job that requires roads and buildings being built, you might ask a road builder you know to bid on just the road portion of the bid and while they will receive those funds they bid and they might make or not make a profit because they supply all needed for the road. So, you would use their bid hopefully to win the contract and the subcontractor “road builder” won’t get more than they bid for the road, regardless of whether or not they make a profit.

Tax treatment should be considered when choosing between a partnership and a joint venture. In a partnership, all of the profits and losses of the partnership pass through the business to the partners in proportion to their ownership [profit] percentage. This means each partner is responsible for reporting taxes on their share of the profits (or deduct their share of the losses) on their individual income tax returns.

Joint ventures, on the other hand, may be taxed as a corporation or partnership or they may simply be allocated gross receipts of the joint venture based upon their bid. Entities that are taxed as corporations are subject to ‘double taxation’ whereby both the corporate and shareholder levels are subject to tax.

Contact our office for additional help defining your business or filing your Massachusetts business tax.

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