By Kimi Murakami
Companies can come in all different shapes and sizes. They can be traditional C corporations, limited liability companies, general partnerships, limited partnerships, S corporations, joint ventures (“JVs”) or various combinations of the above. Selection of corporate structure should be made in consultation with your legal and tax advisors as it is critical when initially forming your company, particularly if you intend to perform government contracts. As with many decisions in running a government contract business, what may be fine under corporate law may not be ideal in the highly-regulated government contracting space.
For example, where two corporate entities come together to form a joint venture they are faced with the choice of simply remaining a “joint venture by contract” or they can go one step further and form a limited liability company (LLC). If the two parties choose the first option, the parties will enter a joint venture agreement and this document will govern their relationship. As a joint venture by contract, no formal instrument must be filed with the state to bring the JV to life. The JV comes into existence when the agreement is signed. A joint venture by contract will be taxed as if it were a partnership. If the JV is awarded a contract by the federal government the contractor will be the JV.
If two corporate entities come together to form the JV with the specific purpose of bidding on and performing work for the federal government, it may be prudent for the JV to go a step further and become an LLC. In addition to the joint venture agreement, the JV simply files a document (known as, for example, articles of organization or certificate of formation) with the state of its choice to form an LLC.
Why should JV/government contractors take this extra step to form an LLC? Because the answer to the question “can you have a partnership of one?” is “No.” When a government contract has been awarded to a JV and things go south for one of the venturers, the options for the remaining venturer become more challenging if the surviving partner wants to continue performing the contract. The challenges arise because the government contract awardee is the JV and if one of the two venturers wants to get out of the JV partnership, or it no longer exists (due to bankruptcy, debarment, etc.), then the JV will fail. The remaining venturer cannot be in the JV partnership alone. In order for the remaining venturer to continue performing the work, the government contract must be novated from the JV to the remaining venturer.
If, however, the JV had formed a separate limited liability company, under most state LLC acts, having a single member LLC is permitted. The remaining venturer of the JV-LLC, therefore, can continue the JV-LLC on its own and continue performance of the government contract. The JV-LLC entity that was awarded the original contract does not change. No novation would be required.
Hence, if you are getting together with another company to form a JV for the purpose of performing government contracts, it may be prudent to consider taking the additional step of forming an LLC before you submit your proposal.
About the Author: Kimi Murakami is counsel with PilieroMazza in the Business and Corporate Law Group. She may be reached at [email protected].