Should You Form a New LLC for a Joint Venture? Legal Risks, Liability, and Structuring Considerations
One of the most common questions entrepreneurs ask when launching a new business venture is deceptively simple: "Do we really need to form a new company?"
Whether the project involves a technology startup, a video game, a music venture, a content platform, a real estate investment, or a new product line, business owners often prefer to move quickly and avoid the time, cost, and administrative burden associated with creating a new legal entity.
Instead, the parties may decide to simply work together under a contractual arrangement, sharing responsibilities, expenses, management duties, and profits through a joint venture. While this approach can be practical in certain circumstances, it also carries legal, financial, tax, and liability risks that are frequently overlooked. In fact, under many state laws, parties may unintentionally create a legal partnership—even when their agreement expressly states that no partnership exists.
This article discusses the risks of operating a joint venture without forming a separate entity, the circumstances under which courts and tax authorities may nevertheless treat the arrangement as a partnership, and several approaches businesses can use to reduce risk while preserving operational flexibility.
What Is a Joint Venture?
A joint venture ("JV") is a business arrangement where two or more parties agree to collaborate on a specific project, business opportunity, or commercial enterprise. Unlike a merger or acquisition, each party generally retains its own separate business identity while contributing resources to pursue a common objective. Those contributions may include capital, intellectual property, technology, employees, marketing or industry expertise.
Joint ventures are commonly used in:
software development,
video game publishing,
entertainment projects,
real estate developments,
licensing arrangements,
manufacturing,
and startup ventures.
Some joint ventures operate through a newly formed entity, while others are governed exclusively through contractual agreements between the parties.
Can Two Companies Operate a Joint Venture Without Forming a New Entity?
The short answer is yes. Parties can enter into a contractual joint venture without creating a new LLC or corporation. In many situations, this approach may be attractive because it reduces startup costs, avoids additional filing requirements, and eliminates separate annual reporting obligations. However, avoiding a new entity does not necessarily eliminate legal consequences. In many cases, it simply shifts those risks directly onto the parties themselves.
The Hidden Risk: Unintended Partnership Liability
One of the most significant risks associated with operating a joint venture without a separate entity is that the arrangement may be treated as a partnership under applicable law. This can occur even when the agreement explicitly states that the parties do not intend to form a partnership. Courts and regulators generally focus on substance over labels.
Factors often considered include:
sharing profits,
sharing losses,
joint management,
shared control,
contribution of capital,
contribution of services,
and whether the parties are operating a business together.
When those factors exist, the parties may inadvertently create a general partnership or joint venture relationship under default legal principles. This distinction matters because general partners may be exposed to joint and several liability for obligations incurred in the ordinary course of the venture.
In practical terms, one party's actions may create liability for the other.
Potential Liability Exposure
If a joint venture is treated as a partnership, each party may become exposed to risks created by the other. Examples may include:
intellectual property infringement claims,
breach of contract claims,
employment disputes,
tax liabilities,
developer disputes,
platform compliance violations,
regulatory investigations,
consumer protection claims,
and other business-related liabilities.
Additionally, if one party acts with apparent authority on behalf of the venture, third parties may reasonably believe that both participants are bound by the resulting obligations. This can create significant exposure if authority limitations are not clearly defined and followed in practice.
(If you’d like to learn more about the legal risks of online platforms and third party content, read this article.)
Special Considerations for Video Game and Roblox Ventures
These risks become even more significant in the context of video game development. Modern game development often involves multiple contributors, third-party assets, independent contractors, publishing platforms, and complex intellectual property rights. For businesses developing games on platforms such as Roblox, several additional issues should be considered.
(1) Intellectual Property Risks
Every game contains valuable intellectual property. Potential disputes may arise regarding items such as: source code ownership, artwork, animations, music, sound effects, character designs, storylines, trademarks, and future derivative works.
Without proper agreements, disagreements regarding ownership can become highly disruptive and expensive. Parties should carefully determine:
who owns the code,
who owns game assets,
who owns future updates,
who owns spin-off titles,
and whether contributions constitute work-made-for-hire.
(If you’d like to learn more about how you can sue the co-owners of your copyrighted work, read this article.)
(2) Platform Risks
Roblox and other game platforms maintain extensive terms of service and content policies. Violations may result in:
account suspension,
account termination,
monetization restrictions,
content removal,
or loss of publishing privileges.
If a single publishing account controls the entire project, a platform enforcement action could potentially disrupt the venture's primary revenue stream. The parties should therefore establish clear responsibility for platform compliance and risk management.
(3) Contractor and Employment Risks
Most game ventures rely heavily on contractors and freelance developers. This creates additional risks involving worker classification, wage claims, foreign contractor compliance, confidentiality obligations and intellectual property ownership.
If contractors are not properly documented, disputes may arise regarding who owns the work product and whether employment obligations exist. Because many development teams are distributed internationally, compliance considerations become even more complex.
(If you’d like to learn more about the difference between employees and independent contractors, read this article.)
(4) Tax Considerations
Many parties assume that avoiding a separate LLC also avoids partnership tax treatment. That assumption can be dangerous. The Internal Revenue Service may treat a joint venture as a partnership if the parties share profits, jointly operate the business, and exercise meaningful control over operations.
If partnership treatment applies, the parties may face additional obligations, including obtaining an EIN, filing informational partnership returns, issuing Schedule K-1s, maintaining separate accounting records, and complying with partnership tax rules.
Failure to address these issues proactively can create unnecessary tax exposure and administrative burdens.
Structuring Option #1: The Operator / Publisher Model
One approach for avoiding many partnership-related risks is to designate one party as the Operator or Publisher. Under this model, one company controls the publishing accounts; it receives platform revenue, manages operations, pays contractors, and oversees day-to-day management. The other company contributes services, capital, development support, marketing assistance, or other resources.
Rather than acting as a co-owner of the venture, the non-operator receives a contractual revenue share. This structure often resembles a publishing agreement or revenue-sharing arrangement rather than a true co-owned enterprise.
The primary advantages include simplified operations, clearer authority, reduced ambiguity, and stronger control mechanisms.
However, it also requires significant trust in the operator.
(If you’d like to learn more about the risks of verbal agreements with business partners, read this article.)
Structuring Option #2: A True Joint Venture Agreement
If both parties intend to exercise joint control and participate equally in management, a comprehensive joint venture agreement becomes essential. Among other things, the agreement should address:
governance,
decision-making authority,
reserved matters,
financial reporting,
accounting procedures,
audit rights,
dispute resolution,
deadlock procedures,
authority limitations,
tax treatment,
indemnification,
buyout rights,
and exit mechanisms.
This approach can be highly effective, but it requires careful drafting and disciplined operational compliance.
Key Agreements Every Joint Venture Should Consider
Regardless of structure, most ventures should consider implementing several foundational agreements. These may include:
Mutual NDA - Protects confidential information and proprietary business data.
Joint Venture Agreement - Defines governance, economics, responsibilities, and decision-making authority.
Publishing and Co-Development Agreement - Addresses development obligations, publishing rights, and commercialization.
Statements of Work - Establish project-specific deliverables and milestones.
Contractor Agreements - Protect intellectual property ownership and confidentiality.
Revenue Reporting Procedures -Establish transparency and accountability regarding financial performance.
Budget Approval Procedures - Reduce disputes involving expenditures and resource allocation.
LLC vs. No LLC: Which Structure Is Better?
There is no universally correct answer. The appropriate structure depends on considerations such as: project size, risk profile, expected revenue, investment plans, ownership structure, and long-term objectives.
However, forming a separate LLC often provides:
cleaner liability separation,
simplified accounting,
clearer tax administration,
improved investor readiness,
and more straightforward exit opportunities.
By contrast, operating without a separate entity may offer simplicity in the short term but can create additional ambiguity as the venture grows.
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*This article is provided for informational purposes only, and does not constitute legal advice, counsel or representation.
