Articles Posted in Business Law

[The other articles in this seven-part series are here:  Part I, Part II, Part III, Part V, Part VI, Part VII.]

Although a bankruptcy debtor’s contract rights are within the definition of property of the estate under Section 541 of the Bankruptcy Code, they are different than most other property of the estate because they represent both a potential asset and a potential liability. As such, they are potentially subject to Section 365, dealing with executory contracts.  An executory contract is one in which some of debtor’s obligations under the contract remain to be performed and some obligations owed to the debtor by another party remain to be performed. The unperformed obligations must be significant enough that failure to perform them would constitute a material breach of the contract.

If a contract is executory, the bankruptcy trustee has two choices under Section 365:  to assume the contract or to reject it.  In many cases, after assuming an executory contract, the trustee will assign it to a third party in exchange for consideration (i.e., payment of money that is added to the bankruptcy estate).  However, the trustee may assume and assign an executory contract only if two conditions are fulfilled:  (1) any breaches of the contract on the part of the debtor must be cured and (2) the assignee who takes over the contract must be capable of performing the debtor’s obligations.  Generally, any contract provisions that prohibit the assignment are void, but there are exceptions.  For example, if another party to the contract to whom the debtor owes obligations has the right to refuse performance by anyone other than the debtor, the contract cannot be assumed and assigned over the objection of that party.

[The other articles in this seven-part series are here:  Part I, Part II, Part IV, Part V, Part VI, Part VII.]

The Indiana Business Flexibility Act creates two distinct categories of LLC rights:  (1) interest, or “a member’s economic rights in the limited liability company, including the member’s share of the profits and losses of the limited liability company and the right to receive distributions from the limited liability company,” I.C. 23‑18‑1‑10; and (2) other rights that are conferred upon members.  Many courts refer to the two categories as economic and noneconomic rights.  The Business Flexibility Act treats those two categories of rights very differently.[1]

It is indisputably clear that economic rights in an Indiana LLC are property rights because the Indiana statute expressly says so:

[The other articles in this seven-part series are here:  Part I, Part III, Part IV, Part V, Part VI, Part VII.]

In re Lee, 524 B.R. 798 (Bankr. S.D.Ind. 2015) involved an Indiana limited liability company with five members, one of whom, Lester Lee, held 51 of the 101 votes allocated to the members and served as the sole manager of the LLC.  Although Lester had no right to receive distributions from the company, he was entitled to compensation for his services as manager and, like the other members, he held rights to buy the interests of other members in certain circumstances.

After Lester filed for bankruptcy protection, the trustee sought a determination from the bankruptcy court that the bankruptcy estate held all of Lester’s rights in the LLC, both economic and noneconomic, including the right to cast his 51 votes as a member. The Bankruptcy Court agreed.

[The other articles in this seven-part series are here:  Part II, Part III, Part IV, Part V, Part VI, Part VII.]

The law of limited liability companies is a blend of concepts taken from the law of corporations and the law of partnerships. One of the differences between corporations and partnerships deals with the rights of the creditor of a shareholder of a corporation versus the rights of a creditor of a partner.

The usual rule for corporations is that a shareholder’s stock is property that, like any other property of the shareholder, can be reached by the shareholder’s creditors. For example, the shareholder’s creditor may be able to force a sale of the stock to satisfy a judgment against the shareholder, and the person who buys the stock will receive all the rights of a shareholder, including the right to receive dividends (i.e., economic rights) and to vote in elections of directors (i.e., noneconomic rights).

I am a fan of the radio show, A Way with Words.  Over the weekend, I ran across a clip on their website discussing an experiment run by a company in London to demonstrate the risks of using public WiFi.  The company set up a hotspot that offered free service to anyone who accepted a user agreement.  Buried in the agreement was what the company calls a “Herod Clause,” a promise by the user to assign his or her first-born child to the company for all eternity. Six people accepted the agreement.  Presumably those people fell into one of three categories:

1. People with no children and no intention of ever having any children.
2. Lawyers who knew that the clause would be unenforceable.

A couple of years ago the Indiana Business Law Blog posted an article about two different Indiana statutes of limitations for breach of contract:

• A six-year statute of limitations at Ind. Code § 34‑11‑2‑9, which applies to “promissory notes, bills of exchange, or other written contracts for the payment of money”
• A ten-year statute of limitations at Ind. Code § 34‑11‑2‑11, which applies to “contracts in writing other than those for the payment of money”

Not just the questions, but also the answers!

1.  I know that a limited liability company is created when articles of organization are filed with the Indiana Secretary of State.  What information is in the articles of organization?

Surprisingly little information is absolutely required.  The bare minimum:

This is the final installment in a series of articles dealing with Indiana’s new benefit corporation statute in general and its applicability to small businesses in particular, and we now arrive at the ultimate question:  Is it a good idea for a small businesses to incorporate as (or to convert to) a benefit corporation?

In our opinion, the best choice of entity for most small businesses is a limited liability company, not a corporation, and the new benefit corporation statute does not change that opinion. Although we think the benefit corporation statute is an excellent addition to Indiana corporate and business law, we believe the Indiana LLC statute already has enough flexibility to permit LLCs to adopt the same governing principles, policies, and procedures that are pre-packaged in the benefit corporation statute without giving up the other advantages that LLCs have over corporations in general.

First, the Indiana Business Flexibility Act allows LLCs to be organized for “any business, personal, or nonprofit purpose,” which certainly seems broad enough to include the combination of business and public benefit purposes for which benefit corporations are created. Second, all of the governance, transparency, and accountability provisions of the benefit corporation statute can be incorporated into a limited liability company’s operating agreement. Finally, certification as a B-Corp is not restricted to benefit corporations – essentially any form of business entity is eligible to be certified as a B-Corp, including LLCs.

Part I of this series briefly discussed Indiana’s new benefit corporation statute as well as certification of a company as a B Corp by B Lab and some of the their possible advantages.  Part II began a closer look at the details of the benefit corporation statute, including the question of whether the benefit corporation is a good choice for small businesses.

The “Benefit” Part of a Benefit Corporation

As we’ve mentioned before, a benefit corporation is one with purposes in addition to making money for its shareholders. All benefit corporations share the purpose of creating a general public benefit, defined as having an overall material positive impact on society and the environment.  In addition, benefit corporations may also establish for themselves the purpose of creating a specific public benefit that serves one or more public welfare, religious, charitable, scientific, literary, or educational purpose or another purpose that goes beyond the strict interests of the shareholders.

Part I of this series briefly discussed Indiana’s new benefit corporation statute as well as certification of a company as a “B Corp” by B Lab and some of the possible advantages of certification and of incorporation under the new statute.  Part II begins to look more closely at the details of the new law and to consider whether it makes sense for small businesses to incorporate under the new statute.

From a corporate law perspective, benefit corporations are, first and foremost, corporations subject to the Indiana Business Corporation Law, just like any other Indiana for-profit corporation.  In our view, a corporation is not the best choice of the form of entity for most small businesses.  For a number of reasons, including the tax alternatives available to LLCs, the “pick-your-partner” and charging order provisions of the Indiana LLC statute, and the fact that LLCs have fewer corporate formalities that must be observed (which decreases the possibility that the liability shield that protects the assets of owners from the creditors of the business will be disregarded through so-called veil-piercing), we believe that a limited liability company is a better choice than a corporation for most small businesses.

The above advantages of LLCs over corporations are the same – or even greater – for benefit corporations.  For example, partnership taxation is not an option for benefit corporations; if that is important enough, a benefit corporation is not a viable alternative.  In addition, the benefit corporation adds more required corporate formalities on top of those already imposed by the Indiana Business Corporation law, increasing the administrative burden and the possibility of weakening the liability shield protecting the assets of owners from the company’s creditors.  In other words, for most small businesses, a benefit corporation will not be the best choice of entity for most small businesses, unless the advantages of incorporating as a benefit corporation outweigh the advantages of organizing as a limited liability company.