Indiana Business Law Blog

Maintaining Indiana LLCs: Part II Best Governance Practices

December 30, 2017 | Michael R. Smith

Part I of this two-part series addressed requirements for maintaining an Indiana limited liability company, including the preservation of the corporate veil, that are imposed by statute or that may be imposed through the LLC’s operating agreement. Part II addresses recommended practices for maintaining Indiana LLCs that will help preserve the corporate veil (the liability shield that protects the assets of owners, or the assets of other related entities, from the LLC’s creditors) and are simply good business practices. Although the failure to follow one or more of the following recommendations will not necessary subject your LLC to veil-piercing, the following characteristics and practices are common to most well operated and maintained LLCs.

Do not use the LLC for fraudulent or other improper purposes. Courts have very little patience with the owners of LLCs, corporations, or other limited liability forms of businesses who use them to perpetuate a fraud or to improperly hide assets from creditors, for example by transferring assets from one company to another in an attempt to hide or protect the assets from creditors of the first company. That is not to say that LLCs cannot be properly used for asset protection purposes under the correct circumstances, but once an LLC has incurred liability, transferring assets to another company or to the owners, especially if the LLC does not receive fair market value in exchange for the assets, will likely result in the company’s veil being pierced to enable its creditors to reach at least the transferred assets and perhaps the other assets of the recipient.
Keep the LLC’s assets separate from the owner’s assets or the assets of other entities. Open bank accounts for the LLC that are separate from the owners’ accounts or accounts of related businesses. Deposit all of the LLC’s income into those accounts (not directly into the owners’); pay all of the LLC’s obligations from its own accounts; and pay none of the owners’ obligations or obligations of a related company from the LLC’s accounts. Generally, the LLC’s assets should be used only for purposes of the LLC’s business and not for the personal use of the owners. Do not pay yourself by writing checks from the LLC bank account to pay your personal obligations; pay yourself by writing a check from the business account, deposit it in your personal account, and then pay your personal obligations from your personal account.

Maintaining Indiana Limited Liability Companies: Part I Statutory Requirements

December 27, 2017 | Michael R. Smith

Compared with corporations, limited liability companies are generally low maintenance, but not entirely maintenance free. A few requirements are imposed by statute, and the operating agreement may or may not create some additional formalities that must be observed. In addition, there are good practices that, in addition to observing the required formalities, help preserve the liability shield that protects the owners’ assets from creditors of the LLCs (or the “corporate veil”). Part I addresses the statutory requirements and the types of requirements that are sometimes found in operating agreements; Part II will address some best practices.

NOTE: This post and Part II address only the requirements and best practices related to “corporate” governance, particularly those that are relevant to preserving the corporate veil. For any particular LLC, there may be a myriad of other legal requirements and best practices related to other areas, such as employer-employee relationships and permits or licenses that are necessary to conduct the LLC’s business, that are not addressed here.

Statutory Formalities

Tax Reform

December 19, 2017 | Michael R. Smith

If you’re not aware that Congress is working on a major revision to federal tax law, you’ve not been paying much attention to the news. The House of Representatives passed its version of the Tax Cuts and Jobs Act, then the Senate passed a similar, but not identical, bill. The bill went to conference committee to work out the differences between the House and Senate versions of the bill, and last week the conference committee issued its report. It currently appears that the conference committee’s recommendations will be approved and become law.

If you have the patience and desire to read the committee report, I suggest you skip to the Joint Explanatory Statement of the Committee of Conference that begins page 191 of the report (which is page 205 of the PDF file) . The pages preceding that set forth language to be inserted into the Senate version of the bill, but not the full text of the final bill. On the other hand, you’re looking for a more concise summary of some of the changes that will affect individuals and small businesses, I refer you to a side-by-side comparison of the current law and the law as it is expected to pass, written by Paul Bogdanoff of Bogdanoff Dages & Co. PC, a CPA and my friend of many years.

While the new law does not take effect until the 2018 tax year, some of its provisions may affect decisions you make in 2017. For example, the increase in the standard deduction (from $6,350 to $1200 for a single person, and from $12,700 to $24,000 for a married couple filing jointly) means that many people who are accustomed to itemizing deductions will no longer do so. As a result, those people will no longer receive a tax benefit from charitable contributions or other itemized deductions. Individuals in that category may want to accelerate charitable contributions and other deductible expenditures that are planned for 2018 by making them before the end of 2017.

The Effects of Tax Reform on Charitable Organizations

November 18, 2017 | Michael R. Smith

Although the tax reform bill just passed by the U.S. House of Representatives retains the income tax deduction for individuals who make contributions to charitable organizations (i.e., organizations that are tax exempt under Section 501(c)(3) of the Internal Revenue Code), it may nonetheless have significant effects on the amount of charitable giving by Americans. The reason lies in the increase in the standard tax deduction for individuals and the elimination of other deductions.

Increasing the Standard Deduction

The tax code provides several types of deductions that reduce the amount of tax owed by individual taxpayers, including deductions for home mortgage interest and contributions to charitable organizations. However, the tax code also provides a minimum “standard deduction” for taxpayers who have less than that amount in itemized deductions. Taxpayers who itemize deductions receive a tax benefit by making a charitable contribution, but not those who take the standard deduction. For example, the after-tax cost of a $100 contribution by most itemizing taxpayers in the 25% tax bracket is only $75. For taxpayers who take the standard deduction, the cost of a $100 contribution is $100 in both before- and after-tax dollars.

Business Lawyers, Accountants, and Insurance Brokers — and the 1908 Chicago Cubs

March 15, 2017 | Michael R. Smith

I’ve written before about the need for the owners of small businesses to have at least three professionals: a business lawyer, a tax accountant, and an insurance broker. Because it has been a while, and because the advice is so important, I decided to write about it again. Thinking about a group of three professionals led me to consider analogies to other groups of three people.

The first thing that came to mind was the traditional English nursery rhyme:

Rub a dub dub,

Seventh Circuit Decides Indiana Nonprofit Corporation Case, Part 2: Members and Membership

February 27, 2017 | Michael R. Smith

Earlier this month, the Seventh Circuit Court of Appeals decided Doermer v. Callen, No. 15-3734 (7th Cir. Feb. 1, 2017). In a previous post, we reviewed the facts and explored what the case had to say about the board of directors and directors’ terms. Today we’ll inch closer to the issue at the center of the case: whether a non-member director of an Indiana nonprofit corporation has standing to bring derivative claims on behalf of the corporation.

But before getting to derivative claims, let’s consider what it means to be a member of a nonprofit corporation. Perhaps you’ve made a donation to a nonprofit in your community and been recognized as an “annual member” for your contribution. Generally it is okay for an organization to refer to its donors and other people who support the organization as members. However, these types of donor membership programs usually do not grant the donor legal or statutory membership in an organization.

Under the Indiana Nonprofit Corporation Act of 1991 (the “Act”), a “member” is “a person who, on more than one (1) occasion, has the right to vote for the election of a director under a corporation’s articles of incorporation or bylaws.” Ind. Code § 23-17-2-17(a). Chapter 7 of the Act discusses membership in more detail (including admission criteria, liability, rights, and duties), but the key is that a member is a person who, once he or she is admitted or meets the admission criteria, has the right to vote for a director.

Seventh Circuit Decides Indiana Nonprofit Corporation Case, Part 1: Board of Directors

February 9, 2017 | Michael R. Smith

Last week, the Seventh Circuit Court of Appeals decided Doermer v. Callen, No. 15-3734 (7th Cir. Feb. 1, 2017), a case that illustrates and implicates several important aspects of Indiana nonprofit corporation law. Over the next few posts, we’ll explore some of the key aspects of the case and what it has to say about Indiana nonprofit law. First up: the board of directors and directors’ terms.

At the center of the case is the Doermer Family Foundation, Inc., a nonprofit corporation formed under the Indiana Nonprofit Corporation Act of 1991 (the “Act”). The initial board of directors consisted of a father; a mother; their son, Richard Doermer; and daughter, Kathryn Callen. Each initial director had a lifetime appointment.

Mother died in 2000. In 2010, Phyllis Alberts was elected to the board of directors for a three-year term expiring in January 2013. Later in 2010, Father died, leaving the board with three directors: Richard, Kathryn, and Phyllis. In September 2013, over Richard’s objection, Kathryn and Phyllis voted to reelect Phyllis for a second term. The board then took several actions that Richard opposed, including making gifts to the University of Saint Francis of Fort Wayne, Indiana, Inc. (Kathryn sat on their board of directors), and electing Kathryn’s son, John, to the board.

Business Entity Reports: New filing schedule for Indiana nonprofits

September 17, 2016 | Michael R. Smith

Indiana nonprofit corporations are being converted to a new schedule for filing business entity reports with the Indiana Secretary of State. In the past, a business entity report has been due every year in the same month in which the organization was incorporated. Nonprofit corporations will now file business entity reports every other year, the same schedule that applies to business corporations and LLCs. The filing fee will double from $10 to $20 for reports filed on paper. Online filings will cost $22.

The transition began on July 1, 2016, when existing organizations began filing biannual reports and paying the $20 filing fee. Organizations that file a business entity report in July through December 2016 will file their next business entity reports in 2018 and then will continue to file reports in every even numbered year (still in the same month in which they were incorporated). Organizations that file their first biannual report in January through June of 2017 will file their next reports in 2019 and then in every odd numbered year.

New organizations incorporated in an even numbered year will file business entity reports in the same month of every even numbered year thereafter. New organizations incorporated in an odd numbered years will file business entity reports in the same month of every odd numbered year.

Indiana Series LLCs, Part VIII: Unanswered Questions

September 10, 2016 | Michael R. Smith

This is the last of eight articles on series LLCs and the new Indiana series LLC statute that will take effect on January 1, 2017. Earlier articles are:

Part I, Basic concepts and terminology

Part II, Is a series an entity?

Indiana Series LLCs, Part VII: Income Taxation

September 10, 2016 | Michael R. Smith

Earlier articles on the topic of Indiana series LLCs are here:

Part I, Basic concepts and terminology

Part II, Is a series an entity?

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