Indiana Business Law Blog

Two years ago we discussed whether nonprofit organizations and businesses can lawfully use unpaid interns. One of the key questions is whether the intern is actually an employee subject to the Fair Labor Standards Act. If so, the intern must be paid at least minimum wage and overtime pay if the intern works more than 40 hours in a week. The answer?

• Businesses may use unpaid interns only if the intern qualifies as a trainee by satisfying six specific criteria.


• Nonprofit organizations may also use unpaid interns who qualify as trainees. In addition, they may use unpaid interns who qualify as volunteers.

The case is Davenport vs. Elite Model Management Corp. The plaintiff, a former unpaid intern, alleges that the agency uses interns as a source of free labor, which is precisely what the Fair Labor Standards Act forbids. According to the complaint, "Without the free labor of its interns like Ms. Davenport, Elite would be forced to do what every other reputable employer in this country does: pay an honest day's wage for an honest day's work."

The complaint steps through the six criteria for determining whether Ms. Davenport and the other interns at Elite qualify as trainees and argues that they do not. Whether that's correct remains to be seen, but the stakes are significant: The complaint alleges that Elite owes damages of at least $50 million for unpaid wages, overtime, and benefits for a class of plaintiffs that includes at least 100 interns.

Continue reading "The $50 million question: Can businesses use unpaid interns? " »

The "Indiana Smoke Free Air Law," which was passed last year by the Indiana General Assembly and took effect on July 1, 2012, bans smoking in most Indiana businesses and nonprofit organizations. We thought the General Assembly might reconsider some of the details this year, but that hasn't happened. Based on our non-scientific observations, it seems that Indiana businesses and nonprofits have not been very diligent about implementing the law, particularly those regarding signs. So we think it's a good time to review the requirements, or at least some of them.

"Does the smoking ban affect my business?"

Smoking is now prohibited by law in "public places" and "places of employment," as well as the area within 8 feet of public entrances to either of them. "Public places" and "places of employment" sound as if they encompass a lot, and they do. A public place includes any enclosed area of a structure in which the public is permitted or invited, and a place of employment includes any enclosed area of a structure (excluding a private vehicle) that is a place of employment. Lest we forget, there's one other category -- smoking is also banned in government vehicles being used for governmental purposes.

There are some exceptions, but the bottom line is that the smoking ban affects most businesses and nonprofit organizations in Indiana.

"Okay, my office is covered. What do I have to do?"

• Not surprisingly, you must inform your employees and prospective employees that smoking is prohibited.
• You must post conspicuous signs that read "Smoking is Prohibited by State Law," or something to that effect. The law has a specific requirement that restaurants must have a conspicuous sign at each entrance informing the public that smoking is prohibited in the restaurant.
• You must also post signs at each entrance (logically, the sign should be outside or at least visible from the outside) stating "State Law Prohibits Smoking Within 8 Feet of this Entrance" or something similar.
• If someone smokes on the premises anyway, you must ask him or her to refrain, and if he or she refuses to stop, you must have him or her removed from the premises. (Note: Don't try to do it yourself! In the unlikely event it becomes necessary, call the police.)

"I own a bar. Does the smoking ban REALLY apply to my business?"

It depends. There are some exceptions to the smoking ban, and one of them is for bars and taverns, but you have to meet certain requirements. For example, you may not have any employees under 18, and you must exclude anyone else under 21. There are more exceptions for several other types of places of employment and public places, each subject to particular qualifications or additional requirements.

"Does the law apply to our nonprofit organization?"

Probably. There is an exception that covers some social clubs and fraternal organizations or lodges that are tax exempt under Internal Revenue Code Sections 501(c)(7), (c)(8), or (c)(10), and it's possible that some other types of nonprofits fit into an exception, but most nonprofits are subject to the smoking ban.

"I have a home office. Is smoking banned there, too?"

Again, it depends. The ban does not apply to a business located in the business owner's residence, but only if all the people who work there live in the residence. Let's assume that only you (the owner) and your spouse work in your office. In that case, you're allowed to smoke, but if you have any employees who don't live in your home, smoking is prohibited.

"Are there other exceptions?"

Yes. For a complete list see Ind. Code 7.1-5-1-5.

"My facility falls within an exception to the smoking ban, so I'm home free. Right?"

Well, not entirely. There are some other requirements that apply to public places and places of employment in which smoking is permitted. Here's an interesting one -- you have to post signs that state "WARNING: Smoking is allowed in this establishment." You must also certify to the Indiana Alcohol and Tobacco Commission that your bar qualifies for the exception.

Moreover, even if most of your facility or building is exempted from the ban, smoking is prohibited in halls, elevators, and common areas where people under 18 are permitted or in rooms intended for use by people under 18.

And don't forget that even if the state law does not ban smoking in your business, it may be prohibited by local no-smoking laws -- such as the Indianapolis Ordinance -- which are allowed to be more restrictive than the state law.

Other resources

NOTE: This is not a comprehensive analysis of the Indiana Smoke Free Air Law. There are other exceptions and other requirements that may apply to your business or nonprofit (even if it is exempt from the ban itself) that we have not discussed. Here are some other resources:

• The full text of the statute can be found at Ind. Code 7.1-5-1.


• The Indiana State Excise Police have published a list of frequently asked questions.


• And signs that comply with the state law are readily available from a number of suppliers.

Continue reading "Indiana Smoking Ban" »

UPDATE, February 19, 2013.
Yesterday, the House Judiciary Committee amended HB1394 to remove the language discussed in this blog post -- the changes to IC 23-18-6-7 that would have expressly provided that a charging order is the only right that the creditor of an LLC member has with respect to the LLC. It appears that Indiana will remain in the fourth category of states listed in the article -- those in which there is no reverse veil piercing for multi-member LLCs, with the issue remaining unsettled with respect to single member LLCs. The most recent version of the bill is available here.

In my last post, I discussed HB 1394, a bill pending in the Indiana General Assembly that would make several amendments to the statute that governs Indiana limited liability companies. One of the most important changes is to strengthen the so-called "charging order" protection, which I'll describe shortly after a brief review of some attributes of LLCs and corporations.

Recall that corporations and LLCs both have liability shields that protect the owners of the company (for a corporation, the shareholders; for a limited liability company, the members) from being personally liable for the company's obligations. That liability shield (whether it's for a corporation or LLC) is sometimes called a corporate veil, and in some circumstances courts will ignore the shield, or pierce the corporate veil, to allow creditors of the business to reach the personal assets of the owners. I've previously discussed precautions that LLC members can take to keep that from happening.

When a court allows a creditor of the business to reach the personal assets of the owners, it's sometimes called "inside-out veil piercing," which implies there might be something else called "outside-in veil piercing." And there is.

Consider what happens when a shareholder of a corporation owes money to a creditor. The shareholder's stock is just like any other asset, like a bank account, a house, or a car. And just like any other asset (well, most other assets), the stock is subject to foreclosure, which effectively means the creditor takes over ownership. The creditor, now the new shareholder, receives all the rights associated with the stock, including the economic rights (i.e., the right to receive dividends, if there are any) and the non-economic rights (including the right to vote in elections of the board of directors). That's called "outside-in veil piercing" or sometimes "reverse veil piercing." If the creditor takes over enough shares of stock, he or she can gain control of the company. Even if the creditor does not gain control of the company, the other shareholders may suddenly find themselves co-owners with someone they don't even know, maybe even with someone they despise. For large, publicly traded companies with millions of shareholders, that's no big deal. For family businesses or other businesses with only a few shareholders, it can be a very big deal.

The area of reverse veil piercing is one in which LLCs differ tremendously from corporations, at least in some states, and it is one of the reasons that I advise clients to set up LLC's far more often than I advise them to set up corporations. When it comes to the rights of a member's creditors, many states, including Indiana, treat the member's economic rights and non-economic rights separately. For example, IC 23-18-6-7 allows a court to issue an order requiring a limited liability company to pay to a member's creditors anything that the LLC would otherwise be required to pay to the member. That's called a charging order, and it's something like an order for the garnishment of wages, applied to a member's right to receive LLC distributions.

The question is whether a charging order is the only remedy a creditor has against the member's rights. If so, there is no reverse veil piercing, and a member's creditors cannot take over control of the business or gain a seat at the table with the other members. I believe there are currently five categories of states:

1. Those in which reverse veil piercing is not allowed for LLCs.
2. Those in which reverse veil piercing is allowed for single-member LLCs but not for multi-member LLCs.
3. Those in which reverse veil piercing is allowed for both single-member LLCs and multi-member LLCs (essentially treating LLCs the same as corporations).
4. Those in which there is no reverse veil piercing for multi-member LLCs but for which the law is unresolved for single-member LLCs.
5. Those in which the law is unresolved for reverse veil piercing both single-member and multi-member LLCs.

Until fairly recently, Indiana was in the fourth group of states. As I've discussed elsewhere, a 2005 decision of the Indiana Court of Appeals, Brant v. Krilich, held that there is no reverse veil-piercing for multi-member LLCs, but apparently leaving the question open for single-member LLCs.

HB 1394 would add a provision to IC 23-18-6-7 expressly stating that a charging order is the exclusive remedy for a judgment creditor of a member and that the creditor has no right to foreclose on the member's interest. Because the bill makes no distinction between single-member and multi-member LLCs, it appears that HB 1394 would place Indiana in the first category of states -- those for which reverse veil piercing is not allowed for either single-member or multi-member LLCs.

Continue reading "Proposed Changes to Indiana LLC Statute Part 2: Charging Order Protection" »

Statutes governing limited liability companies, or LLCs, vary considerably from state to state. In our opinion, Indiana's statute is already among the best in the country, and a bill introduced in the 2013 session of the Indiana General Assembly proposes several changes that would make it even better for small business owners, particularly family-owned businesses. Among other things, HB 1394, introduced by Rep. Greg Steuerwald (R Avon) would:

• Eliminate the possibility that a creditor of a member can take over the member's voting rights


• Allow a membership interest to be held in joint tenancy with the right of survivorship


• Allow a membership interest to be designated as "transfer on death" property


• Expressly provide for LLC officers

Later posts will discuss these proposed changes in more detail, including a few suggestions for possible revisions to the bill that would make it even better. In the meantime, however, small business owners in Indiana may want to contact their state representatives and senators urging them to support HB 1394.

Continue reading "Proposed Changes to Indiana LLC Statute" »

The Indiana Secretary of State has issued a warning about a deceptive letter being received by some Indiana businesses. The letter asks for a fee -- typically $125 or $150 -- to cover the processing of the minutes of a corporation's annual meeting. It is designed to appear as if it is from a state agency, the "Indiana Corporate Compliance Business Division," and it includes a citation to a fictitious law. In fact, it is not from a state agency, and there is no requirement to pay any such fees to the state.

If you receive a letter like the one described above, ignore it. If you have already responded to a letter like this, you may contact the Business Services Division of the Indiana Secretary of State's office at (317) 232-6576.

However, if you receive a letter from the Indiana Secretary of State's office informing you that a business entity report is due by the end of the following month, DO NOT IGNORE IT!

Indiana business corporations and limited liability companies are required to submit a business entity report every two years during the month of the anniversary of the filing of the articles of incorporation or articles of organization. For example, if your articles of incorporation or articles of organization were filed in April of an even-numbered year, a business entity report is due in April of every even-numbered year.

Indiana nonprofit corporations are required to file business entity reports (even though a nonprofit corporation is not usually considered to be a "business") every year in the month of the anniversary of the filing of the articles of incorporation. If the articles of incorporation of your nonprofit were filed in August, a business entity report is due every August.

Business entity reports may be filed on paper or online. The filing fee for business corporations and limited liability companies is $30, and the fee for nonprofits is $10. In both instances, modest discounts are given for filing online.

The Secretary of State's office sends out reminder notices near the end of the month before your business entity report is due, but do not rely on those letters as your only reminder. Because the reports are due even if you do not receive the letter, you should make sure the report is placed on your compliance calendar.

If your organization does not file its business entity reports on time, it is subject to administrative dissolution by the Secretary of State. If that happens, it is possible to have your corporation or LLC reinstated, but the process can be time consuming. It's far better to stay in compliance to begin with.

Continue reading "Letter About Annual Minutes is a Scam -- but Notice About Business Entity Reports is Not!" »

Businesses and nonprofit organizations that have recently hired unemployed veterans and those that do so before 2013 may be eligible for a tax credit of as much as $9,600 for each unemployed veteran hired by a business or as much as $6,240 for each unemployed veteran hired by a qualified tax exempt organization. Qualifying businesses will receive a credit against income tax, and qualifying tax exempt organizations will receive a credit against the employer's share of Social Security tax.

The tax credit is a result of the bipartisan VOW to Hire Heroes Act of 2011, unanimously passed by both houses of Congress and signed by the President on November 21, 2011, which expanded the Work Opportunity Tax Credit (or "WOTC") to include certain classes of unemployed veterans. The amount of credit available depends on the length of time the veteran was unemployed before being hired, the number of hours the veteran works, the amount the veteran is paid in the first year of employment, and whether the veteran has a service-related disability.

Critical Deadlines

Businesses and tax exempt organizations that wish to take advantage of the tax credit need to be aware of two critical deadlines. You will not get the tax credit if you fail to meet either one:

• First, the expanded tax credit expires at the end of the year. The veteran must start work on or before December 31, 2012.
  


• Second, the employer must file certain forms within 28 days after the veteran starts work. (Other rules were in place for veterans hired before May 22, 2012.) Different forms are required for businesses and for tax exempt organizations. The process of for claiming the credit, including a list of the required forms, is summarized here.
  

The IRS has provided several other sources of information on the WOTC for veterans, including a list of frequently asked questions and a detailed description of the WOTC. You should also consult your tax advisor.

Continue reading "Hiring soon? Consider an Unemployed Veteran!" »

The Internal Revenue Service has announced the following standard mileage rates used to calculate income tax deductions for business travel expenses and for travel expenses incurred while serving charitable organizations.

• Business, $0.565 per mile
• Charitable service, $0.14 per mile

These rates, which are one cent per mile higher than the standard rates for 2012, take effect on January 1, 2013.

Continue reading "IRS Standard Mileage Rates Will Increase in 2013" »

I explained in my last two posts how construction managers can be subject to liability when a construction contractor's employee is injured. Ordinarily, the construction manager has no duty to provide a safe workplace for the employees of a construction contractor and, therefore, is generally not liable for injuries to those employees. However, a construction manager can assume a duty to those employees in one of two ways -- either by contract or by actions -- and end up with liability for injuries.

For that reason, some construction managers have been reluctant to have any involvement with safety programs. By drafting contracts carefully, a construction manager can be fairly certain of not assuming a duty contractually, but it is difficult to know exactly what actions a construction manager can or cannot take without incurring liability. The Plan-Tec and Hunt cases discussed in our last post create some certainty. Specifically, a construction manager may take on contractual commitments to perform certain actions without assuming a duty to the employees of construction contractors and, consequentially, without incurring liability it would not otherwise have.

However, the construction management must avoid contractually undertaking to be the "insurer of safety for everyone on the project." Here are some examples of what a construction manager should include in the construction management contract:

(a) To "make certain its avoidance of liability" the court in Hunt said a construction manager can include a provision with language expressly disavowing responsibility for job-site safety (EX: "in no case shall...the Construction Manager...have either direct or indirect responsibility for matters relative to Project safety.").

(b) In Plan-Tec, the court held that the construction manager had not assumed a duty because the construction management contract "unequivocally state[d] that the contractors were to have the responsibility for project safety and the safety of their employees." This language demonstrates that the responsibility for project safety belonged to the construction contractors, not the construction manager.

(c) Hunt's contract stated that the construction manager's services were "rendered solely for the benefit of the [Project Owner] and not for the benefit of the Contractors, the Architect, or other parties performing Work or services with respect to the Project." This confirmed that no one but the Project Owner, not even a subcontractor's injured employee, could expect to "benefit" from Hunt's contract with the Project Owner or claim the contract obligated Hunt to assure their safety.

(d) Hunt's contract provided that Hunt was not "assuming the safety obligations and responsibilities of the individual Contractors," and that Hunt was not to have "control over or charge of or be responsible for...safety precautions and programs in connection with the Work of each of the Contractors, since these are the Contractor's responsibilities." In addition, it said that the construction contractor was the "controlling employer responsible for its own safety programs and precautions," and Hunt's responsibility to review, monitor, and coordinate those programs did "not extend to direct control over or charge of the acts or omissions of the Contractors, Subcontractors, their agents or employees or any other persons performing portions of the Work and not directly employed by Hunt." This proved that Hunt was not vicariously liable for a subcontractor's negligence in executing its own safety precautions.

Given the above contract provisions which help construction managers to avoid contractually assuming responsibility for job-site safety, consider one related reminder about avoiding liability as a result of actions. Remember how construction managers can become liable when they voluntarily perform safety obligations beyond what they previously agreed to in the construction management contract? For this reason, one last contract provision which would benefit construction managers could require that, if the project owner demands that construction manager begin to perform additional safety obligations, such new obligations would first be incorporated into the original contract via an amendment. This would serve as a contractual way to manage the risk of that other means of incurring liability - the construction manager's actions.

Now, here are some examples of what a construction manager seeking to avoid liability should not include in a construction management contract:

(a) Provisions by which the construction manager accepts the "duty to maintain safety on the project."

(b) Provisions providing that the construction manager is responsible for the contractors' compliance with state and federal regulations. A provision like that could show that the construction manager was undertaking legal oversight of the subcontractors. As recounted in point (d) above, construction managers can safely contract to review, monitor, and coordinate safety programs and precautions, but not to be responsible for those programs as the "controlling employer." The important inquiry is whether the construction manager has agreed to ensure contractors' compliance with the law or whether the construction manager has only agreed to monitor contractors' compliance for the project owner.

(c) Language such as: the construction manager "shall take reasonable precautions for safety of...employees on the Work."

(d) Language such as: The construction manager "shall take all necessary precautions for the safety of employees on the work."

(e) Language such as: The construction manager "shall take all necessary precautions for the safety of all employees on the project."

Ultimately, the Indiana Supreme Court held that even though Hunt had agreed to some safety-related responsibilities in the original contract, those responsibilities didn't invoke "vicarious liability." In doing so, the court chose to further the policy of providing "a way of promoting safety without exposing contract managers to suits like this one," rather than encourage construction managers to avoid taking on any responsibility for promoting job-site safety for fear of incurring liability.

Continue reading "Construction Manager Liability: Part three" »

As discussed in my last post, general contractors and construction managers have very different roles in a construction project. General contractors are sometimes sued when their subcontractor's employees are injured on the job, but that's not as often the case for construction managers. In addition, the liability analysis is quite different for construction managers because, unlike general contractors, construction managers do not have overall responsibility to perform the construction and they generally only contract with project owners, not with other subcontractors. A recent Indiana Supreme Court opinion, ("Hunt Construction Group, Inc. v. Garrett") ("Hunt")sheds light on the analysis of construction manager liability.

The opinion concluded litigation which had arisen out an accident which occurred during the construction of the Lucas Oil Stadium. In Hunt, a subcontractor's employee was injured and subsequently sued the construction manager ("Hunt"). The Hunt court based its analysis on Plan-Tec, Inc. v. Wiggins ("Plan-Tec"), the first reported case in Indiana where the employee of a subcontractor sued a construction manager. Indiana courts use Plan-Tec as a "template" to evaluate claims of negligence against construction managers for injuries suffered by subcontractors' employees, and the central test of the template specifically says that "a construction manager owes a legal duty of care for job-site employee safety in two circumstances: (1) when such a duty is imposed upon the construction manager by a contract to which it is a party, or (2) when the construction manager assumes such a duty, either gratuitously or voluntarily.'" Thus, a court will determine whether a construction manager is liable for the employee's injury based on the construction manager's contracts and actions, and only one of these is necessary to prove liability.

Three things in Plan-Tec led the court to find no contractual liability for the construction manager: (1) The construction manager's contract did not specify that the construction manager had any safety responsibilities, (2) the subcontractor's contracts clearly indicated they had responsibility for project safety and the safety of their employees, and (3) the subcontractor's contracts expressly disclaimed that the construction manager had any direct or indirect responsibility for project safety.

Unlike in Plan-Tec, in Hunt, the construction manager's contract did impose some general safety-related responsibilities on the construction manager. For example, Hunt was responsible for approving contractors' safety programs, monitoring compliance with safety regulations, performing inspections, and addressing safety violations. Hunt also had the ability to remove any employee or piece of equipment deemed unsafe. However, the court determined that none of the safety-related provisions imposed on Hunt a specific legal duty to or responsibility for the safety of all employees at the construction site. Instead, the contract included "clear language limiting [Hunt's] liability" which persuaded the court that the construction manager did not have a legal duty of care to subcontractor's employees for job-site safety. We will explore that specific contractual language which limited Hunt's liability in the next post.

But even if construction managers are not liable because of their contracts, they can still, by their actions or conduct, assume "a legal duty for job-site employee safety." In Plan-Tec, it was Plan-Tec's assuming of new supervisory duties beyond those required by the initial construction documents and after the project had already begun which raised the issue of whether it had assumed by its actions such a legal duty of care. For example, Plan-Tec took on extra responsibility by appointing a safety director, initiating weekly safety meetings, directing that certain safety precautions be taken by the subcontractors, and daily inspecting the scaffolding (which scaffolding ultimately injured the employee in that case). However, in Hunt, the court affirmed that the Plan-Tec ruling does not mean that a construction manager must avoid all such responsibilities in order to avoid liability for workplace injuries. In fact, Hunt had equally undertaken each of the previously mentioned actions taken by Plan-Tec. The difference was that, in Hunt's situation, none of these actions were beyond those required by the original construction documents, and (as discussed above) those documents limited Hunt's liability. This simple fact indicated to the court that Hunt did not by its actions assume a legal duty for the employee's safety. Because Hunt neither assumed a duty by its contracts nor its actions, Hunt prevailed.

Continue reading "Construction Manager Liability: Part two" »

When it comes to occupational injuries, the construction industry is among the most dangerous. According to the Bureau of Labor Statistics, in 2010 there were more fatal occupational injuries in construction than in any other private industry sector. And when a worker is injured, it sometimes leads to a lawsuit.

In most cases, the workers' compensation statue (in Indiana, Ind. Code 22-3) restricts the amount an injured worker can recover from his or her employer to the amount of workers' compensation insurance, but it does not limit the amount the worker can recover from anyone else. See Ind. Code 22-3-2-13. For example, the workers' compensation statute does not prohibit an employee of a construction subcontractor from recovering from the general contractor or a construction manager. It is not uncommon for general contractors to be sued when their subcontractor's employees are injured on the job, and there are a number of reported cases in Indiana dealing with that type of claim. However, in the recent case of Hunt Construction Group, Inc. v. Garrett, the Indiana Supreme Court had an opportunity to address the liability of a construction manager. I'll discuss that case in the next couple of postings, but first let's look more closely at the difference between a general contractor and a construction manager.

Although the roles of construction managers and general contractors are sometimes confused, they are really very different. A general contractor has the obligation to the owner of a construction project to perform the work necessary to complete the project. In most cases, of course, a general contractor does not actually do all the work but rather subcontracts at least part of the work to one or more subcontractors (for example, to an electrical subcontractor or a mechanical subcontractor). In other words, the general contractor works for the owner, and the subcontractors work for the general contractor. The owner pays the general contractor for the entire cost of the project, and the general contractor pays the subcontractors out of the amount it receives from the owner. If a subcontractor makes a mistake, the general contractor is accountable to the owner for that mistake, just as if the general contractor made the mistake itself. Naturally, managing its subcontractors is an inherent part of a general contractor's job, and the general contractor has a great deal of direct control over the subcontractors.

Sometimes, however, the owner of a project hires a construction manager to oversee the construction project and to coordinate the work of all the various contractors and subcontractors on the project. Unlike a general contractor, a construction manager is not responsible for actually building the project. The construction manager essentially acts as the owner's on-the-site representative with responsibilities such as managing the budget, the schedule, and the contract documents; sending out bid requests and receiving bid submissions; approving subcontractors when they are hired; inspecting and approving the work; and more. There may also be a general contractor with responsibility for constructing the entire project, or the owner may contract directly with companies that would otherwise be subcontractors (e.g., electrical and mechanical subcontractors) without hiring a general contractor.

Either way, the construction contractors and subcontractors do not actually work for the construction manager; instead, they work either for the general contractor or directly for the owner. The owner does not pay the entire construction price to the construction manager; the construction manager receives only a fee, and the owner pays the construction contractors and subcontractors either directly or through the general contractor, if there is one. The only authority the construction manager has to do anything related the construction is in its capacity as the owner's agent.

In Hunt Construction Group, Inc. v. Garrett ("Hunt"), an employee of a subcontractor, Baker Construction Company, was injured and sued the construction manager, Hunt, claiming that Hunt was vicariously liable for Baker's actions and that Hunt negligently breached its own duty of care for job-site safety. In the next entry, we'll see how that case came out, and in the third entry we'll look at things a construction manager can do to minimize its exposure to liability for injuries to construction workers.

Continue reading "Construction Manager Liability: Part one of a three-part series" »

As a mild spring finally melts into the heat of summer, perhaps you'll soon take a moment to enjoy a small cup of lemonade from a small business on a sidewalk near you. After all it is National Small Business Week.

But while you enjoy your refreshment, consider taking the moment to pay homage to small business and ponder the following questions: What is so unique about a small business? What is it about some small businesses that set them above the rest? When it comes to the legal aspects of business, how can business owners be active rather than passive and what are the payoffs? What are the legal considerations inherent to owning and operating a small business? What about a grown-up's small business can ensure it is any less transient than the venture which sold you your beverage?

If you are a prospective or current small business owner, you likely know first-hand the value of answering such questions earlier rather than later. During the creation of a company and after it is formed, the legal concerns which come into play should be dealt with head-on. Like the rest of a savvy entrepreneur's endeavors, the legal tasks of business organization and transactions, when accomplished both properly and skillfully, are their own reward.

Without a doubt, small businesses are the workhorse of the U.S. economy, representing 99.7 percent of all employer firms and generating 65 percent of net new jobs over the past 17 years (Source of data: U.S. Small Business Administration). The benefits small businesses render to local economies are no joke. An organization we support, The 3/50 Project, recognizes this reality and is setting out to "save the brick and mortars our nation is built on" in a way that is turning heads. No matter what your relation may be to the wonders of small business ownership, consider celebrating the week by exposing yourself to the simple mission of The 3/50 Project and learning in under a minute how you can very practically help to "save your local economy."

Continue reading "Happy "National Small Business Week!"" »

On February 25, 2011 I wrote a blog post about Righthaven, LLC, a company that has made a business out of suing owners of web sites for alleged copyright infringement. At the time, Righthaven had filed at least 239 lawsuits against all sorts of defendants, including individuals, small businesses, and nonprofit organizations. The number of lawsuits has now reached at least 275, most of them in either Nevada or Colorado.

Although many of the lawsuits have been settled, some of the defendants have chosen to fight back. For example, in Righthaven LLC v. Buzzfeed, Inc., the defendants recently filed a class action counterclaim on behalf of the defendants in all the Colorado lawsuits. In their counterclaim, the defendants argue that Righthaven has committed abuse of process and violated the Colorado statute against unfair and deceptive trade practices. In support of their counterclaim, the defendants allege, among other things, that

• Righthaven has asked for remedies that it knows it is not entitled to. Specificially, the counterclaim says that Righthaven has tried to lock the defendants' websites and to get ownership of those websites.


• Righthaven has attempted to coerce defendants into monetary settlements by threatening to get statutory damages and to take control of the defendants' websites.


• Righthaven has sued for infringement of copyrights that Righthaven does not own.

The defendants also raise a number of defenses to Righthaven's claims, including the argument that the defendants' use of copyrighted material was covered by the doctrine of fair use and, therefore, was not an infringement.

In the previous post, we pointed out some things that website owners can do to avoid being sued for copyright infringement:

• Assume that everything you find on the internet is subject to a copyright.


• Don't copy text from another website (or, for that matter, from any other copyrighted source) and post it on your website, even if you give credit to the original source, unless you get permission from the owner of the copyright.


• Don't post copyrighted images on your website unless you receive permission from the owner of the copyright.


• Take advantage of the wealth of images that are available free or at low cost from online stock shops such as www.openphoto.net and www.istockphoto.com.

Regardless of how successful the Righthaven defendants are in their attempts to fight back, these tips remain valid. You do not want to be sued for copyright infringement, even if you might ultimately prevail in that lawsuit. It can be very expensive to ultimately prevail. It's better not to be sued in the first place. But if you are sued, you should understand and take advantage of all the weapons that are available to you, both defensive and counteroffensive weapons.

Continue reading "Righthaven Defendants Fight Back" »

Last November I wrote about a new law that expanded the requirement to issue Form 1099 to include reporting of payments made to corporations and to suppliers of goods. The law was set to go into effect for payments made in 2012. In January I wrote that Representative Dan Lungren (R. California) had introduced a bill to repeal the new requirement. On April 14, President Obama signed Congressman Lungren's bill into law, eliminating the expansion of the reporting requirements.

Everyone knows when individual tax returns (Form 1040 or one of its variations) are due. Today. April 15. Right? Not this year! This year individual tax returns are not due until Monday, April 18.

That's because of the "Saturday, Sunday, holiday rule," which says that if April 15 falls on a Saturday, a Sunday, or a legal holiday, Form 1040 is due on the next day that is not a Saturday, Sunday, or legal holiday. You might not have known that April 16 is Emancipation Day, a legal holiday in Washington, D.C. that commemorates the signing of the Compensated Emancipation Act by Abraham Lincoln on April 16, 1862. But this year, April 16 falls on Saturday, so Emancipation Day is being celebrated on Friday, April 15. Therefore, Form 1040 is not due until Monday, April 18.

By the way, if you make quarterly estimated tax payments, that's not due until Monday either.

In my last entry, I discussed the corporate veil and the protection it provides to individuals who own LLCs or have stock in corporations. Corporate veil piercing only becomes an issue when the LLC or corporation does not have enough financial assets to pay a creditor and that creditor wants to find another way to satisfy that debt. To that end, a creditor may try to persuade a court that the business's corporate veil should be pierced, allowing the creditor access to the owner's personal assets. Most of the time, it won't work, but in some circumstances it will. Here are the factors that tend to justify piercing the corporate veil.

• The business is undercapitalized


• The owners have made fraudulent representations


• The owners have used the business to promote fraud, injustice or illegal activities


• The assets of the business have been used to pay the obligations of the owners


• The owners have commingled their own assets and affairs with those of the business


• Business or corporate records are absent


• The owners have failed to observe required corporate formalities


• The owners have otherwise ignored, controlled, or manipulated the corporate entity

Before I dive into the details of each factor, it's important to note that Indiana courts consider veil piercing to be extremely fact sensitive. In other words, judges look at these issues and base their decisions on the very specific facts of each particular case. In one case, the court may not permit the veil to be pierced despite the presence of several factors. In another case, the presence of even one factor may justify piercing the veil. That means that a prudent business owner needs to keep all of them in mind. That said, let's get on with it.

The first factor is undercapitalization, which has been defined by the courts as "capitalization very small in relation to the nature of the business of the corporation and the risks attendant to such business." Of course, almost anytime a creditor tries to piece the corporate veil, the business is, in one sense, undercapitalized because if the business had enough money to pay the creditor, there would be no need to pierce the veil. So the question is not whether the business is undercapitalized when the veil-piercing lawsuit is filed, but whether it was properly capitalized to begin with. The policy underlying this factor may be the notion that business owners should place at least a reasonable amount of capital at risk. As far as these factors go, undercapitalization is a fairly weak one. Taken alone, it is seldom if ever enough to justify piercing the corporate veil. Often, it will be raised as a minor factor where other, stronger considerations are present. Even so, one way small business owners can protect themselves is to make sure the business is not undercapitalized.

The next two factors are related, and they play a significant role in many veil-piercing cases. Both of them deal with fraud. Indiana courts do not have much sympathy for individuals who use a LLC or corporation to perpetrate fraud and it is highly likely they will pierce the corporate veil if there is evidence of fraudulent business activities. Fraud can include misrepresenting facts about the company to customers or other third parties. For instance, making statements you know are false or otherwise misleading someone to induce them to enter into an agreement with your business could be considered fraudulent misrepresentation.

Sometimes however, what is legitimate in one situation is fraudulent in another. Consider two LLCs that are have a common owner. In most circumstances, if the owner wants to move assets from one of the LLCs to the other, it's perfectly legitimate to do so, assuming the owner keeps the books straight and pays any taxes that might be triggered by the transfer. Now imagine that the owner realizes that one of the LLC's is about to be sued and decides to transfer all the assets owned by that LLC into the other. That attempt to use the LLCs to hide assets from creditors can be (and has been) deemed fraudulent and used as a reason to pierce the corporate veil.

So the second and third ways business owners can avoid becoming personally liable for the obligations of the business are to avoid making fraudulent representations and to avoid using the business for fraudulent, unjust, or illegal activities. We'll cover the other factors in the next entry in this series.

Continue reading "Veil Piercing Part TWO: A few ways to protect your business from having its corporate veil pierced in Indiana" »