Indiana Business Law Blog

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!" »

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" »

This is the first of a series of occasional blog entries dedicated to explaining how Indiana courts deal with the "corporate veil" and "veil piercing" and what small business owners can do to protect themselves from being personally liable for the debts and obligations of the business.

"Corporate veil" is a phrase used to describe the liability shield between the owner of a company and the company itself, and, as the name implies, it originated in the context of corporations. Without the corporate veil, corporations could not raise capital by selling stock to investors, and modern stock exchanges could not exist. Imagine that you buy $10,000 worth of a corporation's stock through an online stock broker, maybe the one with those talking baby commercials, hoping to collect some small dividends for a few years, then sell the shares at a nice profit. Now imagine that one day an envelope appears in your mailbox, but instead of a quarterly dividend check, it contains a letter from the company's creditors saying that the company does not have enough money to pay its bills and that, for your convenience,they have enclosed an envelope that you may use to mail in payment of your share of the corporation's debt, which comes to $75,633. And 27 cents. No personal checks, and the post office will not deliver mail without a stamp.

I suspect that would be the last stock you'd ever buy.

The reason that doesn't happen is the corporate veil. Even if a corporation's stock becomes worthless, the shareholder's loss is limited to the money he or she invested in the stock. The shareholder's other assets -- the house, the car, the checking account, the baseball card collection, and the family dog -- are safe from the corporation's creditors. And that's true not only for the shareholders of large, publicly traded corporations; it's also true for the owners of the smallest incorporated businesses. Furthermore, as a previous blog entry explained, the same type of corporate veil prevents the creditors of a limited liability company from reaching the assets of the LLC's members.

At least, that's the way it works most of the time. However, sometimes, in certain circumstances, a court may allow the creditors of the LLC or corporation to reach through the corporate veil and to collect directly from the business owners. That's called "piercing the corporate veil," and one time it can happen is when the owner has used the company to perpetrate fraud. A future entry will discuss in more detail the circumstances that can lead to veil piercing.

But before we get there, business owners need to remember one other limitation of the corporate veil -- it does not protect them from their own liability. That commonly arises in one of two different ways. First, imagine of a group of engineers who start their own engineering firm and organize it as a limited liability company. If one of the owner-engineers negligently makes a mistake on a design project, that particular owner-engineer can be held liable -- not because he or she is an owner of the LLC, but because he or she is the engineer who made the mistake. In addtion, the LLC will also be liable (at least in most cases), but the personal assets of the other owner-engineers will be protected by the corporate veil. (Hopefully, the owners will have heeded my earlier advice to get a good insurance broker, and the LLC will have an errors-and-omissions policy to cover the liabilty of both the LLC and the negligent engineer.)

The second common way that a member of a limited liability company becomes liable for the obligations of the LLC is when the member contractually assumes the obligation. For example, banks and other lenders often will not extend a loan to a small LLC unless the members sign a personal guaranty that obligates them to repay the money if the LLC doesn't. In those situations, the corporate veil does not prevent the lender from reaching the personal assets of a member-guarantor.

Watch for my next entry on this topic to learn about what you can do to protect your company from having its corporate veil pierced. (Sounds painful, doesn't it?)

Continue reading "Veil Piercing Part ONE: What is the "corporate veil" and can it be "pierced" under Indiana law?" »

[This is the fourth post in a seven-part series discussing the characteristics of limited liability companies and comparing them to the characteristics of corporations, general partnerships, and sole proprietorships. Here's the entire list.

Part 1. Background on sole proprietorships.
Part 2. Background on partnerships.
Part 3. Background on corporations.
Part 4. LLCs are distinct legal entities, separate from their owners.
Part 5. A limited liability company's owners are not liable for the LLC's obligations.
Part 6. Options for an LLC's management structure.
Part 7. Options for an LLC's tax treatment.]

To set the background for a discussion of the basics of limited liability companies, we've discussed sole proprietorships, partnerships, and corporations. As we'll see, a limited liability company shares some characteristics with corporations and other characteristics with sole proprietorships (if the LLC has one owner, called a member) or partnerships (if the LLC has more than one member).

The first thing to recognize about a limited liability company is that it is a separate legal entity, apart from its owners. How does that compare to the other structures? First, a sole proprietorship is NOT a separate legal entity apart from its owner. If you're running a business as a sole proprietorship, you really ARE the business, and the business is you.

At the other end of the spectrum, a corporation is a distinct legal entity, completely separate from its shareholders. For example a corporation can sue and be sued in its own name, It can enter into contracts in its own name. And it can go into bankruptcy without dragging its owners with it.

In the middle of the spectrum is a partnership. Without getting into all the details, I'll just say that for some purposes a partnership has the characteristics of a separate legal entity, and for other purposes a partnership is treated more like the aggregate of all the partners.

So in this sense, a limited liability company is just like a corporation. It is a separate legal entity, apart from its members. It can sue and be sued; it can enter into contracts; and it can go into bankruptcy, all apart from its members. And all that is true even if the LLC has only a single member.

Next we'll discuss another way that a limited liability company is like a corporation -- the liability shield.

Continue reading "Just what IS a limited liability company? Part 4. It's a separate legal entity." »

[This is the third post in a seven-part series discussing the characteristics of limited liability companies and comparing them to the characteristics of corporations, general partnerships, and sole proprietorships. Here's the entire list.

Part 1. Background on sole proprietorships.
Part 2. Background on partnerships.
Part 3. Background on corporations.
Part 4. LLCs are distinct legal entities, separate from their owners.
Part 5. A limited liability company's owners are not liable for the LLC's obligations.
Part 6. Options for an LLC's management structure.
Part 7. Options for an LLC's tax treatment.]

Let's get back to our trek toward a discussion of the basics of limited liability companies. The first two types of business structures we've looked at -- sole proprietorships and partnerships -- have two significant features in common. First, the owner or owners are liable for the obligations of the business. Second, the business itself does not pay taxes. Instead, the income and other tax items are "passed through" to the owner or owners, who pay tax on the income. Things change with corporations, the third type of business structure.

Although corporations are not as old as sole proprietorships or partnerships, business organizations with at least some of the characteristics of corporations have been around for centuries. For example, the oldest corporation in North America, Hudson's Bay Company, was incorporated in 1670.

Perhaps the most important feature of a corporation is that the owners of the corporation -- called stockholders or shareholders -- are NOT liable for the obligations of the business. And that's very good news for people who owned stock in Lehman Brothers, which melted down into the largest bankruptcy in American history. Or, going back a little further to previous record holders, people who owned stock in Enron and Worldcom. Even though the people who owned stock in those corporations may have lost everything they invested, they were not liable to the corporations' creditors, and they did not get pulled into the corporate bankruptcies. That protection against shareholders being held liable for the corporation's obligations is sometimes called a liability shield or a corporate veil, and it doesn't exist for sole proprietorships or general partnerships.

Continue reading "Just what IS a limited liability company? Part 3. It's not a corporation." »