Indiana Business Law Blog

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 last of a seven-part series of posts 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.]

In prior posts, I've discussed several characteristics of LLCs. First, like corporations, LLCs are entities separate from their owners. Second, also like corporations, the owners are not liable for the obliigations of the LLC. Third, they offer choices of management structures: They can be managed directly by the owners, like sole proprietorships and many partnerships, or they can be managed by others who are selected by the owners, in much the same way that shareholders of a corporation elect directors to run the business. This last post of the series looks at the tax characteristics of LLCs.

Interestingly, LLCs do not have a specific category in the Internal Revenue Code or the Tax Regulations. Instead, their tax treatment is governed by the so-called "check-the-box regulation." It provides that the LLC may elect to be treated in one of several ways, and the choices depend on whether the LLC has one member or more than one member.

The default status for a single-member LLC is that it is a "disregarded entity" in that all the income and expenses go directly on the member's personal tax return, just like a sole proprietorship. The LLC itself doesn't even have to file a tax return. The default status for a multi-member LLC is to be taxed as if it were a partnership. Alternatively, either a single-member LLC or a multi-member LLC can elect to be taxed as if it were a corporation, either as a Subchapter C corporation or, if the LLC meets certain criteria, as a Subchapter S corporation. To decide which is the best tax strategy for your LLC, you should consult both your lawyer and your accountant.

Continue reading "Just what IS a limited liability company? Part 7. It's a bundle of tax choices." »

[This is the sixth 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.]

Previous posts discussed the management structures of the three classic business entities that we're using as a framework for discussing limited liability companies and, in particular, exactly who is responsible for running the business day-to-day.

Sole Proprietorships. Remember Drucker's General Store, the example I used to illustrate sole proprietorships? Sam Drucker ran his own store on a day-to-day basis. In fact, I'm not sure Sam even had any employees. That's the prototypical management structure for a sole proprietorship -- the proprietor himself or herself runs the business on a day-to-day basis.

Corporations. Once again, corporations are at the opposite end of the spectrum from sole proprietorships. As discussed earlier,the owners of a corporation (i.e., the shareholders), have no role in the day-to-day operation of the business. Instead, their role is limited to electing a board of directors who, in turn, usually delegate responsibility to officers and employees of the company. Of course, in a closely held company, it's very common for the owners, acting as shareholders, to elect themselves as directors and then to appoint themselves as officers.

General Partnerships. The management structure of general partnerships varies a bit more, but usually the day to day affairs are managed by the partners themselves -- by all of the partners, or by a management committee composed of partners, or by a single managing partner.

Limited Liability Companies. Fundamentally, there are two different ways limited liability companies can be managed -- by the members themselves or by one or more managers, who are appointed by the members. In other words, a limited liability company has the flexibility to be managed like a sole proprietorship and many partnerships are managed -- by the owners of the business themselves. However, it's also possible for the owners to be relatively far removed from the day-to-day operation of the company, with a role largely restricted to appointing one or more managers to operate the LLC. Note, however, that the members of a manager-managed LLC are free to name one or more of their own as manager(s).

Even a single-member LLC has the same choices of management by the members or management by managers. A few days ago, in explaining why a single-member LLC needs an operating agreement, I touched on some of the reasons that the sole owner of a limited liability company might choose to make their LLC manager-managed.

So one of the advantages of a limited liability company is that it offers choices for management structure. Next we'll see that a limited liability company offers choices for tax treatment as well.

Continue reading "Just what IS a limited liability company? Part 6. It offers choices of management structure." »

Under current Indiana law, you can easily start up a limited liability company (LLC) with a credit card and an internet connection. After making a quick trip to the Indiana Secretary of State's website, submitting articles of organization, and paying a fee you could have your very own LLC in about fifteen minutes. But what about creating an operating agreement for your LLC? Nothing about that process requires -- or even mentions -- an operating agreement. Strictly speaking, it's not legally required, and if the LLC has only one member, an operating agreement may even seem pointless. Nonetheless, I advise all my clients with LLCs -- even single-member LLCs -- to have operating agreements.

The reason the Indiana Business Flexibility Act does not require an operating agreement is that it contains default rules that govern the LLC if there is no operating agreement (or if there is an operating agreement but it doesn't address every issue). However, those default rules may or may not be what you want. Having an operating agreement created specifically for the needs and goals of your single-member LLC can help sort out which aspects of the Indiana Business Flexibility Act will apply to your LLC and which will be overridden.

A particular reason that I think single-member LLCs should have an operating agreement flows from the fact that I think most single-member LLCs (at least those owned by individuals rather than by another business entity) should be manager-managed rather than member-managed. Imagine you are the sole member of your own LLC, and it is member-managed. That means that you, and only you, have the authority to take actions on behalf of the LLC. Now imagine that you are in a serious accident and unable to manage your business for an extended period of time. There is no one who can step into your shoes and run the business in your absence.

However, imagine that you set the business up as a manager-managed LLC. You can name yourself as the manager and some other trusted person, such as your spouse, as the assistant manager who has the authority to step in and run the LLC if you are not able to. To do that, you'll need an operating agreement that describes the authority of the other person to run the business when you can't.

It's also likely that third parties, such as banks and the IRS, will want to know various details about how the LLC is organized. An operating agreement includes information like who has the authority to sign contracts for the LLC, the LLC's tax status, and other legally meaningful information. Being able to hand a third party a single document that clearly lays out all of the legally significant details about the LLC can save a lot of time and confusion for the member and the entities the LLC does business with.

Continue reading "Why should a single-member LLC have an operating agreement?" »

[This is the fifth 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.]

The last entry in this series explained that a limited liability company has its own legal identity, separate from its members. A related concept is that a limited liability company has a liability shield, sometimes called a corporate veil, between itself and its members. That means that the members of a limited liability company are not liable for the debts or obligations of the LLC itself, just as the shareholders of a corporation are not liable for the debts or obligations of the corporation itself.

To see how that works, let's imagine that you and two of your good friends, Jack and Jill, decide to buy a bicycle shop. You consult an attorney, and he recommends that you create a limited liability company to buy the shop. He writes an operating agreement for you, which all three of you sign, files articles of organization in the Indiana Secretary of State's office, and takes care of other details such as obtaining an Employer Identification Number . At that point you are the proud owners of a limited liability company Three Good Friends, LLC . (By the way, there is no such LLC in Indiana. I know that because I ran a search on the Secretary of State's website.) The purpose of the LLC is to buy and run a bicycle shop. To raise the money, you and Jill each drain your savings accounts, and Jack mortgages his house to the hilt. All three of you put the money (called your initial capital contributions) into the LLC, and with that money the LLC buys a bicycle shop, which you rename as Three Good Friends Bicycle Emporium. The LLC's lawyer files a certificate of assumed business name showing that Three Good Friends, LLC is now doing business as Three Good Friends Bicycle Emporium.

While you're working in the shop one afternoon, a delivery truck arrives. A LARGE delivery truck. The driver comes in and asks where you'd like to put the 700 bicycles you ordered. (I don't know if a single truck can actually hold 700 bicycles, but cut me some slack and go with me on this.) You tell him there must be some mistake because you ordered only 7 bicycles. After a frantic search through your computer files, you realize that a mistake was indeed made -- and that you're the one who made it. You really did order 700 bicycles. And they're expensive bicycles. VERY expensive. You make a few phone calls and find out that the bicycles cannot be returned and that the shop will have to pay for them. You also know that there's not nearly enough money in the LLC's bank account to pay for the bicycles.

You tell Jack and Jill what happened, expecting them to be furious -- and Jack is. As Jack often does, he imagines the worst. He says that the bicycle manufacturer is going to sue not only the shop but all three of you. He worries that not only will the three of you lose the business, but that he'll lose his house, which he mortgaged to the hilt to come up with the money for the business. Jill, being her characteristically calm self, tells Jack not to worry. The reason that they set up a limited liability company was so that none of the three good friends can be held liable for the debts of Three Good Friends Bicycle Emporium. She tells Jack that even if the LLC goes bankrupt, his house is safe from the bicycle manufacturer. Is Jill right?

Continue reading "Just what IS a limited liability company? Part 5. It has a liability shield." »

[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." »

In the next few days, I'll get back to the discussion of the basics of limited liability companies, but first I want to mention a bill that has been introduced in the Indiana General Assembly that takes on an advanced, cutting-edge topic: the low-profit, limited liability company or "L3C." The bill is Senate Bill 501, authored by Sen. Brandt Hershman (R-Lafayette).

The L3C is a new variation on a limited liability company. The primary purpose of the L3C is to pursue a charitable mission, with the generation of a profit being a secondary purpose. The L3C is not, itself, a tax exempt organization. Instead, it is intended to be a vehicle that can attract both private capital and philanthropic investments to address issues such as low income housing.

Why? Primarily because the L3C is designed to be eligible for program related investments from private foundations. A program related investment is an alternative to a traditional philanthropic grant. An example of the use of program related investments in Indiana is the support of charter schools by the Annie E. Casey Foundation.

You can read more about L3C's from Americans for Community Development.

Continue reading "Indiana General Assembly Report: L3C Bill Introduced" »

[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." »

[This is the second 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.]

In the last entry, I began a discussion of the basics of limited liability companies. To start that discussion, I began by describing the first of three other types of business structures: sole proprietorships. This entry is about partnerships, and the next will describe corporations.

In a sense, a general partnership is like a sole proprietorship, but with multiple proprietors. Each partner is liable for all of the obligations of the partnership. In other words, a creditor of the partnership can sue any or all of the partners to collect what the partnership owes. Income taxes are also similar, but things get a little more complicated with multiple owners.

For tax purposes, a general partnership is a "pass-through entity." Unlike a sole proprietorship, a partnership has to file a tax return, called Form 1065. However, the partnership itself does not have to pay taxes. Form 1065 is used to calculate the partnership's profits or losses and other "tax items," which are allocated to the partners, most often in proportion to their ownership interests. In other words, the tax items are "passed through" to the partners, and each partner receives a report from the partnership called a Schedule K-1 that tells the partner how much income, etc. to report on his or her own personal tax return. Then the partner pays income tax as an individual.

One more point worth noting about taxes. If the partner is actively involved in the operation of the partnership -- in essence, if the partner is "employed" by the partnership -- he or she is considered to be self-employed and must pay self-employment tax on his or her share of the partnership's income. Again, being a partner is very much like being a sole proprietor, except for the "sole" part.

The general partnership is an old form of business association. For instance, in Dickens's A Christmas Carol, Ebenezer Scrooge and Jacob Marley were partners. "The firm was known as Scrooge and Marley. Sometimes people new to the business called Scrooge Scrooge, and sometimes Marley, but he answered to both names. It was all the same to him." Id. at p. 3. Of course, I'm not holding out Scrooge and Marley as a typical partnership or as a model of customer service. The example came to mind only because last month our family attended the Indiana Repertory Theater's annual production of A Christmas Carol, and I've always liked that line.

In the next entry, I'll describe corporations, and then (finally!) get around to discussing limited liability companies.

Continue reading "Just what IS a limited liability company? Part 2. It's not a partnership." »

[This begins a seven-part series of posts 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.]

Limited liability companies or LLCs, particularly Indiana limited liability companies, will be a frequent topic of posts on this blog. To set the stage, I'd like to start with the most basic question: Exactly what IS a limited liability company? It will take me a few posts to go over the basics, but then I'll move on to more sophisticated topics.

Way back, a long time ago, when I was in school (probably high school, but I'm not sure), I was taught that there are three types of business structures: sole proprietorships, partnerships, and corporations. Even then, that was a bit simplistic because there were other types of businesses, but that covered most of the waterfront. Today, it doesn't come close because the most popular form for new small businesses is a limited liability company. However, the easiest way to understand what a limited liability company IS is to understand first what it is NOT. So let's start with sole proprietorships.

As I learned way back then, a sole proprietorship is the classic one-person business in which the owner and the business are one and the same, even if the business is operated under some other name. I always thought of Drucker's General Store on the television shows Petticoat Junction and Green Acres. (I told you it was a long time ago!) Most likely, Drucker's General Store was a sole proprietorship. Sam Drucker and his store were one and the same. In other words, anything the store owned, Sam owned. On the flip side, anything the the store OWED, Sam owed.

For example, if someone slipped and fell on a pickle from Sam's pickle barrel (I don't remember if Sam had a pickle barrel, but he MUST have had one!) and successfully sued the store, the plaintiff could take money not only from the store's cash register and bank account, but also from Sam's bank account - and maybe even his house. That's a disadvantage of a sole proprietorship. An advantage is that (unlike corporations, as well discuss later), the business itself does not have to pay income taxes. The income from the business goes straight to the owners Form 1040, on Schedule C to be specific, and the owner pays the taxes.

So a limited liability company is not a sole proprietorship. Next we'll discuss partnerships, another type of business structure that differs from an LLC.

Continue reading "Just what IS a limited liability company? Part 1. It's not a sole proprietorship." »

A bill has been introduced in the Indiana General Assembly to replace the Indiana Business Flexibility Act, Indiana's statute that governs limited liability companies (LLCs), with the Revised Uniform Limited Liability Company Act (RULLCA). Senate Bill 180 was introduced by Senator Vi Simpson (D-Ellettsville) on January 5. A similar bill may be introduced in the House by Representative Ralph Foley (R-Martinsvlle).

At the moment, it's not clear (at least to me) whether adopting the RULLCA in Indiana would be a good thing or a bad thing. Although uniformity among state laws can be beneficial, in our experience the Indiana Business Flexibility Act works very well. I understand that the Indiana Business Law Survey Commission, a group of experts who advise the General Assembly on business and commercial topics, already planned to review the LLC statute later this year. I think the best course of action would be for the General Assembly to give the Commission time to study the question and to determine the effect on Indiana businesses before making significant changes to the Indiana LLC statute.

About the RULLCA.

The RULLCA is one of the many "uniform laws" that are written and published by the National Conference of Commissioners on Uniform State Laws (NCCUSL). The name uniform "law" is a bit misleading because uniform laws are not really laws at all, and the NCCUSL has no legal authority to create laws. The NCCUSL is a nonprofit, unincorporated organization, and the uniform laws are a set of model statutes that are intended to promote uniformity among state laws, but they have no legal effect until they are adopted by state legislatures, one by one. In 1995, the NCCUSL adopted the Uniform Limited Liability Company Act, but it was not well received, and it was adopted by only a few states. In 2006, the NCCUSL adopted a new version, the RULLCA. In the meantime, the states have gone their own ways, with each having some sort of LLC statute. The statutes are all similar fundamentally, but they vary significantly in the details. A few states have adopted the RULLCA, but it is not yet clear how many will ultimately do so.

Continue reading "Indiana General Assembly Report: Proposed Changes to Limited Liability Company Statute" »