Recently in Small Businesses Category

August 19, 2014

Small Businesses Not Included in Proposed Reporting Requirement for Government Contractors

iStock_000041719054Small.jpgThe Department of Labor's Office of Federal Contract Compliance Programs ("OFCCP") has issued a notice of proposed rulemaking that would require certain government contractors to submit an Equal Pay Report to the government as a supplement to the Employer Information Report (EEO-1) that is already required.

If a final rule is adopted as proposed, the Equal Pay Report will require companies to report the number of workers within each EEO-1 job category, the total W-2 wages of all workers in each job category, and the number of hours worked by all workers in each job category, all broken down by race, ethnicity, and sex. Only aggregate information will be reported; no information regarding individual wages will be required. In addition, the reports will not include any information on worker qualifications or experience that might help explain any differences among the groups within a job category.

Small Businesses Excluded

Small businesses -- those with fewer than 100 employees -- are excluded from the new reporting requirements. In addition the new reporting requirements apply only to companies that hold a contract, subcontract, or purchase order with the Federal government that, including modifications, covers a period of more than 30 days and is worth at least $50,000.

Purpose of the New Reporting Requirement

According to the Department of Labor, working women earn only 77% of the wages earned by working men, and the gap is even greater for African American women and Latinas. The new reporting requirement is intended to address that situation in two ways: First, it will provide the Department of Labor with a source of information to facilitate enforcement actions against government contractors who violate equal pay regulations. However, enforcement actions will not be based solely on the reported information. Instead, the agency will use the information in targeting and prioritizing its enforcement actions. Second, the Department of Labor will use the reports to compile and issue summary data to assist government contractors with their own internal compliance programs.

Where the Proposed Rule fits in the Rulemaking Process

The notice of proposed rulemaking, or NPRM, was published in the Federal Register on August 8, 2014. (Generally, the NPRM is the first official step in the creation of an administrative rule or regulation, but sometimes it is preceded by an advance notice of proposed rulemaking, or ANPRM.) This NPRM has a 90-day comment period, which means that Department of Labor will accept written comments from the public until November 6, 2014. The NPRM contains not only the proposed regulatory language that, if adopted, would be placed into the Code of Federal Regulations, it also includes an extensive preamble with an executive summary, a discussion of the background of the proposed rulemaking, a section-by-section discussion of the proposed rule, and an analysis of other factors, including the need for the regulation and the anticipated costs of the proposed rule.

Once the comment period closes, the agency will analyze all the comments submitted by the public and, probably, issue a final rule by publishing it in the Federal Register. The notice of the final rule will include the language of the final regulation as well as a preamble that usually includes a summary of the comments recieved from the public and the agency's response to those comments.

How to Submit Comments

If you would like to submit your own comments on the NPRM for the Equal Pay Report, you may do so by any of the following means:

  • You may submit them online at the Federal rulemaking portal,
  • If your comments consist of six pages or less, you may fax them to (202) 693-1313.
  • You may mail them to Debra A. Carr, Director, Division of Policy and Program Development, Office of Federal Contract Compliance Programs, Room C-3325, 200 Constitution Avenue, N.W., Washington, D.C. 20210.

Note that the comments must be received (not merely postmarked) by November 6, 2014. You may view comments submitted by others here.

Continue reading "Small Businesses Not Included in Proposed Reporting Requirement for Government Contractors" »

June 30, 2014

Partnership Dissolved, but Partner Still Liable

iStock_000023649013Small.jpgLast year the Indiana Court of Appeals decided a case that illustrates some of the hazards of operating a business as a general partnership. The case is Curves for Women of Angola vs. Flying Cat, LLC.

In 2001, a married couple, Dan and Lori, purchased a fitness and health franchise known as Curves for Women that they intended to operate in Angola, Indiana. The franchise agreement, which Dan and Lori both signed, contained the following affirmation:

We the undersigned principals of the corporate or partnership franchisee, do as individuals jointly and severally, with the corporation or partnership and amongst ourselves, accept and agree to all of the provisions, covenants and conditions of this agreement[.]

At no time did Dan and Lori form a corporation or limited liability company to own the franchise - not before signing the franchise agreement and not after.

At about the same time, Dan and Lori leased space in which to operate the business, known as Curves for Women of Angola. The landlord was Flying Cat, LLC. Both Dan and Lori signed the lease, each in the capacity of "Owner." The lease was for a term of three years, with options to renew for additional three-year terms.

After the lease was signed, the business began operation. Lori managed the day-to-day operations, and Dan handled the responsibilities for accounting and equipment maintenance. The profits from the business were treated as joint marital property, available to both Dan and Lori.

In 2004, Dan and Lori exercised the option to renew the lease. As with the original lease, they both signed the renewal agreement.

In 2005, Dan and Lori separated. Over the next two years, they made several attempts to reconcile, but in 2007 Lori filed for divorce.

After she filed for divorce, Lori signed a second lease extension with Flying Cat, LLC. Dan did not sign the renewal agreement. At the time the second lease extension was signed, the business was already behind in its rent, and over the next two to three years, it fell even further behind. In 2010, Flying Cat, LLC sued Curves for Women of Angola, Lori, and Dan, claiming that, as partners, Lori and Dan were both personally liable for the back rent owed by the partnership.

First, the Court of Appeals held that a partnership existed between Dan and Lori. In doing so, the court cited Ind. Code § 23 4 1 7, which provides that, with certain inapplicable exceptions, the receipt by a person of a share of the profits of a business is evidence that a partnership exists. Once a partnership exists, each partner is personally liable for all the obligations and debts of the partnership. In addition, it requires the signature of only one partner to form a contract that binds the partnership and, by extension, binds all the partners.

However, Dan argued that he was not bound by the second lease extension that Lori signed after she filed for divorce, pointing to the fact that her petition clearly indicated her intent to terminate the business relationship with Dan. The Court of Appeals agreed with Dan that the partnership was dissolved when Lori filed her petition, but nonetheless held that Dan was liable for the second lease extension.

The basis for the holding lies in Ind. Code § 23 4 1 35(1)(b), which provides that a partner can bind the partnership after dissolution if the other party to the transaction knew that the partnership existed prior to dissolution and had no knowledge or notice that the partnership had been dissolved. Notice can be provided by publishing a notice of the dissolution in a newspaper of general circulation in the place where the partnership regularly conducted business. The Court of Appeals noted that the landlord knew of the partnership prior to dissolution, that the landlord had no knowledge or notice of the dissolution, and that no notice had been published in the local newspaper. Accordingly, Lori's signature on the second lease extension bound the partnership and, by extension, Dan, even though the partnership was already dissolved.

Because each partner to a general partnership is liable for all the obligations and debts of the business, including obligations and debts incurred by one partner even without the knowledge of the others, it is hard for us to imagine a situation in which we would advise a client to organize a business as a general partnership. Even so, general partnerships exist, and, as this case illustrates, a partner leaving the partnership must take appropriate measures - including publication of a notice of dissolution - to protect himself or herself from incurring further liability.

Continue reading "Partnership Dissolved, but Partner Still Liable" »

June 2, 2014

Family Businesses: Succession planning for LLCs

iStock_000017700348Small.jpgOwners of Indiana LLCs (and their lawyers) can learn some lessons from a recent case involving an Alabama LLC. The case is L.B. Whitfield, III Family LLC v. Virginia Ann Whitfield, et al.

The Whitfield Case

L.B. Whitfield, III owned half of the voting stock in a business that had been in his family for generations. The other half had belonged to L.B.'s brother, who died and left the stock to a trust for the benefit of his son.

L.B. had four children, his son Louie, and three daughters. After his brother's death, L.B. became concerned that the 50/50 voting balance might be disturbed if, after he died, his stock were to be divided among his four children. To prevent that from happening, L.B. created a manager-managed Alabama limited liability company to hold his half of the voting stock. L.B. was the sole member, and he and Louie were the two managers. His will provided that his interest in the LLC would pass to his four children in four equal shares.

After L.B. died, Louie continued as manager, and the four children were treated as members of the LLC, with each of them holding 25% of the interest in the LLC. About 10 years later, a dispute arose between Louie and his sisters, and the dispute escalated into litigation. Ultimately, the litigation was resolved on a theory that was not argued in the original pleadings and apparently did not even occur to the parties' lawyers until several months into the case.

The Alabama Supreme Court noted that L.B. had been the sole member of the LLC and that, after he died, the LLC had no members. His will gave them equal shares of his econimic rights in the LLC (his "interest"), but economic rights in an LLC and membership are two different things. The Court further noted that, under the Alabama LLC statute, a limited liability company that has no members is dissolved and its affairs must be wound up, a process which includes payment of its debt and distribution of its remaining assets to the holders of interest in the LLC (who are not necessarily members). Accordingly, the Court held that the assets of the LLC should be distributed in four equal shares to Louie and his sisters.

Interestingly, the Alabama statute provides a way that L.B.'s heirs could have become members and avoided the dissolution of the LLC, but they had to do it by mutual written agreement within 90 days of L.B.'s death, and there was no such written agreement.

How does it work in Indiana?

If the Whitfield case had involved an Indiana LLC, the results might well have been the same. Unless other provisions (discussed below) have been made to avoid the result, when the single member of an LLC dies, that member will be dissociated (i.e., will cease to be a member, Ind. Code 23-18-6-5(a)(4)), the LLC will have no members, and, as a result, it will be dissolved, at least if the LLC was formed after June 30, 1999, (Ind. Code 23-18-9-1.1(c)). As a result, the member's heirs will not receive an ongoing business; instead, they will receive only the rights to receive distributions from the dissolved LLC after all obligations are satisfied -- which may be far less valuable than the business would have been as an ongoing concern.

Note that there are other scenarios that can create a similar result. Under Ind. Code 23-18-6-4.1(e) (which applies only to LLC's formed after June 30, 1999), a member who assigns her entire interest to another person ceases to be a member. If the person making the assignment is the sole member, the person who receives the interest can become a member under Ind. Code 23-18-6-4.1(b), which provides that the person who receives the interest can become a member "in accordance with the terms of an agreement between the assignor and the assignee." But what if there are no such terms? What if the agreement simply says, "Seller hereby assigns her interest in the LLC to Buyer," but doesn't mention membership? In that case (unless the operating agreement already deals with the situation some other way), the LLC will have no members, and it will be dissolved. In other words, the person who thought he bought an ongoing business may well have bought only the rights to receive distributions from a dissolved LLC.

Now, what if there are multiple members and one of them dies? In that case, the LLC is not dissolved, at least not if it was formed after June 30, 1999, but the member's heirs may not become members. Although they may inherit the deceased member's interest (i.e., rights to receive distributions), they will become members (and therefore have the right to participate in the management of the company), only if the operating agreement makes some other provisons or the other members unanimously consent.

What should you do?

If you own an LLC, or if you own part of an LLC, and these possibilities make you uncomfortable, you need a business succession plan that includes two different components. First, it should include appropriate estate planning tools to make sure that your economic interest in the LLC goes to the people you want to taken care of after your death. For example, you may want to designate a transfer-on-death beneficiary to your interest in the LLC. Second, the LLC should have an operating agreement with appropriate provisions to ensure that your heirs benefit not only from the right to receive distributions from the LLC but also the right to participate in its management, along with other rights of membership. There are different ways to do that; an attorney with experience in business succession planning, particularly with Indiana LLCs, can help you choose the best one for you.

Continue reading "Family Businesses: Succession planning for LLCs" »

April 5, 2014

Indiana Limited Liablity Companies and the Required Formalities

iStock_000034659194Small.jpgA primary reason to organize a business as a corporation or a limited liability company (LLC) is to protect the owners from personal liability for the debts of the business. Sometimes, however, a court may "pierce the corporate veil" of a business to hold the owners of the business personally liable for the company's obligations.

In deciding whether to pierce the corporate veil, Indiana courts examine and weigh several factors, including whether the owners of the business have observed the required formalities for the particular form of organization. One of the reasons we generally favor LLCs for small businesses is that there are fewer required formalities for LLCs than for corporations, which in turn means that there is not only a lower administrative burden associated with LLCs, but also fewer opportunities for business owners to miss something. However, there are a few requirements, discussed below.

1. An Indiana LLC must have written articles of organization, and the articles must be filed with the Indiana Secretary of State .

There's almost no need to mention this one because an LLC does not even exist until its articles of organization are filed with the Secretary of State, but for the sake of being complete . . .

The articles of organization must state:

  • The name of the LLC, which must include "limited liability company," "LLC," or "L.L.C."
  • The name of the LLC's registered agent and the address of its registered office (discussed in more detail below).
  • Either that the LLC will last in perpetuity or the events upon which the LLC will be dissolved.
  • Whether the LLC will be managed by its members or by managers. (Technically, the articles can remain silent on this point, in which case the LLC will be managed by its members, but the Secretary of State's forms call for a statement one way or the other.)

2. An Indiana LLC must have a registered agent and a registered office within the State of Indiana.

The purpose of this requirement is to give people who sue the LLC a way to serve the complaints and summons. The registered office must be located within Indiana, and it must have a street address. A post office box is not sufficient. The registered agent must be an individual, a corporation, an LLC, or a non-profit corporation whose business address is the same as the registered office's address.

The registered office and registered agent must be identified in the articles of incorporation and in the business entity reports (discussed below) filed every other year with the Indiana Secretary of State, but the requirement to have a registered office and registered agent applies all the time, not just when those filings are made. If the LLC's registered agent resigns, the LLC must name a new one and file a notice with the Secretary of State within 60 days.

In addition, LLCs formed after July 1, 2014, are required to file the registered agent's written consent to serve as registered agent or a representation that the registered agent has consented. That new requirement was established by Senate Bill 377, passed by the 2014 General Assembly and signed into law by the governor.

3. An Indiana LLC must keep its registered agent informed of the name, business address, and business telephone number of a natural person who is authorized to receive communications from the registered agent.

This is another new requirement contained in Senate Bill 377. It takes effect on July 1, 2014.

4. An Indiana LLC must maintain certain records at its principal place of business.

The required records are:

• A list of the names and addresses of current and former members and managers of the LCC.
• A copy of the articles of organization and all amendments.
• Copies of the LLC's tax returns and financial statements for the three most recent years (or, if no tax returns or statements were prepared, copies of the information that was or should have been supplied to the members so they could file their tax returns).
• Copies of any written operating agreements and amendments, including those no longer in effect.
• A statement of all capital contributions made by all members.
• A statement of the events upon which members will be required to make additional capital contributions.
• The events, if any, upon which the LLC would be dissolved.
• Any other records required by the operating agreement.

[Note: Ind. Code 23-18-4-8(e) provides that the failure to keep the above records is NOT grounds for imposing personal liability on members for the obligations of the LLC. It's more likely to become an issue in the event of a dispute among the members. Thanks to Josh Hollingsworth of Barnes & Thornburg for reminding me. MS:4/7/2014].

5. An Indiana LLC must file a business entity report with the Secretary of State every two years.

The report is due at the end of the month that contains an even-numbered anniversary of the filing of the articles of organization. Failure to file the report within 60 days of the due date is grounds for administrative dissolution of the LLC.

Continue reading "Indiana Limited Liablity Companies and the Required Formalities" »

March 25, 2014

The Difference Between Tax Status and Legal Form of a Business or Nonprofit

iStock_000005953904Small.jpgI just read a report by the Small Business Administation that includes a wealth of statistics and other information about small businesses in the United States. As useful as the report is, it contains a mistake that, although commonly made, one would not expect from the SBA. The last item in the report asks the question, "What legal form are small businesses?" That's a good question, but the SBA didn't answer it. Instead, it answered another question, "What is the tax status of small business?" Even though the two questions are related, they are nonetheless distinct, and answering the second question does not answer the first.

Legal Form of a Business or Nonprofit

As we've discussed before, businesses are commonly organized according to one of a handful of legal forms: sole proprietorships, general partnerships, corporations, and limited liability companies. There are a few others used less frequently, including limited partnerships, limited liability partnerships, and professional corporations. Tax exempt organizations are commonly organized as nonprofit corporations, but they can also be organized as unincorporated associations, charitable trusts, and sometimes limited liability companies.

The legal form of a business or tax exempt organization is primarily related to two fundamental attributes: who controls the organization, and who is liable for the organization's obligations. For example, if a business is structured as a general partnership, the partners collectively control the business and the partners are individually liable for the obligations of the partnership. In contrast, if a business is structured as a corporation, it is probably controlled by a board of directors, elected by the shareholders and acting through the officers. Unless something goes wrong, neither the shareholders, the directors, nor the officers are liable for the corporaton's obligations.

Tax Categories

Although selecting the legal form of an organization determines the attributes of control and liability, it does not determine how much income tax the organization must pay. There are four common possibilities of tax status for businesses and nonprofit organizations, categorized by the applicable subchapter of Chapter 1 of Subtitle A of Title 26 of the United States Code (also known as the Internal Revenue Code): Subchapter C (the default provisions for corporations), Subchapter S (which is an alternative to Subchapter C that can be elected by small business corporations that meet the eligibility criteria), Subchapter K (for partnerships), and Subchapter F (for tax exempt organizations). Finally, some types of legal forms that have a single owner, such as sole proprietorships, are diregarded for income tax purposes, with their income reported on the owner's income tax return. Those businesses or nonprofit organizations are known as, appropriately enough, "disregarded entities."

Each of these tax categories can apply to more than one type of legal form of organization, and with two exceptions (sole proprietorships and general partnerships), each legal form has more than one possibility for the tax category, as shown in the chart below. Even nonprofit corporations have more than one possibility; while most nonprofit corporations are organized with the intent of qualifying for Subchapter F (exempt organizations), if a nonprofit corporation fails to meet the criteria for tax exemption, it will be subject to taxation under Subchapter C.

Thumbnail image for Legal Form Tax Status Table cropped.jpg

Now you won't make the same mistake that the SBA made.

Continue reading "The Difference Between Tax Status and Legal Form of a Business or Nonprofit" »

February 20, 2014

New Reporting Requirement for Businesses and Nonprofits -- Change in responsible party

Reports.jpgThe Internal Revenue Service's application for an employer identification number (or EIN) requires the applicant to submit the name and tax identification number (usually a social security number) of the applicant's "responsible party." That is true whether the application, Form SS-4, is submitted on paper or online, and it is true for any type of organization applying for an EIN, including corporations, limited liability companies, partnerships, trusts, and tax exempt organizations. That is the last time most organizations ever think about the "responsible party." Until now.

On May 6, 2013, the Internal Revenue Service published a final rule that requires any business, nonprofit organization, trust, or other entity with an EIN to report any change in the entity's responsible party. Here are the answers to some questions that essentially every business and tax exempt organization should know.

Who is a "responsible party"?

The answer differs a bit for various types of organizations. For companies with shares traded on a public exchange or securities registered with the U.S. Securities Exchange Commission, the responsible party is defined fairly unambiguously:

For corporations, the responsible party is the principal officer. For partnerships, the responsible party is a general partner. For trusts, the responsible part is the trustee, grantor, or owner. For disregarded entities, the responsible party is the owner.

For other entities, the definition is more ambiguous:

The responsible party is "the person who has a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the entity and the disposition of its funds and assets."

For business corporations, the responsible party may be the president or chairman of the board; for LLCs, a member; for partnerships (including limited partnerships, such as family limited partnerships), a general partner.

The issue of identifying a responsible party for a nonprofit organization may be particularly problematic because, in many organizations, no single person who has the authority to control, manage, or direct the organization and -- in particular -- to control the disposition of its funds and assets. In fact, we often tell the boards of directors of our nonprofit clients that, collectively, they have full authority to control the organization but, individually, they have no authority at all. Even so, the IRS requires the designation of a responsible party, and the organization must decide who best fits the definition. For some organizations, that may be the executive director or CEO; for others, it may be the president or chairman of the board.

Our LLC has three members, all with the same rights and authority. Who is the responsible party?

If more than one person qualifies as a responsible party, the entity must select one of them by whatever criteria the entity chooses.

When and how must changes be reported?

As of January 1, 2014, any change in an entity's responsible party must be reported on IRS Form 8822-B within 60 days after the change takes effect. Changes made prior to January 1, 2014 must be reported before March 1, 2014.

Our organization obtained an EIN years ago, and we have no idea who was listed as the responsible party. But Form 8822-B requires us to list not only the new responsible party, but also the old one. What do we do with that?

The best course is probably to submit Form 8822-B without the information about the old responsible party and attach a statement explaining what you have done to locate the information and why it is unavailable despite those efforts. [Revised February 21, 2014, to include the idea of attaching a statement -- a suggestion from James W. Foltz, Attorney at Law, of Indianapolis, Indiana.]

Our nonprofit has filed Form 990 (or 990-EZ or 990-N) every year, and we always have to list the organization's principal officer. Isn't that good enough?

From what we know at the moment, probably not. Even if the responsible party and the principal officer are the same person, Form 8822-B calls for the responsible party's social security number, but Form 990 does not. The same thing is true for the tax matters partner identified on Form 1065 filed by partnerships and by LLCs taxed as partnerships.

I called the IRS and tried to get some more specific information about the new reporting requirement, and the person I spoke with had never heard of this new requirement. Are you sure about it?

We had the same experience, but, yes, we're sure. We hope the IRS will issue guidance that clarifies some of the details, but we're sure the rule is in effect.

What happens if we do not file Form 8822-B or file it late?

That's the good news. As far as we can tell, there is no penalty for failing to file or for filing late. Even so, everyone with an EIN, including small businesses and tax exempt organizations, should comply with the rule using the best understanding of the requirement and the best information available.

Continue reading "New Reporting Requirement for Businesses and Nonprofits -- Change in responsible party" »

February 11, 2014

The 2014 IRS Mileage Rates

Odometer.jpgIf you use a vehicle for business, medical, or moving purposes, or in providing volunteer services to a charitable organization, you may be able to deduct at least a portion of the cost on your income tax return. There are two alternatives for calculating the amount of the deduction, but the simplest is to keep track of the number of miles driven and multiply by the appropriate standard IRS mileage rate.

The standard mileage rates are based on an annual study of the costs of operating a motor vehicle, conducted by the IRS and an independent contractor. The information used in deriving the standard rate for business purposes include both fixed and variable automobile costs, such as insurance, fuel, maintenance, and repair costs. Only variable costs are considered in calculating the standard rate for medical and moving purposes. The charitable rate is fixed by statute.

What are the rates?

On December 6, 2013, the IRS announced the standard mileage rates for 2014. The rates as of January 1, 2014, are:

• 56 cents/mile for business miles driven for business purposes
• 23.5 cents/mile for miles driven for a medical purpose or a moving purpose
• 14 cents/mile for miles driven as a volunteer to a charitable organization.

These rates apply to the use of automobiles, including includes cars, vans, pickups, and panel trucks. With fuel prices generally decreasing, the standard rates miles driven in 2014 for business, medical, and moving expenses are one-half cent below the rates for miles driven in 2013. The charitable rate is the same in 2014 as it was in 2013.

What counts as "Business" miles?

While commuting to and from work does not count toward business mileage, there are many trips that may be characterized as business trips for purposes of calculating mileage, including driving to meet a client, driving to a bank to making a business transaction, driving to pick up mail from the post office, and driving to a supply store to make purchases for your business.

Of course it is easy to forget to keep track of your miles driven, but if you are disciplined about it, the savings can add up. For example, if you are in the 28% tax bracket, the deduction for 100 business miles may reduce your federal income tax by about $15.00.

Other considerations:

As mentioned above, the use of standard mileage rates is not the only alternative for calculating the deduction for the use of a vehicle. Taxpayers may instead calculate the actual costs of using their vehicle, including costs of gas, oil, registration fees, repairs, tires, and insurance. However, calculating the actual costs of using a vehicle for taxation purposes of often takes more time and effort. Broadly speaking, the more economical the vehicle is, the more likely that the standard mileage rate will give you a better deduction. Conversely, if the operating costs of a vehicle are high, the more likely the actual cost method will give you a better deduction.

If a taxpayer uses the depreciation method under the Modified Accelerated Cost Recovery System (MACRS), or claims a Section 179 deduction for a vehicle, she may not use the mileage rates. Additionally, the standard rate for business purposes cannot be used for more than four vehicles simultaneously.

July 30, 2013

Positive Change in Indiana LLC Laws - Part Two: Even More Flexibility in Management Structure

100_3698.JPGEarlier this year the General Assembly passed HEA 1394 which made several changes to the Indiana Business Flexibility Act, the statute that governs limited liability companies. We have already looked at some changes to the Act that enhance the use of Indiana LLCs for estate planning purposes. This article discusses new alternatives for LLC management structure.

The Indiana Business Flexibility Act already provided for a great deal of flexibility for management structure. One of the key steps in designing the management structure of a limited liability company is to establish who has the apparent authority to bind the company, for example by signing contracts on behalf of the LLC. Prior to the changes there were essentially two choices. In a member-managed LLC, the members have that authority. In a manager-managed LLC, the members appoint managers (who may or may not also be members) who have that authority.

HEA 1394 provides a third choice -- officers, who may or may not be members. At first blush, there may seem to be little difference between officers and managers because, like the managers in a manager-managed LLC, officers have the apparent authority to bind the LLC to third party agreements. But there is at least one important difference: In a manager-managed LLC, only the managers, and not the members, have the apparent authority to bind the company. The new revisions allow the members of an LLC to establish officers who have the apparent authority to bind the company, while also retaining that authority themselves. In fact, a manager-managed LLC can also have officers. In that case, both the managers and the officers, but not the members, have apparent authority to bind the LLC.

HEA 1394 includes other changes to the statute that enhance the alternatives for LLC governance. For example, the Act now permits the operating agreement to make certain significant decisions, including mergers, dissolutions, and amendments to the operating agreement, subject to the approval of a third party who need not be a member.

One context in which such provisions may prove useful is in estate planning. Imagine the founder of a business, held by a limited liability company, with multiple heirs, who wants the business to remain in the family. Although the operating agreement may create significant restrictions on transfers of membership interests and admission of new members, the heirs could later agree to amend the operating agreement to remove those restrictions. The Act now allows the operating agreement to name a trusted outside party who must approve any amendments to the operating agreement, thus increasing the likelihood that the founder's desires will be honored.

Continue reading "Positive Change in Indiana LLC Laws - Part Two: Even More Flexibility in Management Structure" »

March 17, 2013

Indiana Smoking Ban


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" »

February 8, 2013

Proposed Changes to Indiana LLC Statute Part 2: Charging Order Protection

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" »

January 29, 2013

Proposed Changes to Indiana LLC Statute

100_3698.JPGStatutes 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:

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" »

January 28, 2013

Letter About Annual Minutes is a Scam -- but Notice About Business Entity Reports is Not!

iStock_000011065644XSmall.jpgThe 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!" »

November 23, 2012

Hiring soon? Consider an Unemployed Veteran!


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!" »

November 21, 2012

IRS Standard Mileage Rates Will Increase in 2013

Thumbnail image for iStock_000017793053Small.jpg

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" »

May 23, 2012

Happy "National Small Business Week!"


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!"" »