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Articles Posted in Limited Liability Companies

The limited liability company is a relatively new form of business entity, with most state statutes adopted in the 1990s. In just a few years, they overtook the corporation as the most common structure for new businesses.  A reason for the LLC’s popularity is that the it combines some of the most desirable aspects of corporations with some of the most desirable aspects of partnerships, but that blending of characteristics can also be a source of confusion.  For example, LLCs work much like partnerships when it comes to ownership rights, but people often incorrectly assume ownership that LLC interest is analogous to corporate stock and that LLC membership is analogous to being a corporate shareholder.

The owners of corporations are called shareholders and their ownership rights are embodied in shares of stock, a form of intangible personal property comprising a bundle of rights, some economic and some non-economic.  The principal economic right is the right to receive dividends (usually cash) from the corporation, and the principal non-economic right is the right to vote in an election of directors and other matters that may be submitted to a vote of the shareholders. Although there can be restrictions (typically set out in the company’s articles of incorporation or bylaws, or a contract among shareholders or between a shareholder and the corporation), stock is generally transferable from one person to another. A person who acquires stock (thus becoming a shareholder) receives both sets of rights, economic (dividends) and non-economic (voting). It makes no difference how the person acquires the stock –by purchase, by gift, by inheritance, as compensation to an employee, or by court order (in a divorce or otherwise); a person who owns stock holds both economic and non-economic rights.

Limited liability companies also have economic and non-economic rights.  The principal economic right is the right to receive distributions (usually cash) from the company, and the principal non-economic right is the right to participate in the management of the company’s business and affairs. A crucial distinction between LLCs and corporations is that the economic and non-economic rights associated with LLCs are not bundled together in a single package the way those rights in a corporation are bundled together in stock.

Suppose you sue a corporation or a limited liability company and win, but the defendant has no money to pay your award and no other assets you can execute against. Is that a factor that justifies piercing the veil to make the owners of the company pay your award?  The Indiana Court of Appeals answered that question, and a couple of others related to veil piercing, in Country Contractors, Inc. v. A Westside Storage of Indianapolis, Inc.

Country Contractors was incorporated in 1983 as a seller of ready-mix concrete under the name Country Concrete, Inc.  In the 1990’s the company expanded its business to include construction work and excavation. Over the years, Country Contractors owned a substantial amount of assets in the form of construction equipment that it leased to other contractors.  In 2007 the corporation changed its name to Country Contractors, Inc. and amended its articles of incorporation to better reflect its expanded line of business.  Its two shareholders served as the board of directors, but three other people were responsible for running the company from day to day — preparing bids, executing contracts, and supervising the work.

In 2007, Westside engaged Country Contractors to perform excavation and construction services for the price of $235,000.  Country Contractors subcontracted much of the work, which began in 2008.  The two owners were not involved in the negotiation or execution of the contract, nor did they supervise the work.

We previously discussed the Business Entity Harmonization Bill (Senate Enrolled Act 443 or P.L. 118-2017) passed last year by the General Assembly in the following posts:

[March 3, 2018. The General Assembly amended some of the provisions created the Business Entity Harmonization Bill, as discussed in a Postscript to this series.]

This is the last in four-part series. The first three parts are here: here, here, and here.

This Part IV describes some flaws of Senate Enrolled Act 443 that we ran across while writing the first three parts.  We hope the General Assembly will address them, either in the 2018 session or another.

[March 3, 2018. The General Assembly amended some of the provisions created the Business Entity Harmonization Bill, as discussed in a Postscript to this series.]

This is the third of a four-part series discussing the Business Entity Harmonization Bill passed by the Indiana General Assembly in 2017. The first two parts are here and here.

Senate Enrolled Act 443 creates, effective as of January 1, 2018, a new Article 0.6, the Uniform Business Organization Transactions Code, in Title 23 of the Indiana Code. In previous versions of the statute, provisions dealing with mergers, conversions, and domestications of business corporations, limited liability companies (LLCs), limited partnerships (LPs), limited liability partnerships (LLPs), and nonprofit corporations were scattered across several articles of Title 23. The Uniform Business Organization Transactions Code gathers most of them into one article that, in general, applies at least as broadly as each corresponding provision of the former statute, and in some cases more broadly. In addition, the new article provides for the acquisition of ownership interest (i.e., stock in a corporation or interest in a partnership or LLC) by another entity.

[March 3, 2018. The General Assembly amended some of the provisions created the Business Entity Harmonization Bill, as discussed in a Postscript to this series.]

This is the second of a four-part series discussing the Business Entity Harmonization Bill passed by the Indiana General Assembly in 2017. An overview of the bill is provided in Part I.

Senate Enrolled Act 443 creates, effective as of January 1, 2018, a new Article 0.5 in Title 23 of the Indiana Code, the Uniform Business Organizations Code, that includes a number of provisions that apply to Indiana business corporations (including professional corporations and benefit corporations, but excluding insurance companies), limited liability companies (LLCs, including series LLCs), limited partnerships (LPs), limited liability partnerships (LLPs), and nonprofit corporations, eliminating a number of inconsistencies between similar provisions for different types of entities. The following discussion is a brief description of some of the more important provisions, drawing attention to new or substantially changed provisions.

[March 3, 2018. The General Assembly amended some of the provisions created the Business Entity Harmonization Bill, as discussed in a Postscript to this series.]

Indiana law provides for several types of business and nonprofit entities, each of which is governed by one or more articles of Title 23 of the Indiana Code, all of which require similar filings with the Indiana Secretary of State, and all of which are capable of undergoing transactions such as mergers and conversions into other types of entities. The types of entities and the governing portions of Title 23 are:

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

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

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

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

Statutory Formalities

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

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

Rub a dub dub,

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