iStock_000007398822XSmall-200x300This begins an occasional series of posts on basics of business contracts, principles that apply broadly to most types of business and commercial contracts, regardless of the subject — merger agreements, stock purchase agreements, asset purchase agreements, construction contracts, professional service contracts, generic independent contractor agreements, advertising agency agreements, software and other intellectual property licenses, publishing contracts, equipment leases, office and retail property leases, procurement contracts (both master agreements and single-purchase agreements), employment contracts, and others. Although there can be a subtle legal distinction between a “contract” and an “agreement,” I will use terms interchangeably.

Let’s start at the beginning, with the preamble clause, the first paragraph that appears after the title of most business and commercial contract. There is no universally recognized name for that part of a contract, but preamble is a good descriptive name. Here’s an example:

This Consulting Agreement (“Agreement”), dated March 22, 2018, is between John J. Doe, an individual with a place of business located at 11650 Lantern Road, Fishers, IN  46038 (dba J.J. Doe Consulting) (“Consultant”) and Jane Roe & Associates, LLC, an Indiana limited liability company (“Client”).

iStock-621263016-300x97We 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:

marshall

Thomas R. Marshall
Governor of Indiana, 1909-1913
Vice President of the United States, 1913-1921

“In that remote and despotic period, when the sovereign king chartered rights and liberties to his subjects – the people – all governmental powers were assumed to be his by divine right. In him were combined the legislative, executive and judicial powers of government. He was the lawgiver, interpreter and enforcer. When the powers were executed by agents, the agents were his, and responsible to him alone. On this continent we came to the time when the people, by revolution, took to themselves sovereignty, and in exercising supreme political power chartered governments by written constitutions. These organic instruments declared and guaranteed the rights and liberties of the individual, which had come to the people through centuries of struggle against absolutism in government. The majority was to rule, but under restraints and limitations which preserved to the minority its rights. ‘By the constitution which they establish, they not only tie up the hands of their official agencies, but their own hands as well; and neither the officers of the State, nor the whole people as an aggregate body, are at liberty to take action in opposition to this fundamental law.’ Cooley, Const. Lim. (7th ed.) 56.”

Ellingham v. Dye, 178 Ind. 336, 342; 99 N.E. 1, 3 (1912).

iStock-621263016-300x97[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.

iStock-621263016-300x97[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.

iStock-621263016-300x97[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.

iStock-621263016-300x97[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:

iStock-185255574-1-300x200Part 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.

iStock-185255574-1-300x200Compared 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

iStock-623124952-200x300If you’re not aware that Congress is working on a major revision to federal tax law, you’ve not been paying much attention to the news.  The House of Representatives passed its version of the Tax Cuts and Jobs Act, then the Senate passed a similar, but not identical, bill.  The bill went to conference committee to work out the differences between the House and Senate versions of the bill, and last week the conference committee issued its report. It currently appears that the conference committee’s recommendations will be approved and become law.

If you have the patience and desire to read the committee report, I suggest you skip to the Joint Explanatory Statement of the Committee of Conference that begins page 191 of the report (which is page 205 of the PDF file) .  The pages preceding that set forth language to be inserted into the Senate version of the bill, but not the full text of the final bill.  On the other hand, you’re looking for a more concise summary of some of the changes that will affect individuals and small businesses, I refer you to a side-by-side comparison of the current law and the law as it is expected to pass, written by Paul Bogdanoff of Bogdanoff Dages & Co. PC, a CPA and my friend of many years.

While the new law does not take effect until the 2018 tax year, some of its provisions may affect decisions you make in 2017.  For example, the increase in the standard deduction (from $6,350 to $1200 for a single person, and from $12,700 to $24,000 for a married couple filing jointly) means that many people who are accustomed to itemizing deductions will no longer do so.  As a result, those people will no longer receive a tax benefit from charitable contributions or other itemized deductions.  Individuals in that category may want to accelerate charitable contributions and other deductible expenditures that are planned for 2018 by making them before the end  of 2017.