iStock-621263016-300x97[This series started out to have three parts.  Then we decided to extend it to five.  Now we have cut it back to four. 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.

Relationship to ESIGN

iStock-621263016-300x97[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.

Conversions, mergers, and domestications effect changes in organization that could be accomplished by other means, but with different tax or legal consequences. For example, instead of converting to a limited liability company, a corporation could form a new LLC, transfer all its assets to the LLC, and dissolve, distributing the interest in the LLC to its shareholders. However, that process will have tax consequences that can often be avoided by conversion. In addition, all the corporation’s contracts will need to be assigned to the LLC, and those assignments may require the consent of the other parties to the contracts. In most cases, consent of the other party to a contract is not required for a conversion because a conversion preserves continuity of identity. Even though the converted entity has a different name and will be governed by different laws, it is treated as if it is the same entity that existed prior to conversion. The same is true for domestication and mergers, at least with respect to the entity surviving a merger.

iStock-621263016-300x97[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.

Chapter 2, Filing

iStock-621263016-300x97Indiana 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.

iStock-91632872-244x300Although the tax reform bill just passed by the U.S. House of Representatives retains the income tax deduction for individuals who make contributions to charitable organizations (i.e., organizations that are tax exempt under Section 501(c)(3) of the Internal Revenue Code), it may nonetheless have significant effects on the amount of charitable giving by Americans. The reason lies in the increase in the standard tax deduction for individuals and the elimination of other deductions.

Increasing the Standard Deduction

The tax code provides several types of deductions that reduce the amount of tax owed by individual taxpayers, including deductions for home mortgage interest and contributions to charitable organizations. However, the tax code also provides a minimum “standard deduction” for taxpayers who have less than that amount in itemized deductions. Taxpayers who itemize deductions receive a tax benefit by making a charitable contribution, but not those who take the standard deduction. For example, the after-tax cost of a $100 contribution by most itemizing taxpayers in the 25% tax bracket is only $75. For taxpayers who take the standard deduction, the cost of a $100 contribution is $100 in both before- and after-tax dollars.

2017-06-08-18.40.11-169x300.jpgThis post has nothing to do with business law. Instead, it deals with one of my extracurricular interests, plants native to Indiana.  Specifically, it’s about serviceberries, of which there are several species in the genus Amelanchier.  Serviceberries have been at their peak this last week in central Indiana, as much as two weeks behind those in southern Indiana, and I suspect those in northern Indiana probably trail by as much as another couple of weeks.

Most species of serviceberries grow on small, usually multi-stemmed, trees.  At least one species or another is native to most of the United States and Canada, but they go by several different common names in different regions. In some parts of the U.S., they’re called Juneberries.  In Canada, Saskatoon berries. The old-fashioned southern name that I learned from my grandparents in Tennessee is sarvis berry. Other names for the trees are shadbush, shadblow, and shadwood.  Many of the species are very similar and difficult to distinguish, with identification complicated by the fact that many sold in nurseries are hybrids.  We have four trees in our yard that we bought from a nursery several years ago, and I don’t know what species they are.

Serviceberry trees have become popular for landscaping in the last 20 years or so.  They’re often seen lining sidewalks and outside shopping malls, and they’re good choices for residential landscaping.  Even though they bear fruit, the berries don’t create a mess in the yard, partly because birds eat them so quickly.  In Indiana, the white blooms appear in April.  They’re a good alternative to another native tree that blooms about the same time, flowering dogwood, which is more showy but more difficult to grow in Indiana, the northernmost part of its native range.  According to the Colorado Supreme Court, the leaves of serviceberry trees also make good grazing for sheep.  (Okay, I needed something to connect this post with the law, and that’s all I could find!)

wrigley-field-stadium-in-chicagoI’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,