Maintaining Indiana LLCs: Part II Best Governance Practices

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.
  • Sign all LLC contracts and other documents properly. The signature block should make it clear that the person signing the document is doing so on behalf of the LLC and not in his or her own capacity. Typically, a signature block should list the LLC’s name, followed by a signature line that has “By:” at the front of it, the typed name of the person signing, and the person’s title.
  • Adequately capitalize the business. Generally, the owners of an LLC should contribute to the company sufficient capital to enable it to meet its anticipated obligations until the company is able to meet its obligations from its revenues. The amount of capital varies significantly, depending on the nature of the company’s business.  In addition, it may not be necessary for the owners to contribute working capital as an equity investment; some courts have recognized that it is a legitimate business practice to capitalize a business with debt (i.e., by borrowing capital), at least in part.
  • Maintain good business records. The records required by the Indiana Business Flexibility Act were discussed in Part I, but there are all sorts of other reasons — legal reasons, tax reasons, and business reasons — for other records.
  • Use business cards and letterhead with your LLCs name and logo, your name, and your title. If you don’t have a logo, consider having one created for you.
  • Obtain a domain name for your company and use it for your email addresses. Gmail accounts, hotmail accounts, and the like look like personal email addresses, not business addresses.

Owners of multiple companies face the possibility of a particular category of veil piercing based on the alter ego doctrine. The doctrine is perhaps most often applied to hold a successor business responsible for the obligations of a predecessor, but it is also used to make the assets of one company available to the creditors of a related company, such as a sister company. The essence of the doctrine is that, if two companies have enough in common, including appearance, a court may treat the two as one company. Owners of multiple business should follow as many of the following recommendations as possible.

  • The companies should have at least some differences in ownership.
  • Give the companies distinct names and distinct branding, such as logos and taglines.
  • Each company should have its own employees.
  • Each company should have its own business address and phone numbers. If it is not practical to provide separate offices, at least have separate phone numbers and consider using a mailbox service provided by a storefront business such as a UPS Store.

If you would like to discuss your own business practices, please feel free to contact our Business Law Office.