Articles Posted in Indiana General Assembly

Benefit Corporations and Small Businesses: Part I

June 18, 2015 | Michael R. Smith

On January 1, 2016, Indiana will join nearly 30 other states with statutes authorizing a relatively new form of for-profit corporations known as a benefit corporation. The Indiana statute was created by House Enrolled Act 1015, which was authored by Rep. Casey Cox (R-Fort Wayne), and will be codified at Ind. Code 23‑1‑1.3.

Indiana’s benefit corporation statute, like most (maybe all) others, is based on a model statute developed by B Lab, a nonprofit organization that certifies businesses that meet certain standards for social and environmental performance, accountability, and transparency. There are currently 1287 businesses certified by B Lab, including some companies that were well known for their social responsibility long before they were certified, such as Ben & Jerry’s.

Sorting out the terminology

National Criminal History Background Checks for Child Care Workers

August 10, 2013 | Michael R. Smith

Last session, the Indiana General Assembly passed, and Governor Pence signed, House Enrolled Act 1494, amending Indiana Code Title 12, Article 17.2 by establishing new requirements for national criminal history background checks for employees and volunteers of regulated child care providers.

A national criminal history background check involves the submission of an individual’s fingerprints to the Federal Bureau of Investigation for comparison to a national database. (Note that there is a separate process for background checks for individuals under 18 years of age.) The new requirement for a national background check replaces a previous requirement for a background check at the state level, but it is in addition to the requirement for substance abuse testing.

This article discusses the new requirement for background checks in broad terms. More detailed information is available from the Bureau of Child Care of the Indiana Family and Social Services Administration. Note also that HEA also creates some other new requirements for some child care providers that are not addressed by this article.

Applicability

The requirement for background checks applies to essentially all individuals who have any contact with children at any type of regulated child care providers, which include

child care centers and child care homes that must be licensed;
child care ministries that are exempt from licensing but must be registered; and
child care homes and facilities that are exempt from licensing but receive funding from the Child Care Development Fund, a federal program administered by the state.

For all types of regulated providers, background checks are required for all individual caregivers, including both employees and volunteers. For child care homes, the requirement also extends to any member of the household who is 18 years of age or older (or, if younger than 18, who has been previously been charged with a crime and waived from juvenile court to adult court), even if he or she will have no contact with children.

Background checks are required when the child care center, home, or ministry applies for a license or registration; when an unlicensed provider applies for certification of eligibility to receive CCDF funding; when a new employee is hired or a new volunteer begins work; and every three years after that. The requirements for new applications and new employees and volunteers (and for child care homes, new household members) took effect on July 1, 2013. Other regulated providers have until July 1, 2014, to comply with the requirements for existing caregivers and household members.

Prohibitions

The purpose of the background check is to identify individuals who are prohibited from being child care provider, an employee or volunteer of a child care provider, or a member of the household at a child care home. An application for a license, registration, or CCDF certification may be denied if the provider, a caregiver, or (for child care homes) a household member has been convicted of certain types of felonies or misdemeanors or if the individual has been charged of such a crime while the application is pending. Note that only convictions or pending charges count; previous charges that were dismissed or resulted in an acquittal do not disqualify an individual.
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Positive Change in Indiana LLC Laws – Even More Flexibility in Management Structure

July 30, 2013 | Michael R. Smith

Earlier 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.
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Indiana Smoking Ban

March 17, 2013 | Michael R. Smith

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.
Signs that comply with the state law are readily available from a number of suppliers.

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

February 8, 2013 | Michael R. Smith

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:

Those in which reverse veil piercing is not allowed for LLCs.
Those in which reverse veil piercing is allowed for single-member LLCs but not for multi-member LLCs.
Those in which reverse veil piercing is allowed for both single-member LLCs and multi-member LLCs (essentially treating LLCs the same as corporations).
Those in which there is no reverse veil piercing for multi-member LLCs but for which the law is unresolved for single-member LLCs.
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.
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Proposed Changes to Indiana LLC Statute

January 29, 2013 | Michael R. Smith

Statutes 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:

Eliminate the possibility that a creditor of a member can take over the member’s voting rights
Allow a membership interest to be held in joint tenancy with the right of survivorship
Allow a membership interest to be designated as “transfer on death” property
Expressly provide for LLC officers

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.
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