A couple of years ago the Indiana Business Law Blog posted an article about two different Indiana statutes of limitations for breach of contract:

  • A six-year statute of limitations at Ind. Code § 34‑11‑2‑9, which applies to “promissory notes, bills of exchange, or other written contracts for the payment of money”
  • A ten-year statute of limitations at Ind. Code § 34‑11‑2‑11, which applies to “contracts in writing other than those for the payment of money”

More specifically, we considered whether a contract that for the payment of money that also includes other types of obligations is subject to the six-year or the ten-year statute of limitations.  An old Indiana Supreme Court case, Yarlott v. Brown, 192 Ind. 648, 138 N.E. 17 (Ind. 1923), held that a mortgage which also included the obligation to repay the underlying loan was subject to the statute of limitations for contracts “other than those for the payment of money” because, unlike notes and bills of exchange, a mortgage includes provisions in addition to an obligation to pay money.  However, a more recent Indiana Court of Appeals case, Aigner v. Cass School Tp. of Porter County, 577 N.E.2d 983 (Ind. Ct. App. 1991) held that a teacher’s contract was subject to the six-year statute of limitations, even though a teacher’s contract also contains provisions other than an obligation to pay money.

Since we posted that article, there have been at least two other cases addressing the same issue.

Folkening v. Van Petten

In Folkening v. Van Petten, 22 N.E.3d 818 (Ind. Ct. App. 2014), the court was presented the question of which statute of limitation applied to a settlement agreement that required Folkening to pay Van Petter $175,000 in exchange for stock in a company and to either satisfy the mortgage on a certain piece of real estate or to convey the property to Van Petten.  Folkening failed to pay the $175,000 and neither satisfied the mortgage nor conveyed the property.  The court held that the settlement agreement was a contract other than for the payment of money and, accordingly, that the applicable statute of limitations was ten years, not six.  The court held that,

[Contracts subject to the six-year statute of limitations] are strictly agreements to pay money to another party; they are not agreements to pay money in exchange for something else, such as goods, services, real property, or stock shares such as those at issue here.

Even so, one might argue that Van Petten’s two claims were subject to different statutes of limitations, that the breach of the obligation to pay $175,000 was subject to the six-year statute and the breach of the obligation to convey the property was subject to the ten-year.  However, the Court of Appeals answered held that both claims were subject to the ten-year statute of limitations.  In doing so, the court explained that the substance of the contract, not the nature of the claim, controls the selection of the applicable statute of limitations.  Even so, one should not overlook the fact that Folkening was a 2:1 decision, with Judge Riley, who would have applied the six-year statute of limitations, dissenting.

Pecan Shoppe of Whitestown v. SJC, Inc.

Just last week, in Pecan Shoppe of Whitestown v. SJC, Inc., No. 06A05-1504-PL-177, 2016 Ind. App. Unpub. LEXIS 24 (Ct. App. Jan. 14, 2016) the court of appeals decided a case dealing with an asset purchase agreement for, among other things, certain real estate.  The agreement contained a provision that required the buyer to make additional payments, above and beyond the original purchase price, if certain conditions were satisfied after the sale closed.  The conditions were satisfied, but the buyer failed to make the additional payment, and the seller sued.  The litigants were at odds regarding the date on which the statute of limitations began to run.  Under the seller’s theory, the lawsuit was filed within the six-year statute of limitations, and under the buyer’s theory it was not.  However, even under the buyer’s theory the lawsuit was filed within the ten-year statute of limitations.  Apparently, however, the question of the applicable statute of limitation was not presented to the court of appeals because the court simply held that the lawsuit was barred because it was not filed within the six-year statute of limitations.  The court did not even mention the possibility that the applicable statute of limitations might be ten years, not six.

So what is the answer?

So what is the correct statute of limitations for breach of a written contract to pay money that also includes other substantive provisions, such as service contracts and purchase agreements?  Yarlott answers the question for mortgages, but what about other types of agreements? [1]   We now have at least three relatively recent opinions from the Court of Appeals, Aigner, Folkening, and Pecan Shoppe, addressing breaches of contract that, as far as we can tell, are indistinguishable for the purpose of selecting the applicable statute of limitations.  One of them – Folkening – applies the ten-year statute of limitations; the other two apply the six-year statute.  However Pecan Shoppe can be disregarded for two reasons:  First, the Court of Appeals did not actually decide the question, and, second, it is an unpublished decision that cannot be cited as precedent.  At the moment, it appears to us that Folkening and Aigner cannot be reconciled and that only one of them can be correct. Which one?  That remains to be seen.


[1]There is at least older Court of Appeals case, Lewis v. Davis, 114 Ind. App. 715, 55 N.E.2d 119 (1944), that is consistent with Yarlott, but, like Yarlott, it deals with a mortgage that contains an obligation to pay and sheds no new light on other types of contracts, such as purchase agreements and service contracts.

Trusts have long been one of the most important tools used by estate planning lawyers to ensure that a person’s assets ultimately benefit the people they are intended to benefit. For example, estate planning attorneys sometimes use spendthrift trusts to protect the estate from creditors of either the person implementing the estate plan or the plan’s beneficiaries. In recent years, limited liability companies have also become important estate planning tools, especially for estates that include businesses, in part because they provide certain protections against creditors of the owners of the LLC, similar to the protection provided by spendthrift trusts, that are not offered by corporations, the usual alternative to LLCs.

The LLC is a relatively new creature, intended to combine the limited liability of a corporation (i.e., a liability shield between the owners of the company and the company’s creditors) with the income tax structure of a partnership.  LLC law draws some of its principles from the law of corporations and other principles from the law of partnerships.  One of the areas in which corporation and partnership law differ is the nature of ownership of a corporation or partnership, which in turn affects the extent to which a creditor of an owner can acquire the economic fruit of the business and the rights of the owner to control and manage the business.

Ownership of a corporation is represented by a share of stock.  The corporation is an entity distinct from the owners of the stock (called stockholders or shareholders), and the shareholders do not directly own any of the assets that belong to the corporation.  The owner of a share of stock has the right to receive the economic fruit of the business, delivered in the form of dividends paid to the company’s shareholders, and certain rights to control the business, primarily through a right to vote in an election of directors who are entrusted with its management and operation. Generally, shares of stock in a corporation are freely transferable, and a person who buys or otherwise receives the stock, no matter who that person is, acquires the right to receive any dividends paid by the corporation and the right to vote in the election of directors.  Although there can be more than one class of stock, representing different economic and noneconomic rights, and the transferability of stock, and even the voting rights of shareholders, can be restricted by contractual agreement, the fundamental model is that stock in a corporation represents a relatively inseparable bundle of economic and noneconomic rights that are freely transferable from one person to another.

Partnerships, on the other hand, are very different. (Note that there are different types of partnerships, including general partnerships, limited partnerships, and limited liability partnerships.  For simplicity, we’ll concentrate on general partnerships.)  Although a partnership is generally treated as an entity distinct from its partners, some aspects of partnership law make the partnership look more like a collection of people (i.e., the partners) rather than a separate entity jointly owned by partners.  More importantly for these purposes, the rights of the owners of a partnership (i.e., the partners) to control it and to receive its economic fruit are often much more complicated than the rights of a shareholder of a corporation.  The details of those rights are, for the most part, controlled by an agreement among the partners called, appropriately enough, a partnership agreement, but the basic model is that a partner’s rights, especially noneconomic rights, are not freely transferable.  Generally speaking, even though a partner may be able to assign his or her right to receive the economic fruit of the partnership (mostly in the form of distributions of cash from the partnership to the partners), a partner can generally not assign his or her rights to participate in the control and the management of the partnership.  Only a partner has that right, and generally a person can become a partner only with the consent of the other partners.

In Part II, we’ll examine how these principles of corporation law and partnership law have been integrated into LLC law and how that affects the utility of LLCs for estate planning and asset protection purposes.


Not just the questions, but also the answers!

1.  I know that a limited liability company is created when articles of organization are filed with the Indiana Secretary of State.  What information is in the articles of organization?

Surprisingly little information is absolutely required.  The bare minimum:

  • The name of the LLC. The name must generally be distinguishable from the name of any other entity that is required to file documents with the Secretary of State and it must include the “limited liability company,” “LLC,” “L.L.C.” (Generally, but not always. If the LLC’s name is not distinguishable from the name of another entity the name may still be used if the owners of the other entity give their consent.) Note that two names are not considered distinguishable if the only difference between them is, for example, “LLC” versus “Inc.”  In other words, Indiana Construction Management, LLC is not considered distinguishable from Indiana Construction Management, Inc.
  • The street address of the company’s registered office in Indiana and the name of the company’s registered agent whose business address is the same as the address of the registered office. The registered agent can be an individual, a corporation, a nonprofit corporation, or another LLC.
  • A representation that the person named as registered agent has consented to serve as registered agent.
  • The latest date that the company will dissolve or a statement that the duration of the company is perpetual until dissolved in accordance with the Indiana LLC statute.
  • If the company is to be managed by managers, a statement to that effect. (Technically, no statement is required if the LLC will be managed by its members; in other words, management by members is the default.  However, the Secretary of State’s form requires a statement one way or the other.)
  • The name and signature of the person, who need not be a member, submitting the articles.

2.  Are the articles of organization available to the public?

Yes, readily available on the Secretary of State’s web site.

3.  What is the Secretary of State’s filing fee for articles of organization?

The fee is $90 if you file articles of organization on paper, a bit less if you file the articles online.

4.  Does Indiana require an operating agreement for every LLC?

No, but it is a good practice for every LLC, even those with only one member, to have an operating agreement.

5.  Is the operating agreement a public document?

Generally, no.  Unlike the articles of organization, the operating agreement does not have to be filed with the Secretary of State.

6.  You didn’t mention the names of the members as part of the information required for the articles of organization.  Does that mean the members of an Indiana LLC can remain anonymous?iStock_000011930554_Small

Sort of. The names of the members need not be filed with the Secretary of State; the Secretary’s form for online filing has a place to name one or more members, but that information is optional.  However, various federal and state tax forms require the members to be named, and there are other circumstances, such as litigation involving the company, in which the names of the members will likely be disclosed. But is possible to form an Indiana LLC without publicly disclosing the names of the members.

7.  What about the LLC’s business or mailing address?  Is that available to the public?

Strictly speaking, the company’s business or mailing address (which need not be a street address and need not be inside Indiana) need not be included in the articles of organization.  As with the names of the members, the company’s address must be disclosed to the federal and state taxing authorities, and perhaps others.  As a practical matter, most companies include their addresses in their articles of organization, but technically that information is optional.

This is the final installment in a series of articles dealing with Indiana’s new benefit corporation statute in general and its applicability to small businesses in particular, and we now arrive at the ultimate question:  Is it a good idea for a small businesses to incorporate as (or to convert to) a benefit corporation?

In our opinion, the best choice of entity for most small businesses is a limited liability company, not a corporation, and the new benefit corporation statute does not change that opinion. Although we think the benefit corporation statute is an excellent addition to Indiana corporate and business law, we believe the Indiana LLC statute already has enough flexibility to permit LLCs to adopt the same governing principles, policies, and procedures that are pre-packaged in the benefit corporation statute without giving up the other advantages that LLCs have over corporations in general.

First, the Indiana Business Flexibility Act allows LLCs to be organized for “any business, personal, or nonprofit purpose,” which certainly seems broad enough to include the combination of business and public benefit purposes for which benefit corporations are created. Second, all of the governance, transparency, and accountability provisions of the benefit corporation statute can be incorporated into a limited liability company’s operating agreement. Finally, certification as a B-Corp is not restricted to benefit corporations – essentially any form of business entity is eligible to be certified as a B-Corp, including LLCs.

Here are the links to the other articles in this series:

Benefit Corporations and Small Businesses — Part I
Benefit Corporations and Small Businesses — Part II
Benefit Corporations and Small Businesses — Part III
Benefit Corporations and Small Businesses — Part IV

[This article is written by Rep. Casey Cox (R-Fort Wayne), the author of Indiana’s new benefit corporation statute and an attorney in the Fort Wayne office of Beers Mallers Backs & Salin, LLP, where he practices in the areas of business and corporate matters, real estate, and local government law. As we developed this series, Rep. Cox was very generous with his time and his insights into the new statute.  For that and for this article, we are grateful, and we thank him. — MS]

The last few decades have seen a dramatic increase in the number of investors who not only seek a financial return but also want to invest their money is socially and economically responsible businesses, as well as an increase in the number of consumers who want to purchase goods and services from those businesses. Many of them are frustrated by the number of companies who claim to be good corporate citizens but do not provide the transparency for investors and consumers to prove it.

The Potential Drawback to Transparency

That does not necessarily mean the claims of those companies are false.  Some companies that are every bit as responsible as they say they are may be reluctant to provide transparency out of a concern of inviting shareholder lawsuits when their efforts to be socially and environmentally responsible arguably result in lower profits.  The benefit corporation statute addresses that concern in part by requiring directors to take into account the interests of constituencies other than shareholders, as well as local and global environmental impacts and the short and long term interests of the company.  Part III of this series raised the question of whether requiring (rather than just permitting) directors to consider those factors shifts the risk of lawsuits from those brought by shareholders who are disappointed with the company’s financial performance to those who are disappointed with the company’s social or environmental performance.

Encouraging, Not Punishing, Good Intentions

I discussed this point with B Lab and with the author of the Model Benefit Corporation Act. Their view was that the requirement to consider the factors listed in the code of conduct certainly does not require the board to act on the consideration. I do think it would be advisable in Board meetings to make reference to the factors to consider.  I also think the scope of which a particular Board would undertake those considerations may vary widely.  Also, while a benefit enforcement proceeding could be levied for failure to consider such factors, I think the failure would have to be pretty significant to merit bringing a benefit enforcement proceeding.  In addition, the remedy, I think, would be to simply force the Board to consider it, but not necessarily act or not act on the consideration.  I view the standard of conduct as a reminder to the Board of their purposes and the benefit report and the market itself as the prime enforcement of these standards.

In addition, a benefit enforcement proceeding brought by shareholders is also a derivative proceeding subject to the procedures of chapter 32 of the Indiana Business Corporation Law. (A derivative proceeding is one brought by a shareholder against a director or other person based on a lawsuit that the corporation could bring in its own name, but hasn’t.)  That chapter permits the board to appoint a committee of independent directors to decide whether the corporation should file its own lawsuit to pursue a claim raised in a derivative proceeding.  If the committee decides that it is not in the best interest of the corporation to do so, the derivative lawsuit will be generally be dismissed.

Finally, according to B Lab, there are about 2200 incorporated or converted benefit corporations in the country.  When I asked in January 2015 how prevalent the benefit enforcement proceeding was, they told me they were not yet aware of a single case in which it had been brought.

Casey B. Cox

[Part V concludes this series — MS]

Part I of this series briefly discussed Indiana’s new benefit corporation statute as well as certification of a company as a B Corp by B Lab and some of the their possible advantages.  Part II began a closer look at the details of the benefit corporation statute, including the question of whether the benefit corporation is a good choice for small businesses.

The “Benefit” Part of a Benefit Corporation

As we’ve mentioned before, a benefit corporation is one with purposes in addition to making money for its shareholders. All benefit corporations share the purpose of creating a general public benefit, defined as having an overall material positive impact on society and the environment.  In addition, benefit corporations may also establish for themselves the purpose of creating a specific public benefit that serves one or more public welfare, religious, charitable, scientific, literary, or educational purpose or another purpose that goes beyond the strict interests of the shareholders.

Transparency and Accountability

The benefit corporation statute also includes provisions intended to provide transparency to investors, customers, and the public.  For example, the corporation must prepare and file with the Secretary of State an annual benefit report that includes, among other things, a description of the ways in which the corporation pursued the general public benefit and its specific public benefit, the ways in which those benefits were achieved, and an assessment of the corporation’s performance measured against a standard created by an independent third party.

The statute also includes provisions that assure a degree of accountability for pursuing the general public benefit and its specific public benefit. Among those provisions are standards of conduct that require the directors to take into account the effects of any corporate action or inaction on:

  • The corporation’s shareholders
  • The workforces of the corporation, of its subsidiaries, and of its suppliers;
  • The corporation’s customers as beneficiaries of the corporation’s public benefits
  • The communities in which the corporation’s facilities, subsidiaries, and suppliers are located
  • The local and global environment
  • The short-term and long-term interests of the company

In addition, the statute gives the corporation, shareholders, and directors the right to initiate a benefit enforcement proceeding against the corporation or its directors or officers for the failure to pursue or create a general public benefit or the corporation’s specific public benefit or to comply any duty, obligation, or standard of conduct created by the statute.

The Concern that No Good Deed Goes Unpunished

A concern of the boards of some business corporations who would like to take into account factors other than maximizing corporate profit is that, by doing so, they may expose themselves to shareholder lawsuits for a breach of their fiduciary duties.  One of the reasons for the standards of conduct described above is to address that concern for the boards of benefit corporations.  However, taking into account every factor listed above for every corporate action or inaction appears to be a tall order, raising the question of whether the benefit corporation statute shifts the directors’ exposure to shareholder lawsuits from those based on the failure to maximize profit to those based on the failure to pursue the public benefit.  That question is addressed in Part IV.

Part I of this series briefly discussed Indiana’s new benefit corporation statute as well as certification of a company as a “B Corp” by B Lab and some of the possible advantages of certification and of incorporation under the new statute.  Part II begins to look more closely at the details of the new law and to consider whether it makes sense for small businesses to incorporate under the new statute.

From a corporate law perspective, benefit corporations are, first and foremost, corporations subject to the Indiana Business Corporation Law, just like any other Indiana for-profit corporation.  In our view, a corporation is not the best choice of the form of entity for most small businesses.  For a number of reasons, including the tax alternatives available to LLCs, the “pick-your-partner” and charging order provisions of the Indiana LLC statute, and the fact that LLCs have fewer corporate formalities that must be observed (which decreases the possibility that the liability shield that protects the assets of owners from the creditors of the business will be disregarded through so-called veil-piercing), we believe that a limited liability company is a better choice than a corporation for most small businesses.

The above advantages of LLCs over corporations are the same – or even greater – for benefit corporations.  For example, partnership taxation is not an option for benefit corporations; if that is important enough, a benefit corporation is not a viable alternative.  In addition, the benefit corporation adds more required corporate formalities on top of those already imposed by the Indiana Business Corporation law, increasing the administrative burden and the possibility of weakening the liability shield protecting the assets of owners from the company’s creditors.  In other words, for most small businesses, a benefit corporation will not be the best choice of entity for most small businesses, unless the advantages of incorporating as a benefit corporation outweigh the advantages of organizing as a limited liability company.

As we discussed in Part I, the advantages of a benefit corporation appear to fall into two categories:

  • The business advantages that may be achieved by demonstrating to customers and investors the company’s commitment to social and environmental responsibility and to creating specific social benefits.
  • Protecting the directors from lawsuits based on allegations of breach of fiduciary duties for basing decisions on social benefits instead of maximizing corporate profits.

As for the first category, we note that being a benefit corporation can help demonstrate a commitment to creating benefits to society but a benefit corporation probably has no more ability to produce those benefits than a regular business corporation or a limited liability company. For example, the Indiana Business Corporation Law already permits directors to take into account the impact of their decisions on constituencies other than their shareholders and concerns other than maximizing profit, and the Indiana Business Flexibility Act permits the organization of LLCs for any business, personal, or non-profit purpose, which seems broad enough to cover anything that might be accomplished by a benefit corporation. We will discuss that topic in more detail in Part III of this series.  The degree to which directors of a benefit corporation are exposed to lawsuits by shareholders for pursuing purposes other than the pecuniary interests of shareholders will be addressed briefly in Part III and more thoroughly by a guest blogger in Part IV.

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

Incorporation as a benefit corporation and certification by B Lab are two different things, but, unfortunately, both benefit corporations and certified businesses are often called “B Corps.” Another source of misunderstanding is that, although benefit corporations may serve purposes similar to the purposes served by nonprofit corporations, including those that are tax exempt under Section 501(c)(3) of the Internal Revenue Code, benefit corporations are neither nonprofit nor tax exempt.  Finally, despite the similar terms, a B Corp (by either definition) is not an alternative to an S-corp or a C-corp.  The latter two terms refer to the part of the Internal Revenue Code that applies to a particular corporation, not to the state statute that governs the corporation or to any sort of certification.  In fact, if things are not already confusing enough, every B Corp is also either an S-corp or a C-corp.

What is a benefit corporation?

A benefit corporation is a business corporation (i.e., a corporation governed by the Indiana Business Corporation Law or IBCL, Ind. Code 23-1-1), that opts in to the benefit corporation statute.  In essence, the benefit corporation statute serves as an overlay to the IBCL.  (Indiana’s professional corporation statute works more or less the same way, as an overlay to the IBCL.) Both existing corporations and new corporations may elect to be covered by the benefit corporation statute.

Once a company has elected to be a benefit corporation, it is subject to several additional requirements.  Among them are:

  • It must have a corporate purpose of generating a general public benefit, and it may have a purpose of generating a specific public benefit, including public welfare, religious, charitable, scientific, literary, or educational purposes.
  • In making decisions, its directors and its officers must take into account not only the interests of the shareholders but also the interests of other specified constituencies and concerns.
  • It must have a “benefit director,” and it may have a “benefit officer,” who have specific responsibilities and duties.
  • It must prepare and deliver to shareholders an annual benefit report including, among other things, an assessment of the company’s social and environmental performance measured against standards established by an independent third party (such as these).

Why elect treatment as a benefit corporation?

The advantages of the benefit corporation statute probably fall into two categories:  to enhance the company’s reputation as a socially and environmentally responsible company and to give its officers and directors more “cover” for making decisions that serve a public benefit at the expense of lower corporate earnings.

Companies have good reasons to enhance their reputations for social and environmental responsibility. For example, the company’s goods and services may be more attractive to certain groups of customers; its stock may be more attractive to certain groups of investors; and it may help with the company’s recruitment of employees.  The relative values of B-Corp certification and opting into a benefit corporation statute are a bit speculative.  It seems likely that B-Corp certification will be most effective in reaching out to customers and prospective customers because B Lab provides publicity to certified companies, but investors who are interested in corporate governance might attribute value to incorporation under a benefit corporation statute, either alone or in combination with certification.

On the other hand, protecting the directors from allegations of breach of fiduciary duties to the shareholders by making decisions that do not maximize profits is directly related to benefit corporation statute, and probably not at all to certification.  Although, as we will discuss later in this series, the IBCL already authorizes directors to take into account constituencies other than shareholders, some think the benefit corporation statute provides even more protection for officers and directors who pass up opportunities to make more money for the company in favor of serving a public purpose.

The issuance or sale of securities is subject to regulation by the United States Securities Exchange Commission and by authorities in every state, including the Securities Division of the Office of the Indiana Secretary of State.   Depending on the situation, a member’s interest in a limited liability company may or may not be within the definition of a “security” and, therefore, may or may not be subject to federal and state securities laws.  If the securities laws apply, the consequences can be signficant because, as my friend and retired securities lawyer Steven Lund says, “There are three types of securities:  registered, exempt, and illegal.”

Contrary to what you may sometimes hear, there is no exemption for securities that are issued or sold to family members or close friends, and there is no sale of securities that is exempt solely because the value is less than a certain amount.  In addition, certain parts of the securities laws, such as those prohibiting securities fraud, apply to every securities transaction, even if it is exempt from registration requirements.  An illegal sale of securities can have serious ramifications, including civil lawsuits and potentially even criminal charges.  And there can be ramifications even if there is never a lawsuit or governmental enforcement action  For example, a debt incurred through a securities violation cannot be discharged in bankruptcy.  Owners of small businesses who set up new LLCs, or bring new members into existing LLCs, without obtaining the advice of a lawyer with experience in corporate and LLC law expose their businesses and themselves to signficant risk.

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