Articles Posted in Corporations

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.

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I sometimes run across small business owners who have set up their business as a corporation, and I often ask why they chose a corporation rather than a limited liability company (or LLC).  Sometimes the answer is that the business was incorporated before LLCs existed, or when LLCs were new and the lawyer who advised the owner was not familiar with LLCs or was not comfortable with using them, and that makes sense.  Another relatively common answer is that the owner’s lawyer or, more often, accountant advised the owner that there were advantages to being taxed as a Subchapter S corporation rather than being taxed as an LLC, so the business was organized as a corporation rather than a limited liability company.  That doesn’t make as much sense, at least not since 1997.

Although the history of LLCs can be traced back to earlier statutes in Germany and other European countries, there were no LLCs in the United States until 1977 when Wyoming passed the first LLC statute in the country.  For several years after that, the use of LLCs was suppressed by uncertainty surrounding their status for income tax purposes.

The Internal Revenue Code did not (and still does not) include provisions specifically written for taxing LLCs.  The question was whether they would be taxed as partnerships or as corporations, and the answer was not clear.  In 1995, the IRS issued guidance identifying four specific attributes Continue Reading

iStock_000034659194Small.jpgA primary reason to organize a business as a corporation or a limited liability company (LLC) is to protect the owners from personal liability for the debts of the business. Sometimes, however, a court may “pierce the corporate veil” of a business to hold the owners of the business personally liable for the company’s obligations.

In deciding whether to pierce the corporate veil, Indiana courts examine and weigh several factors, including whether the owners of the business have observed the required formalities for the particular form of organization. One of the reasons we generally favor LLCs for small businesses is that there are fewer required formalities for LLCs than for corporations, which in turn means that there is not only a lower administrative burden associated with LLCs, but also fewer opportunities for business owners to miss something. However, there are a few requirements, discussed below.

1. An Indiana LLC must have written articles of organization, and the articles must be filed with the Indiana Secretary of State .

There’s almost no need to mention this one because an LLC does not even exist until its articles of organization are filed with the Secretary of State, but for the sake of being complete . . .

The articles of organization must state:

  • The name of the LLC, which must include “limited liability company,” “LLC,” or “L.L.C.”
  • The name of the LLC’s registered agent and the address of its registered office (discussed in more detail below).
  • Either that the LLC will last in perpetuity or the events upon which the LLC will be dissolved.
  • Whether the LLC will be managed by its members or by managers. (Technically, the articles can remain silent on this point, in which case the LLC will be managed by its members, but the Secretary of State’s forms call for a statement one way or the other.)

2. An Indiana LLC must have a registered agent and a registered office within the State of Indiana.

The purpose of this requirement is to give people who sue the LLC a way to serve the complaints and summons. The registered office must be located within Indiana, and it must have a street address. A post office box is not sufficient. The registered agent must be an individual, a corporation, an LLC, or a non-profit corporation whose business address is the same as the registered office’s address.

The registered office and registered agent must be identified in the articles of incorporation and in the business entity reports (discussed below) filed every other year with the Indiana Secretary of State, but the requirement to have a registered office and registered agent applies all the time, not just when those filings are made. If the LLC’s registered agent resigns, the LLC must name a new one and file a notice with the Secretary of State within 60 days.

In addition, LLCs formed after July 1, 2014, are required to file the registered agent’s written consent to serve as registered agent or a representation that the registered agent has consented. That new requirement was established by Senate Bill 377, passed by the 2014 General Assembly and signed into law by the governor.

3. An Indiana LLC must keep its registered agent informed of the name, business address, and business telephone number of a natural person who is authorized to receive communications from the registered agent.

This is another new requirement contained in Senate Bill 377. It takes effect on July 1, 2014.

4. An Indiana LLC must maintain certain records at its principal place of business.

The required records are:

• A list of the names and addresses of current and former members and managers of the LCC.
• A copy of the articles of organization and all amendments.
• Copies of the LLC’s tax returns and financial statements for the three most recent years (or, if no tax returns or statements were prepared, copies of the information that was or should have been supplied to the members so they could file their tax returns).
• Copies of any written operating agreements and amendments, including those no longer in effect.
• A statement of all capital contributions made by all members.
• A statement of the events upon which members will be required to make additional capital contributions.
• The events, if any, upon which the LLC would be dissolved.
• Any other records required by the operating agreement.


[Note: Ind. Code 23-18-4-8(e) provides that the failure to keep the above records is NOT grounds for imposing personal liability on members for the obligations of the LLC. It’s more likely to become an issue in the event of a dispute among the members. Thanks to Josh Hollingsworth of Barnes & Thornburg for reminding me. MS:4/7/2014].

5. An Indiana LLC must file a business entity report with the Secretary of State every two years.

The report is due at the end of the month that contains an even-numbered anniversary of the filing of the articles of organization. Failure to file the report within 60 days of the due date is grounds for administrative dissolution of the LLC.
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iStock_000011065644XSmall.jpgThe Indiana Secretary of State has issued a warning about a deceptive letter being received by some Indiana businesses. The letter asks for a fee — typically $125 or $150 — to cover the processing of the minutes of a corporation’s annual meeting. It is designed to appear as if it is from a state agency, the “Indiana Corporate Compliance Business Division,” and it includes a citation to a fictitious law. In fact, it is not from a state agency, and there is no requirement to pay any such fees to the state.

If you receive a letter like the one described above, ignore it. If you have already responded to a letter like this, you may contact the Business Services Division of the Indiana Secretary of State’s office at (317) 232-6576.

However, if you receive a letter from the Indiana Secretary of State’s office informing you that a business entity report is due by the end of the following month, DO NOT IGNORE IT!

Indiana business corporations and limited liability companies are required to submit a business entity report every two years during the month of the anniversary of the filing of the articles of incorporation or articles of organization. For example, if your articles of incorporation or articles of organization were filed in April of an even-numbered year, a business entity report is due in April of every even-numbered year.

Indiana nonprofit corporations are required to file business entity reports (even though a nonprofit corporation is not usually considered to be a “business”) every year in the month of the anniversary of the filing of the articles of incorporation. If the articles of incorporation of your nonprofit were filed in August, a business entity report is due every August.

Business entity reports may be filed on paper or online. The filing fee for business corporations and limited liability companies is $30, and the fee for nonprofits is $10. In both instances, modest discounts are given for filing online.

The Secretary of State’s office sends out reminder notices near the end of the month before your business entity report is due, but do not rely on those letters as your only reminder. Because the reports are due even if you do not receive the letter, you should make sure the report is placed on your compliance calendar.

If your organization does not file its business entity reports on time, it is subject to administrative dissolution by the Secretary of State. If that happens, it is possible to have your corporation or LLC reinstated, but the process can be time consuming. It’s far better to stay in compliance to begin with.
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[This is the fourth post in a seven-part series discussing the characteristics of limited liability companies and comparing them to the characteristics of corporations, general partnerships, and sole proprietorships. Here’s the entire list.

Part 1. Background on sole proprietorships.
Part 2. Background on partnerships.
Part 3. Background on corporations.
Part 4. LLCs are distinct legal entities, separate from their owners.
Part 5. A limited liability company’s owners are not liable for the LLC’s obligations.
Part 6. Options for an LLC’s management structure.
Part 7. Options for an LLC’s tax treatment.]

iStock_000005422636XSmall.jpgTo set the background for a discussion of the basics of limited liability companies, we’ve discussed sole proprietorships, partnerships, and corporations. As we’ll see, a limited liability company shares some characteristics with corporations and other characteristics with sole proprietorships (if the LLC has one owner, called a member) or partnerships (if the LLC has more than one member).

The first thing to recognize about a limited liability company is that it is a separate legal entity, apart from its owners. How does that compare to the other structures? First, a sole proprietorship is NOT a separate legal entity apart from its owner. If you’re running a business as a sole proprietorship, you really ARE the business, and the business is you.

At the other end of the spectrum, a corporation is a distinct legal entity, completely separate from its shareholders. For example a corporation can sue and be sued in its own name, It can enter into contracts in its own name. And it can go into bankruptcy without dragging its owners with it.

In the middle of the spectrum is a partnership. Without getting into all the details, I’ll just say that for some purposes a partnership has the characteristics of a separate legal entity, and for other purposes a partnership is treated more like the aggregate of all the partners.

So in this sense, a limited liability company is just like a corporation. It is a separate legal entity, apart from its members. It can sue and be sued; it can enter into contracts; and it can go into bankruptcy, all apart from its members. And all that is true even if the LLC has only a single member.

Next we’ll discuss another way that a limited liability company is like a corporation — the liability shield.
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[This is the third post in a seven-part series discussing the characteristics of limited liability companies and comparing them to the characteristics of corporations, general partnerships, and sole proprietorships. Here’s the entire list.

Part 1. Background on sole proprietorships.
Part 2. Background on partnerships.
Part 3. Background on corporations.
Part 4. LLCs are distinct legal entities, separate from their owners.
Part 5. A limited liability company’s owners are not liable for the LLC’s obligations.
Part 6. Options for an LLC’s management structure.
Part 7. Options for an LLC’s tax treatment.]

iStock_000006606955XSmall.jpgLet’s get back to our trek toward a discussion of the basics of limited liability companies. The first two types of business structures we’ve looked at — sole proprietorships and partnerships — have two significant features in common. First, the owner or owners are liable for the obligations of the business. Second, the business itself does not pay taxes. Instead, the income and other tax items are “passed through” to the owner or owners, who pay tax on the income. Things change with corporations, the third type of business structure.

Although corporations are not as old as sole proprietorships or partnerships, business organizations with at least some of the characteristics of corporations have been around for centuries. For example, the oldest corporation in North America, Hudson’s Bay Company, was incorporated in 1670.

Perhaps the most important feature of a corporation is that the owners of the corporation — called stockholders or shareholders — are NOT liable for the obligations of the business. And that’s very good news for people who owned stock in Lehman Brothers, which melted down into the largest bankruptcy in American history. Or, going back a little further to previous record holders, people who owned stock in Enron and Worldcom. Even though the people who owned stock in those corporations may have lost everything they invested, they were not liable to the corporations’ creditors, and they did not get pulled into the corporate bankruptcies. That protection against shareholders being held liable for the corporation’s obligations is sometimes called a liability shield or a corporate veil, and it doesn’t exist for sole proprietorships or general partnerships.
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