Under Indiana law, shareholders of a corporation and members of a limited liability company enjoy the benefit of limited liability. Indiana law treats corporations and LLC's as separate legal entities distinct from their owners. Unlike partnerships and sole proprietorship's, shareholders and members are not personally liable for the business’s debts, obligations, or liabilities. (See Indiana Code section 23- 1 - 26 - 3 and Indiana Code Section 23 -18 - 3 -3 (a).)
There are exceptions to this rule, however, where shareholders or members can be held liable for company obligations. The most common exceptions are the following:
1) shareholders or members can be held responsible for their own actions;
2) debts which are personally assumed or guaranteed; and
3) debts imposed personally by statute such as the failure to collect, account for, and pay payroll taxes (Indiana Revenue Code Section 6672 ).
In the interest of preventing fraud or other injustices in certain circumstances, courts can and do “pierce the corporate veil” to reach the personal assets of the shareholders or members. “Piercing the corporate veil” is the equitable remedy courts used to disregard the corporate and LLC structure and hold the owners personally liable for the company's obligations. Shareholders and members of a business must pay particular attention to observe the corporate formalities in order to preserve limited liability characteristics of the business. Failure to observe corporate formalities creates potential avenues of attack for plaintiffs to challenge the validity of the corporate form and successfully pierce the corporate veil.”.
Indiana courts examine eight factors to determine whether a corporate form is “so ignored, controlled or manipulated that it was merely the instrumentality of another period” Aronson v. Price 644 NE 2nd 864, 867 (Ind. 1995). Indiana courts will consider whether there is evidence showing:
1) undercapitalization;
2) absence of corporate records;
3) fraudulent representation by Corporation shareholders or director;
4) use of the Corporation to promote fraud, injustice or illegal activities;
5) payment by the corporate entity of individual obligations ;
6) Commingling of assets an affairs;
7) Failure to observe required corporate formality; or
8) other shareholder acts or conduct ignoring, controlling, or manipulating the corporate form. Id. At 867-68.
These factors will also be considered in determining whether members of a limited liability company should be held personally responsible for the obligations of an LLC. Four Seasons manufacturing, Inc v, 1001 Colosseum, LLC, 870 N.E. 2d 494, 504-506 (Ind. Crt. App, 2007).
PODLASKI LLP can create and maintain the appropriate corporate records and observe the required formalities that will help protect you from personal liability. When we incorporate or organize a new business, we prepare the necessary documents. However, as time goes on additional documentation may become necessary. For example, if a member or shareholder gives additional capital to the business because of an anticipated cashflow shortage, it is important to document whether that is a loan or a capital infusion. Otherwise, there could be a dispute later over the additional funding. All important transactions should be adequately documented.
In addition, we recommend that each business schedule at least an annual meeting during the year where meeting minutes are recorded. While Indiana law does not specifically require an LLC to hold an annual meeting, it is a good practice. If PODLASKI LLP keeps your corporate or LLC record book, we will send you a reminder to have the meeting and then, we will prepare the meeting minutes. (Minutes generally include the names of the individuals who were present, the topics discussed, any votes or decisions made, including the election of directors and officers, and any other information that would be helpful to have in an official record.)
Each Indiana for-profit corporation and LLC (both domestic and foreign), must file, at a minimum, a biennial business entity report with the Indiana Secretary of State. The Indiana Secretary of State has phased-out reminders for the business entity reports and now uses email notifications. Provide your email address to the Indiana Secretary of State, by calling 317-232-6576. Non-profit corporations are required to file annual reports. By filing a business entity report with the Indiana Secretary of State your business will stay in good standing with the State of Indiana. According to Indiana law, failure to file business entity reports and pay the applicable fee with the Indiana Secretary of State, will result in the business being administratively dissolved or revoked. It is important to maintain and keep good records for the health of your business.
LLCs should maintain:
1) articles of organization,
2) any and all tax elections,
3) list of members (past and present),
4) Copies of the LLC's tax returns for the three most recent years,
5) Operating agreement with all amendments (and a copy of prior operating agreements,
6) Subscription agreements,
7) Bank statements, meeting minutes, and resolutions authorizing activities that, either by law or under the terms of the operating agreement, require a vote of the members. (See Indiana Code Section 23 -18 -4-8.)
The documents an Indiana corporation should maintain include, but are not limited to:
1) The articles of incorporation,
2) bylaws,
3) resolutions adopted by its board of directors with respect to one or more classes or series of shares and fixing their relative rights,
4) The minutes of all shareholder meetings and records of all action taken by shareholders without a meeting for the past three years;
5) All written communications to shareholders generally within the past three years, including the financial statements furnished for the past three years;
6) A list of the names and business addresses of its current directors and officers, and
7) Its most recent annual report delivered to the Indiana Secretary of State under Indiana Code Section 23-1-5-3, and Indiana code Section 20-3-1-52-1(e).
An Indiana corporation is also required to keep as permanent record, minutes of all meetings of its shareholders and board of directors, as well as, record of all actions taken by the shareholders or board of directors without a meeting. (See Indiana Code Section 23-1-5 2-1 (a).
Keeping good records is a good business practice and will help avoid costly problems in the future PODLASKI LLP can help you do that.
