Archive | Choosing a Business Type

A Primer on Indiana LLCs

A Primer on Indiana LLCs

An Indiana LLC offers all of the advantages that most people would point to when assessing whether to form an Indiana LLC as opposed to operating a business as a sole proprietorship.  Those would include:

  • Limited liability and protecting personal assets.
  • Creates credibility with business customers and clients.
  • The risk of audit can be reduced in some cases.
  • It becomes easier to deduct certain valid expenses.

An Indiana LLC offers all of the advantages that most people would point to when assessing whether to form an Indiana LLC as opposed to a corporation.  Those would include:

  • An Indiana LLC provides a great deal of flexibility and organizational freedom.
  • An Indiana LLC can be member managed, manager managed, can have any number or type of officers.
  • An Indiana LLC has less requirements, restrictions and formalities under Indiana law.
  • An Indiana LLC can allocate profits, losses, and distrubutions among members in whatever manner the members agree to – not so for a corporation and its shareholders.
  • An Indiana LLC has far fewer restrictions than an S corp and can have as many members as it needs.
  • An Indiana LLC can enjoy pass though taxation.  Any business profit or loss is passed through to the members, so that they pay the taxes individually on their personal income tax returns.  Paying tax at the business level is avoided for an LLC.

Finally, forming an Indiana LLC does have a few advantages over forming an LLC in a different state:

  • Forming an Indiana LLC is fast!  The process of filing articles of organization with the Indiana Secretary of State can be done electronically – and in most cases – your Indiana LLC can be up and running within 24 hours.  Some states require documents to be mailed to the state, while other require that certain notifications be published in the newspaper – all of which can take weeks!
  • Forming an Indiana LLC is can be a private and confidential process.  Most other states require that the name and address of members, managers and/or officers of the LLC be filed as a matter of public record.  Indiana only requires that the name and address of the registered agent of an Indiana LLC be filed (which can be anyone located in the state of Indiana – typically an attorney or registered agent service provider).
  • Forming an Indiana LLC only requires a $87.00 filing fee with the state (which is included in in all of our LLC formation packages).  Some other states charge double, triple, and even quadruple that amount.

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Starting a Business – Forming a Corporation

Starting a Business – Forming a Corporation

A corporation is an entity created under statute that is separate and distinct from its owners. In other words, a corporation can be created only by following the requirements of the relevant statute (in Indiana, it is the Indiana Business Corporation Law) and will not automatically be created (as can be the case with some partnerships). Once formed, the corporation is recognized as being independent from you, the owner/shareholder. The corporation is managed by directors and officers; sometimes, the directors and officers are also the shareholders. From a liability standpoint, the corporation affords you complete protection; creditors must rely on the assets of the corporation and you are notpersonally liable for anything beyond your investment and financial commitment to the corporation.

That said, lenders frequently require shareholders of smaller corporations to personally guarantee the debt of the corporation. Corporations are the most complex entities, both in terms of creation and operation. In addition to filing articles of incorporation, corporations need to adopt by-laws, elect directors and officers, and in many states, have regular meetings. There may also be annual reporting requirements with the Secretary of State in addition to annual fees.

The shares of a corporation are freely transferable and unlike a partnership or limited liability company, the transferee of yourshares will succeed to all of your rights in those shares. In other words, the person to whom you transfer your shares will be just as much an owner of the corporation as you were. This ease of transferability can have significant impact later on as you begin to implement exit strategies (that is, you are ready to retire from
the enterprise).

From a tax perspective, corporations can also be more complex than their partnership and limited liability company counterparts. Usually, a corporation is a separate taxable entity. It pays tax on its income and later, when it distributes accumulated income to the shareholders, the shareholders will pay a second layer of income tax on those dividends. This “double taxation” is a significant drawback for most corporations. There is a special type of corporation (commonly referred to as an “S” corporation) that generally is not subject to double taxation. An “S” corporation allocates income and losses on a pro-rata basis to its shareholders, although the use of losses by a shareholder is limited to that shareholder’s basis in the corporation. You must strictly adhere to rigid equirements imposed on “S” corporations, and shareholders sometimes are surprised by how easy it is to terminate an existing “S” election inadvertently.

Occasionally, a business owner might intentionally choose the double taxation of a regular corporation to take advantage of certain corporate tax benefits. For instance, while partners in a partnership cannot be employees of that partnership, shareholders in a corporation can be employees; as a result, these shareholders can participate in certain fringe benefits extended to “employees” under the federal tax law, such as flexible spending accounts. Other examples include (i) the ability of a corporation to participate in tax-advantaged reorganizations unavailable to partnerships and limited liability companies and (ii) the potential for up to $50,000 ($100,000 on a Married Filing Joint Return) of losses from the sale, exchange, or worthlessness of certain small business corporation stock to qualify for ordinary loss treatment (as opposed to capital loss treatment).

As you can see from this post and my prior business entity selection and formation posts, a good deal of thought and care must go into your decision of what type of legal form your new business should take. Quite often, the advantages of one form will be offset by disadvantages not present in another. As mentioned, within similar types of legal forms, nuances exist that make the decision all the more difficult. By identifying the right combination of advantages and disadvantages and with the assistance of competent advisors, the right choice of entity selection can help ensure your business success.

Check back soon for a post regarding limited liability companies.

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Starting a Business – Choosing The Type of Business to Form

Starting a Business – Choosing The Type of Business to Form

So, you have come up with the next great idea and you are ready to begin building your fortunes. One of the first questions you should ask is “what type of business should I be,” or as we lawyer-types put it, “what choice of business entity should you make”? Choosing the proper legal entity with which to conduct business is one of the most important decisions a business owner faces. This early decision will determine myriad other issues including responsibility for tortious acts, complexity of the entity, ability to transfer interests in the entity, ease of additional capital infusions, protection of intellectual property, and, of course, liability for the payment of taxes, to name just a few.

Business Entity Selection

So many choices - will you make the right one?

The list of available entity forms is fairly extensive. From the more traditional corporations and partnerships to the more exotic state business trusts and conduits, it seems there is a form for everyone, and in most cases, multiple forms. In some instances, it may be appropriate to forego a separate entity and conduct your business as a sole proprietorship. In a sole proprietorship, the business is conducted in the owner’s individual capacity. Perhaps intuitively, a sole proprietorship offers no protection from liability, but it is the simplest way to conduct business. Generally, no separate documents or records need to be filed with any governmental authority, including the Internal Revenue Service.When a business owner wants to sell his or her sole proprietorship, it will always be a sale of the underlying business assets.

Future blog entries in this series will focusing on the three most common types of entities — partnerships,limited liability companies, and corporations.  Each of these has important characteristics that distinguish one from the others. By recognizing these differences, you can begin to highlight the factors that will influence your decision on which form of entity to select.

Check back in a few days for a discussion regarding corporations.


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6 Big Mistakes that Startups Make.

6 Big Mistakes that Startups Make.

Oops!!There is a great post on Venturebeat.com about 6 common legal mistakes startups make.  Some of these have been covered elsewhere on this blog – some not.  Here is the cliff notes version- check out the post itself for more details:

  • IP Ownership – make sure it can be transferred to the startup.
  • Choice of Entity – choose carefully.  They recommend a corporation instead of an LLC.  I disagree on a certain level, as I have stated before on this blog and my Indiana Law Practice Blog.
  • Place of Incorporation – they say Delaware.  Again, I disagree to an extent (see this post).
  • Vesting Restrictions – make sure founders stock vest over time, otherwise you run the risk of a founder leaving early on and keeping all of his /her stock.
  • Securities Law Compliance – beware of not complying when issuing any securities to anyone, no matter who they are.
  • Legalzoom – avoid like the plague.  Hire an attorney! 🙂

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myIndianaLLC.com – Form an Indiana LLC Online!

myIndianaLLC.com – Form an Indiana LLC Online!

MyIndianaLLC - Logo1(bvp)Today I launched a new a couple of new websites, one of which is myIndianaLLC.com. Over the past year, a good deal of my solo legal practice has been driven by the various blogs and sites I maintain on the internet, including this one.  One thing I have learned is that not everyone that finds me wants a “traditional” experience with an attorney. They know what they want in terms of legal advice or documents. They want it quick, and they want it to be affordable. They don’t need or want to meet face to face. They don’t want to visit an office. They don’t want broad representation. Some of them need an LLC formed. Some of then need a power of attorney.

myIndianaLLC.com caters to the needs of these people. By using carefully designed, interactive questionnaires that help me quickly assemble documents, I am able to form and organize an Indiana Limited Liability Company at a fraction of the cost that some other attorneys charge. In fact, the prices on myIndianaLLC.com are right on par with non-attorney legal form sites such as LegalZoom.com. Keep in mind that LegalZoom.com is not an attorney and may not give you legal advice – I can.   Not to mention that myIndianaLLC.com will form your Indiana LLC and return all of your documents to you in either 1 or 3 business days, depending on which package you purchase.  You get an Indiana LLC, prepared online by an Indiana LLC Attorney.

So what do you get?

A single member LLC starts at $400.  A multiple member LLC starts at $600.  You get:

  • Articles of Organization that have been filed with the Indiana Secretary of State (the filing fee of $87 is included in your price!).
  • A Certificate of Organization from the Indiana Secretary of State.
  • A Single Member Operating Agreement.
  • Organizing Resolutions of the Members or Managers.
  • A Membership Interest Certificate, evidencing your ownership interest in your new Indiana LLC.
  • A memo with instructions on what to do with your documents, how to apply for an EIN, various state reporting requirements, and advice regarding how to maintain the limited liability protections provided by your LLC.

How Does it work?

Follow a simple process to get started:

  1. Choose the Indiana LLC package you would like to purchase.
  2. Register for an account (subject to terms of use).
  3. Purchase your Indiana LLC package.
  4. Fill out our easy online questionnaire

Once you complete the questionnaire, the documents associated with your Indiana LLC will be generated and sent to experienced LLC attorney Brian V. Powers for review.  We will review them, follow up with any questions, file the appropriate documents with the Indiana Secretary of State, and when everything has been completed, we upload your completed documents to the site where they will be available for your download.

Why are online legal services fast and affordable?
Its the technology of course!  By using the latest in online document automation technology, your documents are prepared quickly without the need to a paralegal or legal secretary to key in your information.  Our technology is smart too – it knows how to assemble your document based on the answer you provide.  Answers are collected online.  Payments are collected online.  Documents and advice are delivered online (and by phone from time to time).  Most lawyers waste a lot of time and money on expensive offices, unnecessary staff & overhead, and client meetings.  Not here.  We focus on you and your legal needs – which saves you time and money!

Why are online legal services fast and affordable?

Its the technology of course!  By using the latest in online document automation technology, your LLC documents are prepared quickly without the need to have a paralegal or legal secretary to key in your information.  Our technology is smart too – it knows how to assemble your document based on the answer you provide.  Answers are collected online.  Payments are collected online.  Documents and advice are delivered online (and by phone from time to time).  Most lawyers waste a lot of time and money on expensive offices, unnecessary staff & overhead, and client meetings.  Not here.  We focus on you and your legal needs and organizing your Indiana LLC – which saves you time and money!

Compare Us to Others – A Licensed Attorney vs Legal Forms Providers

applesorangesI challenge you to find a better value anywhere. In fact, here is a link to the “leading” online document-preparation service: LegalZoom(tm).  I put that link there hoping you will click on it, and knowing that you’ll be back.  I spend a lot of time fixing the mistakes they, and other non-attorney document preparation services, make.  The advantage of using us – you’ll have the advantage of a real lawyer personally preparing your LLC documents and forming your Indiana limited liability company, instead of some non-attorney clerk on the other side of the country.

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Does Your Corporation Have ByLaws?  It Should.

Does Your Corporation Have ByLaws? It Should.

Lots of start-up founders try to do things the easy way and create a corporation online with the Indiana Secretary of State, which has really one of the best, fastest, and easiest to use websites around.  This is a great way to start, and it will indeed form your corporation with Secretary of State and generate a basic Articles of Incorporation for you.  The problem, though, is that most people will stop right there, falsely believing that filing articles is all that is necessary.  That is not the case.  Indiana law requires a number of formalities when setting up a corporation, including the approval of bylaws.

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LLC Operating Agreements – Restricting the Transfer of Membership Units.

LLC Operating Agreements – Restricting the Transfer of Membership Units.

An operating agreement is the organic document of a Limited Liability Company.  It defines the relationship of the members among each other, the relationship of members with the company, and how the company will be managed / operated.  One important component of an operating agreement, in the context of a multiple member limited liability company, is the inclusion of provisions which restrict the transferability of membership interests.  In the context of a corporation, this would normally be handled in a buy-sell agreement – but for a limited liability company, it is typically addressed in the operating agreement (although it certainly could be addressed in a separate buy-sell agreement among the members.)

The importance of these provisions is to maintain the closely held structure of the LLC.  If members are allowed to freely transfer their interests, or if those membership interests are freely allowed to transfer via involuntary means (i.e. death, divorce, bankruptcy), members who originally started the business with one or more particular members may be forced to continue the business with new members that they do not necessarily approve of.  Putting restrictions on transferability can solve this issue by giving members control over how/when/why membership interests can be transferred.

If you are interested in learning more about what types of things should typically be considered in these provisions, check out my post on buy-sell agreements.

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Manager Managed vs Member Managed – What is the Difference

Manager Managed vs Member Managed – What is the Difference

Limited liability companies (LLCs) can be managed by either their members, or by a board of managers (board of managers is the term used in Indiana – some states differ slightly).  This is something that needs to be specified in the articles of organization for the LLC, and although the articles can obviously be amended at any time to change how the LLC is managed, it is an important decision nevertheless.

A member managed LLC is exactly what it sounds like – an LLC with its daily business managed by its members.  This is obviously not a big deal if you have one, or even two members.  Problems arise when an LLC has multiple members.  Typically, except as otherwise spelled out in a written operating agreement, all of the members will have the authority to act on behalf of the LLC (sign checks, execute agreements…etc).   This is not an ideal situation.

A manager-managed LLC, on the other hand, has its daily business matters managed by a board of managers.  This would be analogous to a board of directors or even officers in a corporation. Members elect the board of managers, and become much more passive in the operation of the LLC.  Members, of course, can also serve as managers.  The flip side of this, and another advantage to having a manager managed LLC is that you can elect managers that are not members.

Any LLC, regardless of whether it is member managed or manager managed should clearly define the authority of its members and managers in a written operating agreement executed by all the members and the LLC.   Check back sometime soon for a follow up post about how this should be handled and what things need to be considered.

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Raising Venture Capital – What form of entity should I choose?

Raising Venture Capital – What form of entity should I choose?

Have a great idea and plan on starting a business? Thinking about raising venture capital at some point in the future? You should think twice about forming an LLC. Venture capitalists typically require a “C” corporation when investing in a business. Here are a few reasons why:

  • Venture Capitalists like preferred stock, they are familiar with preferred stock, and will usually have already perfected terms for preferred stock.
  • Venture Capitalists typically don’t care about / don’t want pass through losses from an LLC.
  • Venture Capitalists will invest with an exit strategy in mind. That exit will likely either be an IPO, which is generally only available to “C” corporations, or sale of the company, which would preferably occur via a tax-free reorganization. Only corporations can participate in tax free reorganization.

So why not an “S” corporation? First, “S” corporations, under most circumstances, may not have a shareholder that is not a natural person; most Venture Capital funds are organized as limited partnerships. Second, “S” corporations may not have more than one class of stock. As I mentioned above, Venture Capital funds love preferred stock, and they can’t get it from an “S” corporation.

My business law practice can help you set up your business and plan for raising venture capital.

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What state should your business incoporate in?

What state should your business incoporate in?

Martin Zwilling over at Startupprofessionals.com has a nice post regarding why start-up busineses should consider incorporating / organizing their business in their home state.  The post can be found here, but here is a brief summary:

  • Don’t automatically flock to incorporating in Delaware.  Sure there might still be some advantages to doing so, but they don’t really apply to start-ups.
  • In Indiana, where I practice law, the filing fees for incorporating a business are inexpensive and the process is relatively straightforward – not the case in popular states such as Delaware and Nevada.
  • Attorneys in your home state, if you are using an attorney (hopefully you are), will be more familiar with your state incorporation laws.
  • Your company may qualify for an intrastate securities law exemption in the event it offers securities for sale.
  • There is no need to register as a foriegn entity in your home state – and added expense if you incorporate elsewhere.

As he points out, there are many other concerns that should be addressed when determining in what state you should incorporate – concerns you should address with a corporate attorney in your home state.

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