corporate law

Or the limited liability company's operating agreement? Or a partnership agreement?

First and foremost, these documents set out how the legal entity will operate internally. Think of them as a blueprint or like a disk operating system. I used the analogy to tailor made goods in an earlier post. The by-laws set out the rights and responsibilities of the owners to one another and to the business. The by-laws need to meet the needs of the owners and the business.

Secondly, the agreement - if it is any good - sets out the process for splitting up the business. For a bit more on this topic you might want to read Like a marriage, a new business partnership needs a 'pre-nup' written by an Illinois attorney and published in The Napierville Sun.

The law require three things for starting a corporation:

1. Corporate by-laws.
2. Articles of Incorporation.
3. An Employer Identification Number.

I suggest a fourth is necessary from the business side of things: a business plan.

How to get these things done? First, option has you doing all the work. You cna find corporate by-laws online by just googling the term. Indiana Secretary of State has a online method ff starting new companies here. You can go to irs.gov and get a EIN number. You will also be trying to get your business up and running at the same time. And what is an incorporator? Why do you need a resident agent?

You can go with a company who may or may not employ a lawyer, offering low cost incorporations in Delaware or somewhere exotic for some very low fee. I am not sure I understand the allure of these companies. Your corporation will be governed by the laws of the state in which you incorporated and you will be in Indiana. What happens if a question comes up about the corporations law in this other state? Either you find an Indiana lawyer licensed in that other state and knowledgeable about the other state's corporations law, or you hire an attorney in that other state.

I have said for many years that the reason for lawyers is so that people like you do not spend your time in a courthouse. The same idea applies here. What makes life easier for us in a business start up situation. You will find it a more efficient use of your time to turn over to a lawyer the tasks of getting the Articles of Incorporation done and getting the EIN number. Just as if you have downloaded those corporate by-laws and read them can lead to more efficiently using the attorney's time. (By the way, let me say that my view is that online bylaws are only good as a starting point. Think of the difference between wholesale and retail. Online bylaws epitomize wholesale when what you need is not only retail but tailored work. Bad bylaws pose a grave danger to any corporation.)

Having an attorney on hand at the start can get you through the meeting of incorporators and first meeting of the corporation so that the corporation begins its life in full legal propriety.

And why is all this so important? Erroneously setting up the corporation can rob the shareholders of what they wanted: protection from personal liability.

What can be the most difficult thing about running a business? Ending it.

The Iowa Law Blog has a brilliant post on the subject: How to Avoid the Business Divorce.

I say brilliant because I say about the same thing to all potential business start ups:

Every business partnership (whether in a corporation, LLC or true partnership) should consider a buy-sell agreement from the outset. As Central Iowa financial planner Art Dinkin says, Begin with the End in Mind.

A buy-sell generally covers how an owner can sell shares and how to value those shares. Further, a good buy-sell agreement sets forth what happens in the event of death, disability, retirement, divorce, bankruptcy or other considerations.

Effective buy-sell agreements will generally require a right of first refusal. This means if one owner finds an outside buyer for his shares the owner must first offer those shares to the other existing owners. This protects the owners from suddenly running the business with someone they did not intend to have as a partner.

I especially look at the buy-sell agreements for limited liability companies. I had a bad experience in trying to get a client out of one (he did) and I am twice shy when once bitten.

For those starting a limited liability company or a corporation, you need an EIN. IRS maintains FAQs (Frequently Asked Questions) about EIN numbers. These FAQs include:

Do You Need an EIN?

Online EIN: Frequently Asked Questions

Do you want to start an Indiana corporation? What follows is a very general outline of what it takes to incorporate in Indiana.

1. Check the availability of the corporate name with the Secretary of State, Division of Corporations.


2. Prepare the Articles of Incorporation.

Another service our Secretary of State office makes available online. If you prepare the Articles online, the site checks the name of the proposed business for you. However, the registration cannot be completed online:
At this point, you might want to reconsider your desire to do this yourself balanced against the risks of getting one of the following responses from the Sectary of State:

Incomplete: You must finish filling out your form with the required information before SOS can approve your registration
Pending Review: You have completed your registration and have successfully submitted it to the Indiana Secretary of State for review. The Indiana Secretary of State will contact you via email to let you know your registration has been approved or rejected.
Rejected: Your business entity registration was not approved by the Indiana Secretary of State. A reason (s) should be listed in your email as to why it was not approved. You may contact SOS at 317.232.6576 to determine why your registration was not approved.

3. Getting the Articles of Incorporation to the Secretary of State, Division of Corporations. Make sure that the registration fee is enclosed.

Assuming that the registration is approved, you will have a valid registration with Indiana's Secretary of State. This does not make your business a corporation. You are are at a half-way point now. What follows finally establishes the business as a corporation.

4. Prepare the By-laws and schedule a meeting with the incorporators (or the incorporators and shareholders if these are different people).


6. Comply with all applicable state laws concerning any fictitious name under which the corporation will conduct its activities.

7. Dealing with the IRS.

1. You need an EIN (Employer Identification Number) number from the IRS and
   
2. Also the documents to get "S Corporation" status, if is desired.

Go to http://www.irs.gov/businesses/small/article/0,,id=102767,00.html to apply for the EIN number. According to the IRS website today, these are the hours for using the online application process:

This application is available during the following hours:
Monday - Friday 6:00 a.m. to 12:30 a.m. Eastern time
Saturday 6:00 a.m. to 9:00 p.m. Eastern time
Sunday 7:00 p.m. to 12:00 a.m. Eastern time

During this application you can also produce the documents needed for electing Subschapter S status. Remember that Subchapter S is a creature of the federal tax law - Indiana recognizes only two types of corporations: for-profit and not-for-profit.

7. Apply for a state sales tax number, if the corporation will be responsible for collecting state sales tax.

Lawyers dislike partnerships because they do not protect the partners' assets from business creditors. Corporations limit the liability of their shareholders to their interest in the corporation. The liability limited in a limited liability company is the members' assets to those invested in the LLC.

What lawyers like, clients often ignore. Partnership law allows for creating a partnership without an agreement, instead the mere actions of the people creates the partnership. Indiana Code 23-4-1-7(4) says:

The receipt by a person of a share of the profits of a business is prima facie evidence that the person is a partner in the business, but no such inference shall be drawn if such profits were received in payment for the following:

(a) As a debt by installments or otherwise.
(b) As wages of an employee or rent to a landlord.
(c) As an annuity to a widow or representative of a deceased partner.
(d) As interest on a loan though the amount of payment varies with the profits of the business.
(e) As the consideration for the sale of a goodwill of a business or other property by installments or otherwise

Other problems include:

1. The partners act as agents of one another with the possibility of one partner binding another without the other's knowledge. Indiana Code 23-4-1-9
2. "An admission or representation made by any partner concerning partnership affairs within the scope of his authority as conferred by this chapter is evidence against the partnership." Indiana Code 23-4-1-11
3. Notice to one partner acts as notice for all partners. No problem if no gets absent-minded or is always forthright. Indiana Code 23-4-1-12
4. One partner has the power to bind the partnership for his wrongful acts. Indiana Code 23-4-1-13
5. A partner binds the partnership for any breach of trust to a third party. Indiana Code 23-4-1-14

Think about these problems when you start sharing business profits with another person.

For articles posted on this blog about business law, corporate law, and/or start ups, click on the links next to the word label directly below this post.

If you contemplate starting a business in Indiana, please contact me about a consultation.

I debated this post about a Fox News article Insider Trading: Pillow Talk Reveals Couples’ Dirty Little Secrets.After all, what readers I have do not come here for SEC matters. This paragraph changed my mind:
Fiduciary duty applies to more than securities fraud. The duty applies to the personal administrators of estates, trustees of all sorts, members of a limited liability company, and directors/officers of a corporation. I have not seen an Indiana case applying a duty on a spouse, but it may be possible.

Be prepared for what can go wrong with a business. You start a business with other people. You do not want to think about the business ending but most people do not want to think about their marriage coming to an end, either.

The New York Times published Making the Breakup Much Easier and I think it gives a non-lawyer perspective on business relationships falling apart. For a more lawyerly post on the same subject follow this link.

"When he tried to cash out, they argued that the business had hit hard times and wasn’t worth anything. (Both restaurants have since closed.) Mr. Ayoub, 51, who now owns Fornino, an upscale pizzeria in the Williamsburg section of Brooklyn, said he walked away from the feud with just enough to pay his lawyer."

Such tangles and many others can be avoided with a buy-sell agreement — basically a business prenup or a postnup, depending on when owners draw it up. In a buy-sell, partners (the process is the same for corporations and limited liability companies) decide what will happen to their interest in the company if events like death, divorce and personal bankruptcy occur.

A buy-sell can prevent an assortment of evils, like becoming unwilling partners with an owner’s heirs, or leaving a surviving spouse illiquid because the remaining owners refuse to buy the survivor’s inherited shares. By requiring a sale under certain circumstances, known as trigger events, and specifying the terms beforehand, the buy-sell avoids conflict and protects everyone, said Louis A. Mezzullo, author of “An Estate Planner’s Guide to Buy-Sell Agreements for the Closely Held Business.”

The best time to arrange the details, which can require 20 pages or more, is before you begin a venture, said Robert E. Gregg, a lawyer with Squire, Sanders & Dempsey in Tysons Corner, Va. Still, Mr. Gregg, who has worked with many start-ups, said there was generally no harm in waiting six months or so until you’re sure the business is workable. Either way, there are issues to sort out.

The article goes on a bit about the different options for the content of a buy-sell agreement:

What are the payment terms and financing? A lump-sum payout is often associated with life insurance that is used to finance a buyout when an owner dies, Mr. Redd said. You’ll need fewer policies if the company buys a policy for every owner, rather than if they insure one another individually, he said. The alternative is an installment sale, with payments plus interest over a defined period. These arrangements are common in buyouts where the owners don’t anticipate a ready source of cash, which could happen if one owner gets divorced or wants to quit the business, Professor Donaldson said. The legal bill to prepare a buy-sell agreement can cost $2,500 to $15,000, depending on complexity. If your budget is tight, you can rely on the free buy-sell agreement that many life insurance companies offer policy buyers, but it will probably cover only an owner’s death, not other trigger events.

I wonder if the fees quoted are not New York fees instead of Indiana fees, but I agree on what increases the costs. The more complexity wanted and needed by a client means more work and higher fees. However, I (again) say that the buy-sell agreement must be part of the documents creating the business entity - the Limited Liability Company's operating agreement, the corporation's corporate by-laws and so on.

Jeff Dennis has a column, Lessons from the edge on Canadian Business Online that includes excerpts from his book of the same name. He describes the book as "a chronicle of entrepreneurs who lost or almost lost their companies, and what they learned in the process...."

The third one has relevance for this blog:

Business Week published a fairly straightforward article on the different types of business structures for a startups: Room To Grow. The article gives the basic information on partnerships, corporations, and limited liability companies.

Contact me if you are looking to start a business in Indiana and need legal counsel.