Entity Forms to Consider When Starting Your Indiana Business

When starting a business in Indiana, entrepreneurs should consider the advantages and disadvantages of forming a sole proprietorship, a corporation, and a limited liability company.

The simplest form of business is the sole proprietorship.  A sole proprietorship is a business entity owned by one individual who performs the majority of the business’s functions.  The sole proprietorship is relatively simple to initiate, but there are a few procedures the sole proprietor must follow in maintaining the business.  For example, if the proprietor sells products or other tangible items, she must collect sales tax and register with the Indiana Department of Revenue to receive a Registered Retail Merchant Certificate.  Other tax registration procedures must be followed if the business sells food and beverages, gasoline, tires, fireworks, or prepaid wireless cards, among others.

The relative ease and low cost of establishing a sole proprietorship is countered by the significant exposure to personal liability.  A sole proprietor is personally liable for the business debts, obligations, and liabilities.  For example, if a sole proprietorship is found to have breached a warranty in the sale of goods, the owner’s personal assets will be subject to judicial liens after the creditor receives a judgment.  Additionally, sole proprietorships present tax consequences to consider.  Profits and losses of a sole proprietorship are treated as personal income or loss to the owner and must be reported on the owner’s personal income taxes.  I.R.C. §61(a).

The second business form to consider is a corporation.  Indiana corporations are established and governed by the provisions of I.C. § 23-1-1 et seq.  An advantage of formation as a corporation is that it allows entrepreneurs to spread the risk of doing business over a large number of investors.  A corporation is “owned” by its shareholders.  The shareholders are not personally liable for the debts or liabilities of the corporation.  Generally, creditors of the corporation cannot attach to the assets of the shareholders absent instances of “piercing the corporate veil.”  The actions and assets of the corporation are controlled by its directors.  The directors operate to manage the corporation in a manner that will maximize profits for the shareholders and are required to act in a way that is, at least arguably, best for the company.

Although the corporate form provides some protection for the assets of the individual directors and shareholders, individuals doing business as a corporation are often frustrated by the numerous formality requirements placed on corporations.  Among these corporate formalities are the incorporation process, the establishment of bylaws, board meetings, shareholder voting, heightened standards of care for directors as fiduciaries, and records and reporting requirements.  Failure to abide by the statutory formality requirements can lead to administrative dissolution of the corporation and actions to pierce the corporate veil.  Additionally, income derived by the corporation (except that derived by an “S” corporation) is subject to “double taxation.”  This means that the corporation’s income is taxed once when it is received by the corporation, and the shareholders are then personally taxed on the income they receive from their shares.

A third option is the limited liability company (“LLC”).  LLCs are created and governed by I.C. § 23-18-1-1 et seq.  The LLC is often described as being somewhere in between sole proprietorships and corporations.  Forming and doing business as an LLC allows entrepreneurs to protect themselves against personal liability for company debts while, at the same time, avoiding many of the statutory formalities of corporations.  Members of LLCs are typically only personally liable for their own acts and omissions.  Members of LLCs are able to manage and control the company without dealing with boards of directors or shareholder votes.  The LLC form also allows members to take advantage of “pass-through taxation.”  This means that LLC derived income is taxed only at the personal income level, instead of being taxed at both the business and personal level.

LLCs are required to abide by some statutory formalities, but the requirements are less strenuous that those on corporations.  LLCs are required to file articles of organization, use the term “LLC” in their company name, designate a registered agent, and file a report with the Secretary of State every two years.  Failure to abide by these requirements can lead to administrative dissolution of the company.

When determining what type of business entity to form, it is important to consider the filing requirements, personal liability exposure, and tax consequences of each. Julie Camden and Corey Meridew of Camden & Meridew, P.C. practice in the area of business formation and litigation and can use their knowledge and experience to help you. To speak to one of our attorneys, please call 317-770-0000 or fill out our online contact form.

This website supplies general information about the law but it is provided for informational purposes only.  This content does not create an attorney-client relationship and more importantly is not meant to constitute legal advice.  You should not act on any of the information contained herein without first consulting an attorney.