Starting your Business in Indiana: How to Get it Right from Day One.

Business Formation
Written By Matthew Shelton

We get it. Launching a business is an exciting new chapter in your life, but it can also be a daunting process. Whether you’re opening a storefront in downtown Indy, or launching your Indiana based e-commerce business, this short yet comprehensive guide will help you establish the proper legal foundation from day one so you can focus on growth with confidence.

Step 1: Choosing the Right Business Structure

LLC? Corporation? S-Corp? Partnership? What do I choose?

Your business entity type (aka your legal structure) will determine how you pay taxes, protect your personal assets, and manage liability. You choose your legal structure when you file your articles of organization (for LLCs)/articles of incorporation (for Corps) with Indiana’s Secretary of State. Indiana makes this simple with their INBiz platform: Start a Business - Business Entity - INBiz.

In Indiana, there are several types of structures you can choose from. Here is an overview of each of them:

  • Sole Proprietorship

    • No formal filing is required. This type of entity is automatically presumed when one does business in the State of Indiana without having filed with the secretary of state.

    • There is no liability protection associated with this classification, which practically speaking means that if you provide a service, and your customer or client files suit against you for any reason, your personal assets are at risk. If a judgement is rendered against you, the courts will look to the assets that are in your name for satisfaction of the judgement. The same is true for debts incurred in connection with the business.

    • The income of the business is reported on the owner’s personal tax return. Additionally, Schedule C of Form 1040 will need to be filed.

    • Generally, because of the significant risks associated with this structure, it is typically not recommended except for certain circumstances where the business’s scope is particularly small in nature.

  • Limited Liability Company

    • Filing with the secretary of state is required. This choice is the most popular for new businesses, and there is good reason why. An LLC designation provides both the liability protection of a corporation, as well as the tax flexibility of a sole proprietorship as taxes are “passed through” to the members of the LLC rather than paid at the entity level. In Indiana, this means your LLC itself does not pay state income tax; instead, profits and losses flow directly to your personal return, avoiding the double taxation issue that corporations face (unless those corporations are electing S-Corps).

    • Forming your business as a limited liability company will protect your personal assets from business debts and lawsuits (absent gross negligence or misconduct, in which case a court may “pierce the corporate veil” and hold the members liable, although this is a rare occurrence).

  • Corporation

    • Requires filing articles of Incorporation with the Indiana Secretary of State through the INBiz portal. Corporations must also adopt bylaws and hold organizational meetings.

    • Shareholders generally enjoy limited liability, meaning their personal assets are protected from corporate debts and lawsuits (unless, as mentioned above, the corporate veil is pierced).

    • By default, corporations are subject to “double taxation” - the corporation pays taxes on its profits, and shareholders pay taxes again on their personal tax returns once those profits are distributed. However, Indiana corporations may elect S-Corp status with the IRS by filling form 2553 to avoid double taxation, allowing profits and losses to pass through to shareholder’s personal returns.

    • Corporations are typically more complex to form and maintain than LLCs, which is why for most businesses, LLCs are the best option. However, some companies may want to go with the Corporation structure as it can be advantageous when seeking investment, issuing stock, or planning for significant future growth. This is because a corporation provides a more formal governance structure, which can be appealing to certain lenders and investors.

  • Partnerships

    • There are three types of partnerships in Indiana: General Partnerships (GPs), Limited Partnership (LPs), and Limited Liability Partnerships (LLPs). The determination of which one to choose here will depend on factors such as the nature of the relationship between yourself and your business partner, the level of involvement in the business by each partner, and how you may want risk to be allocated between the partners.

    • A General Partnership exists when there are two or more co-owners of a for-profit business. No formal filing with the Secretary of State is required, however there should be a formal partnership agreement between the partners that outlines how profits, losses, taxes, and decisions will be allocated. If you need assistance creating this document, please fill out a contact form. All partners are responsible for the liabilities and debts of the partnerships. Income is reported on each partner’s tax return, similar to how a sole proprietorship and LLCs treat tax.

    • A Limited Partnership is a partnership with at least one general partner and at least one limited partner. A limited partner’s liability is limited (as the name suggests) to their investment in the partnership. On the other hand, the general partner is responsible for all debts and liabilities of the partnership. Income for this partnership classification is treated the same as in a general partnership - each partner, both GP and LP, pays taxes on their respective share of income on their personal tax returns.

    • A Limited Liability Partnership is simply a general partnership that formally files with the Secretary of State and elects to be treated as a LLP in their application. This provides liability protection to all of the partners, and taxes are treated the same as they are in general partnerships and limited partnerships.

  • Non-Profit Corporation

    • A non-profit corporation (typically referred to as a 501(c)(3), as this is the tax-exempt status under the tax code) is one in which the business does not exist to pursue a profit.

    • A filing with the Indiana Secretary of State is required, along filling form 1023 with the IRS, which is the application for exemption status since these entities are tax exempt.

    • Liability and debt protection exists for those Directors, officers, and members of the non-profit corporation, similar to a regular corporation.

    • Although no taxes are paid with the IRS, Non-Profit Corps must still file an annual informational tax return with the IRS (Form 990).

    • This type of legal structure is ideal for organizations with a mission-driven purpose, such as a church or charity.

Step 2: Obtaining your Federal EIN Number

Once you’ve chosen your entity type and filed with the Indiana Secretary of State, the next step is to obtain your Employer Identification Number (EIN) from the IRS. This is essentially your business’s Social Security number and is required for opening bank accounts, hiring employees, and filing taxes. You can apply online directly through the IRS website, and approval is immediate. Note that individuals are limited to obtaining one (1) EIN per day.

Step 3: Supplemental Filings

Depending on your industry and location, you may need additional licenses or permits to operate legally in Indiana. Examples include local business licenses, professional licenses, or sales tax permits if you’re selling goods. When registering your business with the secretary of state, the application will point out these particular business purposes where additional filings are required.

It is also recommended to check with both Federal, Indiana, and local law to see if there are additional requirements for operation of the particular business you are starting. Typically, these are businesses where there is general public concern about the practices/location of these establishments (for example: liquor stores or towing companies), or alternatively the business is one that is highly regulated (such as the food production). We can help you do this, so feel free to fill out a contact form if you need help with compliance.

Step 4: Indiana Business Entity Reporting

Indiana requires registered business entities to file bi-annual reports with the Secretary of State to remain in good standing. LLCs, corporations, and non-profits must confirm basic information such as their registered agent and principal office address. Reports can be filed quickly through INBiz, and failure to file can result in administrative dissolution of your entity.These filings cost $31.00.

Still have questions?

I’m here to help! Feel free to shoot me an email: matt@sheltonlawpc.com , or fill out a contact form to hear back from me within 48 hours on your legal matter.

Disclaimer: This article is intended to be informational in nature and is not intended to provide legal advice. The information contained is general in nature for new businesses in the state of Indiana. Those businesses for example who will be selling alcohol or other goods/services with heightened regulations and restrictions will require additional paperwork. Those in Indiana in need of legal advice should fill out a contact form with information regarding their particular matter.

Matthew Shelton