An Overview of South Carolina Business Organizations

Business Organization & Registration Services

In South Carolina, there are several reasons why professionals, entrepreneurs, and business owners may choose to set up and register a new business. The state’s dynamic and varied economy offers abundant opportunities for new ventures. With thriving industries such as manufacturing, agriculture, and technology, South Carolina is a fertile ground for a variety of business types.

One of the key advantages of forming a legal business entity in South Carolina is the liability protection it offers. Once a business is registered, its owners are generally shielded from personal liability for business debts and obligations. This means personal assets are typically protected in the event of business-related legal issues. Moreover, being a registered business adds a layer of legitimacy and credibility. This is often important to customers, suppliers, and investors, who usually prefer dealing with registered entities over unregistered sole proprietorships or partnerships. It demonstrates a serious commitment to business operations within South Carolina.

Taxation is another consideration. While South Carolina imposes a corporate income tax, it also offers several tax incentives to attract and retain businesses, especially in certain industries or regions. Finally, registering a business in South Carolina is essential for legal compliance. It ensures adherence to state laws and regulations, which may include zoning, licensing, and permits.

In summary, organizing and registering a business in South Carolina brings numerous advantages, including liability protection, enhanced credibility, support systems, tax benefits, and legal compliance. Nonetheless, it’s important to consider these factors in light of the specific needs and circumstances of the business.

How To Choose The Right Business Entity

Selecting the right business entity is a crucial step when starting a new business in South Carolina. The nature of your business and its potential risks play a significant role in this decision. For businesses facing higher liability risks, entity types like corporations or limited liability companies (LLCs) are often preferred for the personal asset protection they offer against business debts or legal actions.

The way you plan to fund your business is another key factor. Structures like LLCs and corporations are often more appealing to investors because they can issue stock or membership units. This feature is advantageous for raising capital. On the other hand, simpler structures like sole proprietorships and partnerships might be more suitable for smaller-scale businesses with limited capital requirements.

Tax considerations are also critical. Each business structure has distinct tax implications. For instance, traditional corporations (C Corporations) face double taxation on profits and dividends. Alternatively, entities like S Corporations or LLCs taxed as S Corporations, partnerships, or disregarded entities allow profits to pass directly to owners, bypassing corporate tax.

Control over your business is another aspect to consider. Sole proprietorships and partnerships offer complete owner control, whereas corporations are typically governed by a board of directors. It’s important to weigh the administrative demands and costs of each entity type. Corporations have more stringent requirements for record-keeping and reporting, which might be challenging for some business owners. LLCs, in contrast, offer greater flexibility with fewer formalities.

Your long-term objectives, such as selling the business, going public, or transferring it to heirs, should influence your choice too. Corporations and LLCs, for example, are generally more conducive to ownership transfers, making them preferable for those planning a future sale. Lastly, each state has its own regulations and rules for business entities, making it important to consider these local legal aspects when choosing your business structure.

To summarize, the ideal business entity should be selected based on considerations like risk exposure, financial needs, tax implications, level of control, administrative burdens, long-term goals, and local legal requirements. Consulting with our business attorneys is advisable to ensure you make a well-informed choice tailored to your unique circumstances.

South Carolina Business Entity Types

Corporations

In South Carolina, a corporation is a business entity established in line with the state’s regulations, particularly under the South Carolina Business Corporation Act of 1988 (SC Code Section 33-1-101). This Act outlines the rules for forming, operating, governing, and dissolving corporations in the state.

A corporation stands as a separate legal entity from its owners, known as shareholders. This separation offers notable advantages:

  • Limited Liability: Shareholders are only liable up to their investment in the corporation. This means personal assets are generally safe if the corporation faces debts or legal challenges.
  • Perpetual Existence: The corporation continues to exist indefinitely, even if ownership changes due to the sale of shares or the death of a shareholder.
  • Ease of Ownership Transfer: Shares in a corporation can be easily transferred, allowing for flexible changes in ownership.
  • Capital Raising: Corporations often find it easier to raise funds as they can issue stock.

However, corporations in South Carolina also have specific responsibilities and complexities. They are required to file annual reports with the South Carolina Secretary of State and the South Carolina Department of Revenue, along with the payment of associated fees. They face corporate income tax and, in some cases, double taxation — where the company’s profits and the dividends paid to shareholders are taxed separately.

Additionally, South Carolina corporations must have a board of directors and comply with certain standards for corporate meetings and record-keeping. These requirements ensure that the corporation adheres to legal and operational protocols set by the state.

Professional Service Corporations

In South Carolina, a Professional Service Corporation (PSC) is a distinct type of corporation created for individuals who offer licensed or highly specialized professional services. This includes fields such as medicine, law, engineering, accounting, architecture, and consulting, to name a few. The formation of a PSC is governed by the South Carolina Professional Corporation Supplement (SC Code Section 33-19-101).

A defining feature of a PSC is that it offers limited liability protection to its owners, who are referred to as shareholders. This means their personal assets are generally safeguarded from the corporation’s debts and liabilities. However, it’s important to note that in cases of malpractice or professional negligence, the individual professional might still bear personal liability.

Taxation for a PSC can differ based on location and the tax decisions made by the corporation. Sometimes, a PSC might choose to be taxed as an S corporation. In this scenario, the corporation itself doesn’t pay income tax. Instead, the income or losses of the corporation are passed through to the shareholders’ personal tax returns, and taxes are paid at an individual level.

Closely Held Corporations

A South Carolina Close Corporation, also known as a Closely Held Corporation, is a corporate structure usually with a limited number of shareholders. This term typically applies to corporations owned by a tight-knit group, like a family or a small circle of investors, and is regulated by the South Carolina Close Corporation Supplement (SC Code of Laws Section 33-18-102).

Key features of a close corporation include:

  • Small Shareholder Group: These corporations usually have a limited number of shareholders, which can vary from a few individuals to several dozen. In some areas, the law might set a maximum limit on the number of shareholders for a close corporation.
  • Share Transfer Restrictions: Unlike public corporations, close corporations don’t freely trade shares on public exchanges. There are usually specific rules governing how and to whom shares can be sold, often outlined in the corporation’s shareholder or stock agreement or bylaws.
  • Operational Flexibility: Close corporations generally have more leeway in how they operate compared to publicly traded companies. For instance, they might not need to hold annual meetings or establish a board of directors, though they must still fulfill certain legal requirements.
  • Privacy in Financial Matters: These corporations are not obliged to publicly share their financial information, offering a level of privacy that may appeal to some shareholders.

While close corporations benefit from limited liability protection, shielding shareholders from personal liability for corporate debts, they also demand careful management of shareholder relations. Disputes among shareholders, especially in such a small group, can significantly impact the business. As such, it is critically important to have Corporate Bylaws and Shareholder Management Agreements for the Closely Held Corporation in place.

Benefit Corporation

A Benefit Corporation in South Carolina, as defined by the South Carolina Benefit Corporation Act (SC Code of Laws Section 33-38-110), is a for-profit entity with a twist. Its goals extend beyond profit, encompassing a positive impact on society, workers, the community, and the environment. The core aim of a Benefit Corporation is to generate a general public benefit, which means creating a substantial positive effect on society and the environment.

The defining aspects of a Benefit Corporation are:

  • Purpose: These corporations are mandated to incorporate a public benefit purpose in their articles of incorporation. This purpose transcends profit-making and focuses on creating positive effects on society, workers, the community, and the environment.
  • Accountability: Benefit Corporations must be accountable to shareholders not only for financial returns but also for achieving their public benefit goals. Their decision-making process must consider the impacts on a broad group of stakeholders, including employees, customers, the community, and the environment.
  • Transparency: They are required to produce an annual benefit report, measuring their social and environmental performance against a third-party standard. This report offers transparency to both shareholders and the public, detailing how well they meet their goals.

Positioned between a traditional corporation and a nonprofit, Benefit Corporations are unique. Unlike standard corporations, they are obligated to consider the effects of their decisions on various stakeholders, not just on shareholders. However, unlike nonprofits, they are for-profit entities, can issue dividends, and aim to be profitable.

Benefit Corporations are particularly appealing to entrepreneurs and investors looking to address social and environmental issues through their business operations, while also pursuing profitability. They attract businesses that prioritize transparency, accountability, and contributing to the greater good along with financial success.

Nonprofit Corporation

In South Carolina, a Nonprofit Corporation (NFP) is established under the South Carolina Nonprofit Corporation Act of 1994 (SC Code of Laws Section 33-31-101). These organizations are not focused on profit generation but rather on pursuing a mission, such as addressing social issues, providing public benefits, or serving specific groups. Unlike for-profit businesses, any surplus income in a nonprofit is reinvested to further its mission instead of being distributed to owners or shareholders.

The main features of a nonprofit organization are:

  • Mission-Driven: The core of a nonprofit is its mission, which could involve tackling social challenges, providing public services, or catering to a particular group. This mission is the guiding force behind all activities and decisions of the organization.
  • No Profit Distribution: While nonprofits can earn income, any excess funds are put back into supporting the organization’s purpose. There is no profit sharing among members, officers, or directors.
  • Tax-Exempt Status: Nonprofits in many areas, including the U.S., can seek tax-exempt status. For instance, achieving 501(c)(3) status with the IRS exempts them from federal income tax.
  • Public Disclosure: These organizations are generally required to be transparent about their finances, which promotes accountability.
  • Governed by a Board: Typically, nonprofits are overseen by a board of directors or trustees who ensure the organization remains aligned with its mission and operates effectively.

Nonprofits encompass a wide array of organizations, including charities, educational entities, healthcare organizations, and cultural institutions. Each is dedicated to its unique mission, contributing significantly to various sectors of society.

Limited Liability Company (LLC)

In South Carolina, a Limited Liability Company (LLC) is a business structure governed by the South Carolina Limited Liability Company Act (SC Code of Laws Section 33-44-101). It merges the limited liability features of a corporation with the operational flexibility and pass-through taxation characteristic of a partnership.

Key aspects of an LLC include:

  • Limited Liability: LLCs provide their owners, called members, with protection from personal responsibility for the company’s debts and liabilities. This means personal assets are generally safeguarded if the LLC faces financial or legal troubles.
  • Operational Flexibility: South Carolina LLCs usually offer more flexibility in management compared to corporations. They don’t typically require a board of directors or annual meetings, unless specified in their operating agreement.
  • Pass-through Taxation: An LLC is normally a pass-through entity for tax purposes, meaning profits and losses are passed through to members who report them on their personal income tax returns, avoiding the double taxation that corporations sometimes face.

LLCs can adopt different tax structures, depending on their membership and elections:

  • Disregarded Entity: A single-member LLC is by default a disregarded entity for tax purposes, akin to a sole proprietorship. The owner reports the LLC’s income and expenses on their personal tax return.
  • Partnership: A multi-member LLC is treated as a partnership by default for tax purposes, with profits and losses passed through to members’ personal tax returns.
  • C Corporation: LLCs can choose to be taxed as C Corporations, subjecting them to corporate tax rates and potential double taxation on dividends.
  • S Corporation: LLCs can also opt for S Corporation status, where only owner-employee salaries are subject to self-employment taxes, potentially offering tax benefits.

The LLC is a popular business entity choice due to its flexibility and protection features. For more information about South Carolina LLCs, please visit our webpage dedicated to this topic.

Limited Liability Partnership

A Limited Liability Partnership (LLP), as outlined in the Uniform Partnership Act (South Carolina Code of Laws Section 33-41-1110), is a partnership model that offers limited liability to its partners. This structure ensures that partners are not personally responsible for the partnership’s debts or for the negligent actions of other partners.

The key characteristics of an LLP are:

  • Limited Liability Protection: In an LLP, partners are protected from personal liability for the business’s debts and actions. Generally, partners’ personal assets are safe from business creditors, and they can’t lose more than their investment in the partnership.
  • Flexible Internal Structure: LLPs allow partners to define their roles, responsibilities, profit-sharing, decision-making processes, and other operational aspects, providing significant internal flexibility.
  • Pass-through Taxation: Typically, LLPs are treated as pass-through entities for tax purposes. This means the LLP itself doesn’t pay income tax. Instead, profits and losses are passed on to the partners, who report them on their personal tax returns.
  • Management Participation: Unlike limited partnerships where limited partners do not participate in management, all partners in an LLP have the right to be involved in managing the business.

LLPs are often chosen in fields traditionally organized as partnerships, like law, accounting, and architecture. Their popularity stems from the advantage of allowing professionals to avoid personal liability for the malpractices of their partners. The following requirements pursuant to the limited liability partnership statute should also be noted:

SECTION 33-41-1130. Liability insurance.

  • (A)(1) A registered limited liability partnership shall carry at least $100,000 of liability insurance, beyond the amount of any applicable deductible, of a type that is designed to cover the kinds of negligence, wrongful acts, and misconduct for which liability is limited by Section 33-41-370(B) and which insures the partnership and its partners.
  • (2) A registered limited liability partnership which renders professional services, as defined in Section 33-19-103(7), shall carry such additional insurance of the type described in item (1) of this subsection as may be required by the appropriate licensing authority. Professional service licensing authorities may prescribe additional insurance only on the profession as a whole, and not only on individual service providers.

Limited Partnerships

A Limited Partnership (LP), established under the Uniform Limited Partnership Act (SC Code of Laws Section 33-42-10), is a partnership model involving at least two partners, including one general partner and one limited partner.

Characteristics of an LP are:

  • General Partners: These partners handle the LP’s daily management and are personally liable for its debts and obligations. Their personal assets might be at risk if the LP fails to meet its financial responsibilities.
  • Limited Partners: Limited partners contribute financially but are not involved in managing the partnership. Their liability is generally restricted to their investment amount, protecting their personal assets beyond this contribution.
  • Pass-Through Taxation: LPs often enjoy pass-through taxation, where the partnership doesn’t pay income tax directly. Instead, profits and losses are passed to the partners, who report them on their individual tax returns.

LPs are commonly used where investors wish to fund a venture without managing it or risking their personal assets. This structure is popular in fields like real estate investment, venture capital, private equity, and film production.

However, it’s important for limited partners to avoid management roles to maintain their liability protection, as active management involvement could forfeit this shield, turning them into active investors.

Contact Our Charleston Business Attorneys

Embarking on the adventure of starting a business in South Carolina brings with it both thrilling prospects and intricate legal challenges. We recognize the importance of each step being taken with confidence and security, setting the foundation for your enduring success. Our firm is adept at guiding individuals and organizations through the complex landscape of business formation, leveraging our comprehensive understanding of various business entities including Limited Liability Companies, Corporations, and Partnerships.

Our legal expertise covers a wide spectrum. We provide advice on choosing the right business structure tailored to your specific needs and objectives, drafting foundational documents, ensuring adherence to state regulations, and aiding with licensing necessities.

Beyond just helping you lay the legal groundwork for your business, our commitment extends to ongoing support as your venture expands and adapts. Our seasoned attorneys are equipped to offer valuable insights and counsel on a range of business-related legal matters such as contracts, employment law, protecting intellectual property, and navigating potential legal hurdles that may emerge along your business path.