Choosing the right type of South Carolina business entity is a critical decision that business owners must make when starting a new business in South Carolina. The debate over which type of business entity constitutes the best vehicle through which to conduct a business enterprise or to hold investment property will never go away. In selecting a from of business entity in which to engage business in South Carolina, the business owner should consider the following six business entity forms.
Selecting a Form of Business Entity in South Carolina
South Carolina Corporation
A corporation cannot exist without authorization and approval from the South Carolina Secretary of State. Corporations are formed by filing the articles of incorporation with the secretary of state. Corporations are required to adopt bylaws which set forth in detail how the corporation is to be managed and operated. The relationship between the shareholders with respect to their rights, duties and obligations in connection with the corporation will be set forth in a shareholder agreement. Corporations need one or more owners to exist. There is no maximum limitation on the number of owners, and no restrictions on the type of owners unless a decision is made to elect Subchapter S tax treatment for the corporation. Corporations generally have a centralized management hierarchy in the form of board of directors and corporate offices. However, it should be noted that corporations may be managed and operated directly by the owners by elects to form a South Carolina close corporation. Corporations provide protection from personal liability to their shareholders against third parties for the corporations debts and obligations, provided the shareholder does not personally guaranty or accept liability for those debts and obligations.
S Corporations versus C Corporations
It should be first understood that both forms are corporations under South Carolina. The distinction between the two is relation to the corporation’s tax treatment. Click the following link for a detailed summary on the distinctions between an LLC versus S Corporation. An S corporation is organized similarly to a C corporation under the standard South Carolina corporate formation requirements. When incorporated, the S corporation is not designed as an S corporation for state law purposes. The S corporation achieves such status for federal income tax purposes by making an election to be treated as an S corporation. The IRS form for making such an election is IRS form 2553. C corporations are separately taxable, while an S corporation is a pass through entity. In other words, income, losses, deductions, and credits of an S corporation are passed through and taxed to its shareholders, pro-rata based on upon stock ownership. This pass through tax treatment affords an S corporation certain tax advantages as compared with a C corporation.
South Carolina Professional Corporation
In order to determine what businesses should or may be incorporated as professional corporations in South Carolina, it is highly suggested that the business owner review both the professional corporation supplement and the licensing statutes found in Title 40 of the South Carolina Code of Laws. The professional corporation supplement provides that a corporation may elect professional status solely for the rendering of professional services (lawyers, doctors, accountants, etc) Thus, professional business owners should review Title 40 to determine which professions and licensed groups must practice in the professional corporate form, as opposed to the standard corporate form.
South Carolina Nonprofit Corporation
A South Carolina nonprofit corporation is traditionally defined as a corporation which distributes no part of its income to its members, directors or officers. South Carolina nonprofit corporations are very similar to their for-profit counterparts, but with two important differences. First, nonprofit corporations are formed for purposes other than for the generation of profit. For example, trade associations, various membership organizations, religious, charitable, scientific, and educational purposes. Second, unlike regular corporations, nonprofit corporations do not have persons who own equity interests in the corporation. In fact, South Carolina nonprofit corporation are generally prohibited from distributing any assets to its members, the nonprofit equivalent to shareholders in a business corporation.
South Carolina Limited Liability Company
The interest in limited liability companies arose from dissatisfaction with the other business entity forms. For example, corporations, while offering limited liability, impose cumbersome management structures and, by default, double taxation of corporate earnings at both the entity and shareholder levels. S corporations offer limited liability and, generally, one level of taxation on shareholders but are subject to a great number of structural and operating restrictions. These restrictions can make S corporations burdensome to form and costly to operate. Partnerships do not offer all investors limited liability and may not permit as flexible a management structure. The limited liability company offers solutions to many of these problems.
With the enactment of limited liability company statutes in all 50 states and the District of Columbia and the adoption of the check-the-box tax regulations, organizing business ventures as limited liability companies (LLCs) has become more popular. The limited liability company may elect the following tax treatments: sole proprietorship, partnership, Subchapter S, and Subchapter C. The LLC combines limited liability for its members, management flexibility, and flexible tax treatment as noted above. The LLC allows members flexibility to participate actively in managing the business or to delegate to managers some or all managerial power.
One of the primary benefits of the LLC, and a key distinction between it and a limited or general partnership, is the LLC’s limited liability to all of its members. Members of an LLC, like shareholders in a corporation, are generally liable for the debts of the LLC only to the extent of their capital contributions to the LLC. In contrast, in a general partnership, all partners are jointly and severally liable for the debts of the partnership, and in a limited partnership, at least the general partner is liable for the debts of the partnership.
South Carolina Partnership
The Uniform Partnership Act governs a South Carolina partnership. A partnership is an association of two or more persons that establishes co-ownership of a business for profit. The existence of a South Carolina partnership depends on the relationship between the parties and whether the parties came together to carry on a venture for their common benefit, each contributed property or services and had a community of interest in the profits of the business venture. A South Carolina partnership does not insulate the general partners from the debts and liabilities incurred by the business – they are joint and severally liable. This partnership entity does, however, provide the advantage of a pass-through taxation and provides the partners with the ability to control and establish their relationships with great flexibility.
South Carolina Limited Partnership
The formal requirements to form a South Carolina limited partnership are found in the South Carolina Uniform Limited Partnership Act. A limited partnership is a business entity consisting of at least one general partner and one or more limited partners. Generally speaking, the general partner is an experienced businessperson and usually provides financial resources and the daily management skills to the limited partnership. A limited partner is an individual or business that offers only capital or financial resources to that limited partnership.
Contact our Charleston Business Attorneys
If you are deciding which business entity will be the best form for your company in South Carolina, please contact our law firm by giving us a call, filling out the contact form to your right, or sending one of our corporate lawyers an email.