Articles of Incorporation
In South Carolina, the articles of incorporation filed with the Secretary of State are a matter of public record. The articles must specify the name of the corporation, the number and classes of authorized shares, the initial registered agent and the street address of the initial registered office, and the name, address, and signature of each incorporator. Other provisions may be included, such as the corporate purpose, names and addresses of the directors, management of the business and regulating the internal affairs of the corporation, corporate powers, etc. Unless the Articles provide otherwise, certain statutory provisions will apply to the corporation and any substantive amendments to the articles of incorporation may be made only by shareholder approval.
The Bylaws of the corporation do not need to be filed with the Secretary of State and should remain a private. The Bylaws generally contain detailed provisions for governance of the corporation, addressing such matters as election of directors and officers, required corporate meetings, indemnification of directors and officers, the principal purpose of the corporation, the rights and duties existing between the directors, officers and shareholders, the corporation tax structure (C-Corp or S-Corp), etc. In other words, the Bylaws are rules and guidelines for the internal governance and control of the corporation. After the adoption of the initial Bylaws, a corporation’s board of directors may amend or repeal Bylaws unless the articles of incorporation or the Act reserves this power exclusively to the shareholders. A corporation’s shareholders may amend or repeal the corporation’s Bylaws even though the Bylaws also may be amended or repealed by its Board of Directors.
Shares of Capital Stock
A corporation, pursuant to its articles of incorporation, may prescribe the classes of shares and the number of shares of each class that the corporation is authorized to issue. Shares of capital stock must be issued for certain consideration, whether cash, property or services. For services to be performed and promissory notes, shares may be issued but must be held in trust (or escrow) until the services are peformed or the promissory note satisfied. The Act defines shares (or stock) as units into which the proprietary interest of the corporation are divided. If more than one class of shares is authorized, the articles of incorporation must designate distinguishing characteristics for each class, and before the issuance of shares of a class, the articles must describe the preferences, limitations and relative rights of that class of shares. It is not necessary for the corporation to issue all shares that are authorized; shares may be held by the corporation for future use. The articles of incorporation may authorize one or more classes of shares that:
Have special, conditional, or limited voting rights, or no right to vote, except to the extent prohibited by the Act or IRS tax code;
are redeemable or convertible as specified in the articles of incorporation: (i) at the option of the corporation, the shareholder or another person, or upon the occurrence of a designated event; (ii) for cash, indebtedness, securities, or other property; (iii) in a designated amount or in an amount determined in accordance with a designated formula or by reference to extrinsic data or events;
Entitle the holders to distributions calculated in any manner, including dividends that may be cumulative, noncumulative, or partially cumulative;
Have preference over any other class of shares with respect to distributions, including dividends and distributions upon the dissolution of the corporation.
CAUTION: A South Carolina corporation electing an S-Corp tax structure may only authorize and issue one class of shares.
Shareholder and Directors
The Act defines a shareholder as the person in whose name shares are registered in the records of a corporation or the beneficial owner of shares to the extent of the rights granted by a nominee certificate on file with a corporation.
All corporate powers must be exercised by or under the authority of, and the business and affairs of a corporation must be managed under the direction of a board of directors. A board of directors consists of one or more individuals with the number specified in or fixed in accordance with the articles of incorporation or bylaws. Directors are elected at the first annual shareholders’ meeting and at each annual meeting thereafter unless their terms are staggered. A director need not be a resident of South Carolina or a shareholder of the corporation unless the articles of incorporation or bylaws so prescribe. A director shall discharge his duties as a director, including his duties as a member of a committee: (i) in good faith; (ii) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (iii) in a manner reasonably to be in the best interests of the corporation and its shareholders.
Meetings of Shareholders and Directors
A corporation must hold a meeting of shareholders annually at a time stated in or fixed in accordance with the bylaws; the annual meeting may be held in or out of South Carolina at a place stated in or fixed by the bylaws. Shareholders may also act by unanimous written consent in lieu of a meeting. A corporation must hold a special meeting of its shareholders if one of two situations arises: (1) the board of directors or the person authorized in the articles of incorporation calls a special meeting, or (2) in the case of a corporation which is not a public corporation, or a public corporation which elects in its articles of incorporation, the holders of at least ten percent of all the votes entitled to be cast on any issue which would be considered at the proposed special meeting sign, date, and deliver to the corporation’s secretary one or more written demands for the meeting describing the purpose for which it would be held.
Unless the articles of incorporation or bylaws provide otherwise, the board of directors may hold regular and special meetings in or out of South Carolina. Unless the articles of incorporation or bylaws provide otherwise, regular meetings of the board of directors may be held without notice of the date, time, place, or purpose of the meeting. Directors may act by unanimous written consent in lieu of meeting.
As noted above, corporate shareholder are generally not liable for corporate obligations, unless they agree to personally guarantee such obligations or unless a court determines the corporate form should be ignored because the shareholder acted in an egregious manner detrimental to the corporation, its shareholders, or third party. This is also called piercing the corporate veil.
The “S” Corporation Election
Certain corporations may elect, under Subchapter S of the Internal Revenue Code, to have income taxed to the shareholder as if the corporation were a partnership. To be eligible for the election, the IRC requires that the corporation: (i) be a domestic corporation; (ii) not be an ineligible corporation (i.e., certain financial institutions, insurance companies, and domestic international sales corporations); (iii) have no more than 100 shareholders; and (iv) have only one class of shares. Also note that changes in the code now allow an entity taxable as an S Corporation to own a controlling interest in a C corporation, and also to hold a wholly-owned subsidiary that itself is an S corporation (e.g., QSSS).
A strict requirement for S corporations is that the corporation only have one class of shares. Note, a corporation will not be treated as having more than one class of stock solely because there are differences in voting rights among shares of common stock. The primary advantage of the S corporation election is avoidance of double taxation of corporate earnings distributed to shareholders.
Statutory Close Corporations
South Carolina has adopted a South Carolina Close Corporations Supplement. A South Carolina close corporation is commonly referred to as a corporation that is owned, controlled and managed by a small group of shareholders – most often family members. The Act’s close corporation provisions are designed to ease governance requirements, such as, eliminating the Board of Directors, setting voting rights pursuant a shareholder agreement, and there is no requirement of Bylaws or of holding annual meetings.
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 corporation are very similar to their for-profit counterparts, but with two important basic 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 business 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.
Contact our Charleston Corporate Lawyers
If you are deciding whether a corporation is the best choice of business entity for your company in South Carolina, please contact our Charleston corporate lawyers by giving us a call, filling out the contact form to your right, or sending one of our lawyers an email.