An Overview Of The South Carolina Corporation

Understanding The South Carolina Corporation

If you’re an entrepreneur, professional, or business owner looking to organize and register a corporation in South Carolina, it’s important to understand the framework and implications of choosing this type of business entity.

The concept of a corporation has been a cornerstone in the United States business landscape for over a century. Unlike simpler business structures, a corporation is a legal entity separate from its owners, offering unique advantages and challenges. This complexity is partly due to less flexibility in modifying agreements compared to structures like limited liability companies or partnerships.

In South Carolina, corporations are regulated under the South Carolina Business Corporation Act of 1988. This Act establishes a corporation as an entity distinct from its officers and shareholders, meaning the debts of the corporation are not personal debts of the shareholders. This separation offers several benefits:

  • Protection from Personal Liability: Shareholders are not personally liable for the corporation’s debts.
  • Continuity: The corporation continues to exist despite the death, incapacity, or change of shareholders.
  • Transferability of Ownership: Shares can be transferred more easily.
  • Standardized Management and Protection: There’s a clear statutory framework for organization, management, and finance, safeguarding the interests of shareholders and creditors.
  • Flow Through Taxation: Certain corporations may elect to be taxed as S Corporation, which is a flow through tax structure.

However, forming a corporation in South Carolina also comes with certain drawbacks:

  • Decentralized Control: Corporations can lack centralized control, which might be a concern for some owners.
  • Formation and Organizational Expenses: The cost of setting up and organizing a corporation can be more than other business organizations.
  • Corporate Formalities: There’s a need to adhere strictly to corporate formalities in business operations.
  • State Reporting Requirements: Corporations must comply with regular state reporting.
  • Potential Double Taxation: In the case of C-Corp tax treatment, earnings might be taxed twice.

When considering forming a corporation in South Carolina, there are key areas to focus on during the incorporation process. It’s crucial to weigh the advantages, such as limited liability and organizational continuity, against the potential complexities, like adherence to formalities and tax implications.

Choosing A Name For The Corporation

Selecting the right corporate name is a crucial step in forming a corporation in South Carolina. As a business owner, you have the option to reserve a unique corporate name by applying to the Secretary of State. If your chosen name is available, it will be reserved for you. Remember, the name must include specific words or abbreviations like ‘Corporation’, ‘Company’, ‘Incorporated’, ‘Limited’, or their respective abbreviations ‘Corp’, ‘Co.’, ‘Inc.’, or ‘Ltd.’

However, there’s an important caution to consider. Just because a name is distinct and available according to the Secretary of State’s business registration records doesn’t guarantee its availability under federal and state trademark laws. This is a common oversight that can lead to serious legal issues down the road. Imagine establishing your corporation, only to face a cease and desist or a trademark infringement claim because your chosen name is already trademarked by another entity. This scenario highlights why it’s vital to conduct a thorough check of your proposed corporate name.

To navigate this, it’s advisable to perform a detailed trademark search across all state trademark databases and the federal database. This step is more than just a formality; it’s a safeguard against future legal complications and ensures that the name you select is not just unique in South Carolina’s business registration database but also legally permissible to use statewide or even nationwide.

Ensuring that your corporate name is clear on all fronts – both in the South Carolina business registration database and in the broader scope of trademark law – is a critical step in setting up your corporation on a solid and legally secure foundation. This approach minimizes the risk of future legal challenges and contributes to the smooth establishment and operation of your business.

Forming A Corporation In South Carolina

Forming a corporation in South Carolina involves more than just meeting the minimum requirements pursuant to the Articles of Incorporation. While these are essential, they don’t automatically ensure you reap all the benefits a corporate structure offers. Let’s break down the key steps involved in corporate formation.

Articles of Incorporation

Firstly, one or more incorporators must sign the Articles of Incorporation and file them with the South Carolina Secretary of State. There’s a filing fee of $135 (plus an additional $15 online filing administration fee), covering both the initial state corporate tax and the corporate registration fee. The Articles of Incorporation is crucial as it legally establishes your corporation. Additionally, an attorney licensed in South Carolina must certify that your incorporation complies with all legal requirements.

Specific Requirements

The Articles of Incorporation must include:

  • Corporate Name: This is the chosen name you’ve ensured is available.
  • Share Structure: Details on the number and classes of shares your corporation is authorized to issue.
  • Registered Agent and Office: Identifying who will handle legal documents on behalf of the corporation and the location of the corporate office.
  • Incorporators’ Information: Names, addresses, and signatures of the people responsible for forming the corporation.

You can also include other details like the corporate purpose, names and addresses of directors, management structure, and powers of the corporation. It’s important to note that some statutory provisions will automatically apply unless explicitly addressed differently in the Articles.

Beyond the Basics

Once the Articles are filed, the next steps involve the incorporators or the initial Board of Directors. They need to appoint officers and adopt corporate bylaws, which are internal rules governing the corporation. While not legally required, a Shareholder Agreement is highly advisable. This document outlines the management structure and regulates the corporation’s internal affairs, adding an extra layer of clarity and protection for all involved.

Shareholder Approval

Any substantive amendments to the Articles of Incorporation require shareholder approval. This ensures that any major changes in the corporation’s structure or governance are made transparently and with the consent of those holding stakes in the business.

In essence, while the process of forming a corporation in South Carolina is straightforward in terms of the basic requirements, the actual practice involves thoughtful consideration of many elements. From legal compliance to the internal governance structure, each step lays the foundation for a robust and legally sound corporate entity. For entrepreneurs and business owners, understanding these nuances is critical for making informed decisions and ensuring the long-term success of their corporate venture.

Developing Corporate Bylaws

Corporate Bylaws are a fundamental component of managing a South Carolina corporation. These Bylaws, while not required to be filed with the Secretary of State, play a critical role in the internal governance of the corporation. They are essentially the rulebook for how the corporation operates internally and should be kept private.

Role and Content of Bylaws

Bylaws typically include comprehensive provisions covering various aspects of corporate governance. Key areas addressed include:

  • Election of Directors and Officers: Outlining the process for selecting the leadership team.
  • Corporate Meetings: Detailing the frequency, procedures, and requirements for both board and shareholder meetings.
  • Indemnification: Defining protections for directors and officers against certain liabilities arising from their corporate roles.
  • Corporate Purpose: Articulating the principal objectives and activities of the corporation.
  • Relationships and Duties: Clarifying the rights, responsibilities, and interactions among directors, officers, and shareholders.
  • Tax Structure: Designating the tax status of the corporation (C-Corp or S-Corp), which has significant implications for how the corporation is taxed.

The Bylaws serve as a blueprint for internal governance and control, guiding the daily and strategic operations of the corporation. They ensure that everyone involved understands their roles and responsibilities and that the corporation functions smoothly and in compliance with legal requirements.

Amending the Bylaws

The power to amend or repeal the Bylaws typically lies with the board of directors. However, this power can be reserved exclusively for shareholders, depending on the provisions in the Articles of Incorporation or the South Carolina Business Corporation Act. It’s also common for shareholders to retain the authority to amend or repeal the Bylaws, even if this power is shared with the board of directors.

This flexibility in amending the Bylaws is essential as it allows the corporation to adapt its governance practices to changing circumstances, such as growth, restructuring, or evolving legal requirements. Ensuring the Bylaws are current and reflective of the corporation’s needs and legal obligations is a vital aspect of maintaining effective corporate governance and compliance.

In summary, while Corporate Bylaws are not public documents like the Articles of Incorporation, they are equally critical. They provide a detailed framework for managing the corporation and must be crafted and updated with care to reflect the unique needs and goals of the business. For entrepreneurs and business leaders, understanding and effectively utilizing the Bylaws is key to ensuring the efficient and compliant operation of their corporation.

Issuing Shares Of Capital Stock

The issuance and classification of shares issued by a corporation represent the ownership units of the corporation and are a fundamental aspect of raising capital and determining control and profits distribution among the shareholders.

Issuance and Classes of Shares

The corporation, as dictated by its Articles of Incorporation, decides the classes of shares and the number of shares per class it’s authorized to issue. The issuance of shares is subject to specific rules:

Consideration for Shares: Shares can be issued in exchange for cash, property, or services. However, in the case of services or promissory notes, shares are usually held in trust or escrow until the service is performed or the note is fulfilled.

Definition and Rights: Shares are defined as units reflecting the corporation’s proprietary interests. If multiple classes of shares are authorized, each class must have clearly defined characteristics and rights. This might include preferences, limitations, and relative rights specific to each class.

Issuance Flexibility: A corporation doesn’t need to issue all its authorized shares immediately. It can hold some back for future issuance, which allows flexibility in capital management.

Specific Characteristics of Shares

The Articles of Incorporation can stipulate unique features for different classes of shares:

  • Voting Rights: Some shares might have special, conditional, or limited voting rights, or even no voting rights, within the limits set by the Act and IRS tax code.
  • Redeemable or Convertible: Shares can be designed to be redeemable or convertible under certain conditions, such as at the option of the corporation or shareholder, or upon specific events.
  • Distribution Rights: The distribution entitlements, including dividends, can vary among classes. They could be cumulative, noncumulative, or partially cumulative.
  • Preference in Distributions: Certain classes might have preference over others concerning dividends or distributions upon the corporation’s dissolution.

Caution for S-Corp Elections

It’s important to note a crucial distinction for South Carolina corporations opting for an S-Corp tax structure. An S-Corp is only allowed to authorize and issue one class of shares. This restriction is significant for tax purposes and must be carefully considered when deciding on the corporate structure and tax election.

In summary, the decision on how to structure shares in a South Carolina corporation is not just a matter of compliance but also of strategic planning. It influences the company’s fundraising capabilities, control distribution, and financial planning.

Understanding Shareholders & Directors

Understanding the roles and responsibilities of shareholders and directors is crucial for anyone involved in a South Carolina corporation. These key players form the backbone of corporate governance, influencing decision-making and the overall direction of the business.

Shareholders: The Act defines a shareholder as an individual who has shares registered in their name in the corporation’s records or is the beneficial owner of shares to a certain extent. Shareholders are the owners of the corporation, and their primary power lies in their ability to elect directors and vote on major corporate matters. Their involvement in day-to-day operations is typically limited, but they play a critical role in shaping the corporation’s strategic direction.

Directors: The board of directors is responsible for exercising all corporate powers and managing the business affairs of the corporation. The specifics of the board’s size and composition are determined by the Articles of Incorporation or the bylaws, and directors are typically elected during the annual shareholders’ meeting. There is no requirement for directors to be South Carolina residents or shareholders of the corporation, unless specified by the Articles or bylaws.

Directors have a duty to act in good faith and with the care an ordinarily prudent person would exercise. They must always act in the best interests of the corporation and its shareholders. This fiduciary responsibility is central to their role and critical in maintaining the trust and integrity of the corporate governance process.

Meetings and Decision Making

  • Annual Meetings: Corporations must hold an annual shareholder meeting, with the timing and location set in accordance with the bylaws. This meeting is crucial for electing directors and addressing other significant corporate matters.
  • Special Meetings: These can be called by the board of directors, or in certain cases, by shareholders. For instance, if holders of at least ten percent of the votes entitled to be cast on an issue demand a special meeting, the corporation must accommodate this.
  • Location and Frequency: The board of directors can hold regular and special meetings either within or outside South Carolina, as determined by the Articles of Incorporation or bylaws.
  • Notice Requirements: Unless otherwise specified, regular board meetings can occur without a detailed notice of date, time, place, or purpose.

Both shareholders and directors can also take actions through unanimous written consent, an alternative to traditional meetings. This flexibility allows for efficient decision-making when convening a meeting isn’t feasible or necessary.

Limited Liability Offered By The Corporate Structure

Limited liability is a fundamental concept in corporate law, providing significant protection to shareholders. In a South Carolina corporation, shareholders are generally not personally liable for corporate debts and obligations. This protection is a major advantage of incorporating, but there are exceptions and nuances to be aware of.

Piercing the Corporate Veil

While limited liability shields shareholders, certain actions can lead to what is known as “piercing the corporate veil.” This happens when a court disregards the corporate structure due to egregious actions by shareholders that harm the corporation, its shareholders, or third parties. In such cases, personal liability can be imposed on the shareholders involved.

The “S” Corporation Election

For those seeking to avoid the double taxation typical of C corporations (where both the corporation’s profits and the shareholders’ dividends are taxed), an S Corporation election is a viable option. This election under Subchapter S of the Internal Revenue Code allows income to be taxed directly to the shareholders, akin to a partnership.

To qualify, the corporation must:

  • Be a domestic entity.
  • Not be a disqualified corporation (like certain financial institutions, insurance companies).
  • Have no more than 100 shareholders.
  • Only issue one class of shares (though differences in voting rights are permissible).

Recent changes in tax laws have increased the flexibility for S corporations, including the ability to own a controlling interest in a C corporation or a wholly-owned S corporation subsidiary.

Statutory Close Corporations

South Carolina’s Close Corporations Supplement caters to small, often family-run businesses. Close corporations can benefit from relaxed governance requirements:

  • No need for a formal Board of Directors.
  • Flexibility in setting voting rights and shareholder agreements.
  • No requirement for Bylaws or holding annual meetings.

This structure is designed for closely-held corporations, streamlining operations and reducing the formalities required in larger, more public companies.

Nonprofit Corporations

Nonprofit corporations in South Carolina operate under different principles than their for-profit counterparts. Their primary purposes are not profit-oriented but rather focus on activities like trade, membership, religious, charitable, scientific, or educational endeavors. Crucially, nonprofits do not distribute income to members, directors, or officers, reflecting their focus on broader societal or community objectives rather than personal gain.

Contact Our Law Firm

If you are deciding whether a corporation is the best choice of business entity for your company in South Carolina, please contact our Charleston business attorneys by giving us a call or by filling out our online contact form. We make every effort to respond to all inquires within one business day.