Limited Liability Company (LLC) Overview
The South Carolina limited liability company (LLC) pursuant to the Uniform Limited Liability Company Act of 1996 is a legal entity separate and distinct from its members and managers. Over the past few decades, the limited liability company form has become the most popular choice of business entity for business owners and companies. The primary reason for this new popularity is because the LLC is flexible in its structure and taxation (it may be taxed as sole proprietorship, partnership, S corporation or C corporation), and is one of the simplest South Carolina business organizations to establish and operate. Further, the LLC, if properly organized, may provide greater asset and creditor protections than any other business entity.
As noted above, one of the primary advantages in choosing the LLC structure is the considerable flexibility of the operating agreement. The members of an LLC have wide latitude to vary most of the provisions of the LLC Act through a written LLC agreement, even provisions that would otherwise appear to be mandatory – see discussion below. This contractual freedom is significantly broader than the authority granted under the Uniform Partnership Act (UPA) to the partnership agreement or the Corporation Act to the articles of incorporation and bylaws. As a result, the LLC structure, including the LLC agreements, can be customized to a greater degree as compared to South Carolina partnership agreements and corporate agreements.
Similar to a South Carolina corporation, the LLC has the power to conduct business, own property, enter into binding business contracts (and other business transactions), and sue and be sued in a court of law. An important note, even though a single-member LLC is disregarded as a separate entity for tax purposes (sole proprietorship tax structure), this fact does not affect the LLC’s separate legal status. A single-member limited liability company will, if properly organized, be considered a separate legal entity for all other purposes.
Limited Liability Company Under South Carolina Law
Under South Carolina law, the name of a LLC must contain the words “Limited Liability Company” or “Limited Company,” or the abbreviations “L.L.C.,” “LLC,” “LC,” or “L.C.” The word “Limited” can be abbreviated as “Ltd.” and the word “Company” may be abbreviated as “Co.” The name of the LLC must also be distinct and recognizably different than the names of other business entities that have filed with the South Carolina Secretary of State. Searching the South Carolina Secretary of State business name database is advisable.
LLC Powers
As a separate legal entity, the limited liability company has all the powers of an individual, partnership or corporation. Those powers generally include but are not limited to the following:
- Sue and be sued, complain, and defend in the LLC’s name as a separate legal entity;
- Purchase, lease, purchase, acquire, own, hold, manage, develop, improve, use , sell, and otherwise deal in and with real or personal property or an interest in real or personal property wherever situated;
- Enter into business contracts, business transactions, guarantees and incur liabilities, borrow capital, issue promissory notes and other obligations, and secure any of its obligations by pledge;
- Enter into business contracts, business transactions, guarantees and incur liabilities, borrow capital, issue promissory notes and other obligations, and secure any of its obligations by pledge;
- Establish offices and otherwise conduct LLC business and provide professional services as authorized by law;
- Elect and appoint managers, offices, employees, agents of the LLC and define their duties, authority, provide compensation, and lend capital or credit;
- Develop, establish and alter the limited liability company agreement, or operating agreement and its regulations, not inconsistent with its articles of organization or with the laws of the State of South Carolina for the administration and regulation of the internal affairs of the LLC;
- Exercise all powers necessary to effect any and all of the purpose for which the limited liability company is organized as authorized by law.
If an LLC conducts business beyond its powers or the principal purpose for which it is organized, the effect on the LLC and its members can vary. For example, a person who acts on behalf of an LLC without authority to do so and without a good faith belief that he or she has such authority may be liable (civilly and/or criminally) for damage caused to the LLC by that person acting without authority.
Business Contracts
As noted above, as a separate legal entity, the LLC has the right and power to enter into various business contracts and other business transactions. Generally, members in a member managed LLC, or managers in a manager managed LLC, are the elected or appointed individuals with the authority to enter into business contracts on behalf of the LLC (i.e., execution of business contracts, contracting debts, etc). The member or manager scope of authority to bind the LLC in business contracts should be expressly set forth in the limited liability company agreement (or LLC operating agreement).
Maintenance of LLC Records and Information
The South Carolina LLC statute requires the limited liability company to maintain certain books, records and other important company information at the principal office within the State. Such information includes but not limited to the following: articles or organization (and any amendment thereto), limited liability company agreement (or operating agreement), federal and state tax returns, LLC record books, and other information concerning the members, managers, membership rights and interests of such members and managers.
Professional LLC’s in South Carolina
Unlike many other state statutes, South Carolina LLC statute does not offer a special designation for professional LLC’s (LLC’s organized solely with members who practice or provide professional services, such as accountants, lawyers, physicians, and the like – similar to South Carolina professional corporations). However, because LLC’s are creatures of contract and its members are free to contract as they deem appropriate, business owners of an LLC may provide that only professional’s licensed to practice in this State (or other states if it is multijurisdictional practice) may be members of the LLC, and the provision of services may be limited solely to the provision of professional services in which the members are licensed to practice. For example, the operating agreement may provision that the LLC shall only offer one type of professional service and the professional services must be offered through licensed individuals qualified to perform the professional services. Further, the members of the LLC must be licensed to practice the profession of the LLC. And only the licensed members can participate in the ownership, management, and control of the LLC. There are few differences in the overall LLC structure between a professional LLC and a standard LLC.
Choosing the LLC as an Asset Protection Entity
There are two components to the asset protections and creditor protections afforded by the use of a limited liability company. The first is known as the inside out protection, and the second is known as the outside in protection.
The inside out protection is similar to the protection available to corporate shareholders. Under this protection, a member’s personal exposure for debts and obligations of the LLC is limited to his or her investment in the company. In other words, in general, a creditor should be prohibited from seeking a judgment against the personal assets of a member in order to satisfy the debts and obligations of the LLC (there are exceptions, however, see piercing the corporate veil).
The outside in protection is related to the charging order concept. Under the charging order concept, LLC assets are protected from judgment creditors of members of the LLC. A charging order is an order by a court that allows a creditor to acquire a member’s interest in the LLC for payment of his or her debts and obligations to the creditor. If the LLC is properly organized, the judgment creditor, however, should have only the right to foreclose on the economic portion of the LLC interest, and not the non-economic portion of the LLC interest. (An LLC interest is bifurcated into two distinct rights (also called membership rights), economic rights (such as allocations of the LLC’s income and losses, and distributions of the LLC’s cash and other assets) and non-economic rights (such as voting rights, rights to receive notice of, to attend and to participate in meetings, rights with respect to LLC information, fiduciary rights and dispute resolution rights).) The reason for this is because a judgement creditor of a member has only the rights of an assignee of the LLC interest. Unless the operating agreement provisions differently, generally an assignment of an LLC interest does not entitle the assignee to become, or to exercise any right of, a member non-economic rights, as described above. For further protection, our Charleston business attorneys will also include special provisions in the articles of organization and the following provision in the operating agreement:
“If a member assigns (whether voluntarily or involuntarily) the member’s entire LLC interest to a third party, the other members shall have the option to dissociate the assignment member. Notwithstanding, the dissociated member shall no longer have any rights or liabilities as a member except for any rights and liabilities which accrued to the member prior to the dissociation. The dissociation shall be effective on or after the effective date of the assignment as determined by the other members.”
A Member’s LLC Interest
The limited liability company agreement (or operating agreement) will set forth the procedures and methods for issuing a member his, her or its LLC Interest. Note, as mentioned above, an LLC interest is separated into two distinct rights, economic rights and non-economic rights. Moreover, the term LLC interest is often used interchangeably with membership interest.
A member’s LLC interest is the personal property of the member, similar to corporate stock or partnership interest. An LLC interest may be held by a member in any legal form (e.g., as separate property, as community property, as tenancy by the entirety, as tenancy in common, etc). Once the member is properly issued his, her or its LLC interest, the member shall hold all rights and privileges associated with that LLC interest (as provisioned for in the operating agreement and/or South Carolina LLC statute) and may do whatever he, she or it wants with the LLC interest (as authorized for in the operating agreement and/or South Carolina LLC statute).
As referenced above, a member does not have any direct ownership in the real or personal property of the LLC (tangible and intangible) by way of his, her or its ownership in the LLC interest. In other words, if the LLC owns real estate, equipment, inventory, etc, the member does not hold an ownership interest in the actual, specific real estate, equipment, inventory, etc, but instead has an ownership interest in the LLC which owns the assets.
Another important note about a member’s LLC interest which often arises during discussions with business owners is what happens to this LLC interest when a member dies. As referenced above, the LLC interest issued to the member is his, her or its personal property. As such, upon death, a member’s LLC interest becomes part of the member’s estate and will be transferred pursuant to his or her will or trust. (See our South Carolina estate planning section for more information on this topic). The personal representative elected by the member to administer his or her estate becomes an assignee of the deceased member’s LLC interest. The member’s estate is entitled to the members prorata share of all distributions and allocations made by the LLC to its members. If the LLC has an insurance policy in place to purchase the member’s LLC interest upon death, these insurance proceeds will be used to purchase the economic interests of said member pursuant to the provisions contained in the LLC’s operating agreement.
Different Classes of LLC Interests (or Membership Interests)
Depending on how the LLC is organized and the tax treatment the LLC elects, the LLC may be authorized to custom tailor its LLC interests for each member. Again, depending on how the LLC is organized and the tax treatment the LLC elects, the LLC interests do not need to be uniform for all members. A LLC may grant each member different rights and obligations in connection with the issuance of an LLC interest. For example, an LLC may issue different classes of LLC interests which may vary among the member’s with respect to contributions, voting rights, distributions and allocations, priority rights, etc.
Transfer of a Member’s Interest
Of critical importance for any member in an LLC is his, her or its right to transfer LLC interests in the LLC to a third party. Whether a member has the right to transfer an LLC interest to a third party (whether that is another member, the LLC, or an individual or entity with no affiliation to the LLC) will be determined by the operating agreement, South Carolina LLC statute (if the LLC operating agreement is silent) or the articles of organization. The operating agreement in particular may absolutely prevent a transfer of an LLC interest, may make a transfer of an LLC interest contingent on certain factors being satisfied, or allow a transfer at any time in any manner. For more information on this topic, please see our law firm’s blog post titled “transfer of LLC membership interests“.
Contact our Charleston Business Attorneys
If you are deciding whether a limited liability company (LLC) is the best choice of business entity for your company in South Carolina, please contact our Charleston business attorneys by giving us a call, filling out the contact form to your right, or sending one of our lawyers an email.