An Overview Of The South Carolina Limited Liability Company

Understanding The Limited Liability Company

The South Carolina Limited Liability Company (LLC), governed by the Uniform Limited Liability Company Act of 1996, has become an increasingly popular choice for business owners and entrepreneurs over the past few decades. This popularity can be attributed to several key features of the LLC structure, making it an attractive option for many types of businesses.

Key Features of LLCs

  • Legal Separation: An LLC is a separate legal entity from its members and managers. This separation is crucial for limiting personal liability and establishing the business as an independent entity for legal and financial purposes.
  • Flexibility in Structure and Taxation: LLCs offer significant flexibility. They can be taxed as a sole proprietorship, partnership, S corporation, or C corporation, depending on what best suits the business’s needs. This flexibility allows business owners to optimize their tax strategies.
  • Simplicity in Formation and Operation: Compared to other business structures, LLCs are relatively straightforward to establish and operate. This simplicity is a significant advantage for new business owners who may not be familiar with the complexities of corporate governance.
  • Asset and Creditor Protection: Properly organized LLCs can provide robust protection against personal liability in the event of business debts or legal issues, often more so than other business entities.

Operating Agreement and Customization

A notable advantage of an LLC is the ability to craft a highly customized operating agreement. This operating agreement governs the LLC and can override many standard provisions of the LLC Act, offering a level of contractual freedom that can be broader than what’s available under the South Carolina Uniform Partnership Act for partnerships or the Business Corporation Act for corporations. This means the internal structure, governance, and operations of an LLC can be tailored to the specific needs and preferences of its members, offering a unique degree of flexibility and control.

Conducting Business

LLCs, like corporations, have the authority to conduct business, own property, engage in binding business contracts, and initiate or be subject to legal proceedings. It’s important to note that even a single-member LLC, which is treated as a sole proprietorship for tax purposes, still maintains its status as a separate legal entity for other purposes. This distinction ensures that the legal and financial protections afforded by the LLC structure remain intact, regardless of its tax classification.

In summary, the LLC structure in South Carolina offers a blend of flexibility, simplicity, and protection that makes it an ideal choice for many business owners. Its ability to be tailored to specific business needs, coupled with the ease of formation and operation, makes it a compelling option for those looking to start or restructure their business entity.

Naming The South Carolina Limited Liability Company

Naming the LLC is a step that carries more weight than often perceived. Including terms like “Limited Liability Company” or “Limited Company” or abbreviations such as “LLC”  or “LC” in the name isn’t just a legal requirement; it’s a foundational aspect of the business’s identity. This nomenclature provides clarity about the business structure to customers, creditors, and suppliers, setting transparent expectations about liability and operations. Beyond legal compliance, the choice of a unique and memorable name is vital for effective branding and market presence. It’s also prudent to conduct a thorough trademark search to avoid potential legal conflicts, ensuring the chosen name doesn’t infringe on existing trademarks.

Understanding the powers vested in an LLC under South Carolina law is another critical element. These powers, akin to those of individuals, partnerships, or corporations, enable the LLC to engage in various business activities, from contract negotiations to property transactions. How an LLC utilizes these powers can significantly influence its operational success and legal compliance. For instance, many LLCs are used for holding real estate, providing an added layer of liability protection for property investments—a popular strategy among real estate investors. The ability to manage contracts and debts is fundamental for day-to-day operations, impacting the LLC’s financial health and reputation. Moreover, the freedom to tailor its governance structure through an operating agreement allows each LLC to adapt its management and operational processes to specific business needs, ensuring clarity in roles, responsibilities, and decision-making processes.

Powers Of The Limited Liability Company

However, with great power comes great responsibility. Operating beyond the defined powers or principal purpose of the LLC can expose it to various legal and financial risks. It’s essential for LLCs to adhere to their operating agreements and ensure that all actions by members or managers are within their authorized scope. This not only prevents legal liabilities but also maintains the integrity and stability of the business. The powers of the LLC 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.

Power To Enter Into 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

Maintaining accurate and comprehensive records is a critical aspect of managing a Limited Liability Company (LLC) in South Carolina. The state’s LLC statute outlines specific requirements for record-keeping, emphasizing the importance of transparency and accountability in the operation of an LLC. These records are not only crucial for legal and regulatory compliance but also play a key role in the effective management and decision-making processes within the company.
Key Record-Keeping Requirements

The South Carolina LLC statute mandates that certain essential documents and information be maintained at the LLC’s principal office within the state. This repository of records should include, but is not limited to:

  • Articles of Organization and Amendments: This foundational document establishes the LLC and any changes made to it over time. It’s crucial for understanding the LLC’s structure and governance.
  • Operating Agreement: Often considered the LLC’s most important document, the operating agreement outlines the rules for operation and management of the LLC. It includes details about member roles, profit sharing, decision-making processes, and other operational guidelines.
  • Tax Returns: Keeping both federal and state tax returns is vital for financial transparency and for meeting state and federal tax obligations.
  • LLC Record Books: These should contain detailed records of important business transactions, decisions, and minutes from meetings. They serve as a historical account of the LLC’s operations and decisions.
  • Member and Manager Information: Records concerning the members and managers, including their rights, interests, and contributions, are essential. This information is crucial for managing the ownership structure and for resolving any disputes that may arise.

Importance of Proper Record-Keeping

Proper maintenance of these records is not merely a statutory requirement but also a best practice for any well-run business. Accurate and up-to-date records:

  • Facilitate Transparency and Trust: Keeping thorough records builds confidence among members, managers, and external stakeholders like creditors or investors.
  • Aid in Conflict Resolution: Detailed records can help resolve internal disputes by providing clear evidence of past decisions and agreements.
  • Support Legal and Financial Compliance: Well-kept records are indispensable during audits, legal reviews, or financial assessments.
  • Enable Informed Decision Making: Access to comprehensive historical data allows members and managers to make more informed decisions about the future direction of the LLC.

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.”

What Is An LLC Membership 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 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 An LLC Membership Intersts

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 or completing our online contact form.  We make every effort to respond to all inquires within one business day.