Every business organized as a South Carolina limitedliability entity should as determine whether: (1) themost beneficial business form(most commonly a sole proprietorship, partnership, corporation, or limited liability company) is being used for their business, (2) legal requirements for that type of entity are being complied with, and (3) if operating as a limited liability entity, such as a corporation or limited liability company, the entity’s operating procedures risk causing it to lose its limited liability protection or to needlessly incur liability
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Limited liability companies are quickly becoming the entity of choice for most businesses. They can be simple and straight-forward, or as sophisticated as need be. They are often described as having the limited liability protection of a corporation with the flexibility of a sole proprietorship or partnership. With certain exceptions, a limited liability company can provide limited liability protection for each member’s personal assets against contract and tort claims against the company, as well as protection of the assets of the company from creditors, claims, and law suits against the members individually. Limited liability companies also offer greater tax choices than do other business forms. For example, unlike corporations, which may only be taxed under Subchapter “C” or Subchapter “S” of the U.S. Tax Code, a limited liability company, depending on circumstances, can be taxed as a disregarded entity (sole proprietorship), partnership (under Subchapter “K”), or similar to a corporation under Subchapters “C” or “S.” They may begin being taxed one way and later, if it makes tax sense to do so, elect to be taxed another way.
While the South Carolina Limited Liability Company Act states that a written operating agreement is not mandatory, the company members should make sure that an adequate operating agreement is in place to best protect their rights and interests. For example, unless otherwise agreed by the members, the South Carolina Limited Liability Company Act requires that distributions to the members of the company be made on a per capita basis of the members – a scenario not always desired by the members. Having a written operating agreement is the best way to address these and many other issues either not addressed by the Act or not addressed in the manner the members would want.
Depending on the city, township, or county in which your place of business is located or in which you physically carry out any of your business activities, you may be subject to business licensing requirements. You will want to check with appropriate city, township, and county governments to confirm whether your business activities in any city, town, or county are subject to business licensing requirements.
Businesses selling goods and certain types of services are also required to collect retail sales taxes if such goods or services are being sold to the end user (rather than to a reseller or wholesaler). Retail sales licenses are obtained annually through the South Carolina Department of Revenue and are generally required for each retail location.
If you operate a business in your home, you may also be subject to certain zoning ordinances which require you to obtain a permit to operate your business from your home and which place certain restrictions on your business activities. Contact the appropriate county, township, and city zoning offices for more information.
If members in a member managed limited liability company or managers in a manager managed company pursue business opportunities that may be competing with the company, it may be a breach of a member or manager’s duty to the company and its members for a member or manager to pursue or take a competing business opportunity, unless otherwise authorized, approved, or ratified by the members or managers, and only if reasonable to do so.
Are the managers of the company, if a manager managed limited liability company, and key employees subject to well-drafted non-compete or non-solicitation agreements and other restrictive covenants? back to top
It may be of significant value to your company if the managers and other employees are subject to well drafted restrictive covenants. There are four types of such covenants: (1) traditional covenants not to complete, (2) covenants not to solicit customers, (3) covenants not to disclose trade secrets and/or confidential information, and (4) covenants not to solicit employees. Covenants not to compete are generally disfavored by the law unless reasonably limited and necessary to protect the legitimate interests of the company. Covenants not to compete are generally disfavored by the law unless reasonably limited and necessary to protect the legitimate interests of the company. Other types of covenants that are not well drafted in strict accordance with the law may not be upheld. It is therefore crucial that all such covenants be drafted by an attorney experienced in these matters.
Specifically, under South Carolina common law a “reasonableness test” has evolved for determining the validity of a covenant not to compete. Under this test, a covenant not to compete will be enforced if it can be shown that the covenant (1) is necessary for the protection of the legitimate interests of the employer, (2) is reasonably limited with respect to time and place, (3) is not unduly harsh and oppressive in curtailing the legitimate efforts of the employee to earn a livelihood, (4) is supported by valuable consideration, and (5) is reasonable from the standpoint of sound public policy.
Covenants not to solicit customers or clients after termination of employment are often included with or substituted for covenants not to compete. Such a covenant may be more appropriate than the traditional covenant not to compete when an employee deals with national accounts or where an employer has a substantial investment in, or revenue from, then current customers or clients. Unlike traditional covenants not to complete, there is no geographic limitation on such covenants. However, some cases imply that an employee only can be restrained from contacting customers or clients he or she had prior contact with.
Trade secrets encompass a wide range of information of value to a company but not otherwise commonly known and for which reasonable measures to protect the secrecy of have been taken. Trade Secrets are protected under the South Carolina Trade Secrets Act. The South Carolina Trade Secrets Act does not preclude the use of confidentiality, non-compete or other agreements, which seek additional protection for the trade secrets of a business.
Companies will generally also want to prevent departing members, managers, or employees from soliciting away other key employees of the company. Therefore, a covenant not to solicit employees for a reasonable time after an employee’s departure is often included in a written agreement with employees.
Having indemnification provisions in an operating agreement may not be sufficient protection for the members or managers of the company. Indemnification provisions in the operating agreement of a financially troubled company may prove to be meaningless. Members and managers, therefore, should consider taking out insurance to better protect the directors and officers against claims and liabilities. The company insurance policy to indemnify the members and/or managers should be periodically reviewed to monitor the suitability of its exact coverage and exceptions. As the company develops over time, the amount of coverage and persons insured may change. Contact an insurance agent experienced in business insurance matters for more information on insurance rates and coverage.
Members in a limited liability company generally have limited liability status where their personal assets are concerned to the extent that the company is treated as a separate entity. Commingling company assets (including cash or other property) or debts with the personal assets or debts of the members is a sign that the boundaries and distinct nature of the company are not being observed. If the members do not treat their assets or debts as separate from those of the company, then the courts might not either.
For example, if shareholders need cash for personal debts, such debts should not be paid directly by the company, but those funds that are lawfully available should be paid, distributed, or loaned to the member, as appropriate, who then may directly pay the debt. If the company needs cash for company debts, such debts should not be paid directly by the members. Rather, such funds should be contributed or loaned to the company, as may be appropriate under the circumstances, which may then directly pay the debt.
If a member or manager in a limited liability company borrows money from the company without documentation or application of appropriate interest rates and other “arm’s length” procedures and terms, drastic and unexpected consequences can occur. A favorable loan to a member may raise the specter of commingling of assets and cause the company to lose its limited liability protection. A favorable loan to a manager might be viewed as a conflicting transaction which could violate that manager’s fiduciary duty to the company and members and place him or her at risk of liability. Make sure all loans are properly documented and are done at “arm’s length” terms and that the members or managers, as appropriate, pre-approve the transaction.
Most company members and managers are unaware of the restrictions that exist on the company’s ability to make distributions. Under South Carolina law, no distribution to members may be made if, after the distribution, the company: (1) would not be able to pay its debts as they become due in the usual course of business; or (2) the company’s total assets would be at the time of distribution less than the sum of its total liabilities plus the amount needed to satisfy the preferential rights of members whose rights are superior to those receiving the distribution.
Because of the fundamental importance of the Articles of Organization with respect to the structure and management of the company, a copy of the Articles of Organization should be kept in the company record book, which itself should be kept in a safe place.
If a company has a written operating agreement a copy of the properly signed operating agreement should be kept in the company record book. The operating agreement of a limited liability company governs the relations between the members and managers, as appropriate. It establishes the very structure and operation of the company itself, including the rights and obligations of the members and managers. Additionally, each member themselves may wish to also keep a copy of the operating agreement in safe keeping in the event the record book is lost, destroyed or stolen.
While there is no statutory obligation to do so, the minutes as well as written consent forms of the member and/or manager meetings for highly important decisions should be in writing, and kept as evidence of the actions taken, and decisions made, with respect to the company.
Business entities organized under the laws of another state must generally register for authority to do business in states they are not organized in if they have an on-going physical presence in that state, including, for example, employees or sales staff, with certain exceptions allowed, or carry out certain types of transactions. Businesses also may be required to pay state taxes in states where they physically conduct business. Local licenses also may be required in other jurisdictions.
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IMPORTANT DISCLAIMER: This checklist (in whole or part) is not an exhaustive list of legal issues applicable to any business. Its purpose is strictly educational. It is not intended to be construed as legal advice, or a substitute for legal advice, and should not be relied on without consulting a licensed attorney competent in business matters. The federal, state, and local laws and regulations on which this information was originally created are subject to change without notice. No warranty, whether express or implied, is made as to the frequency or timeliness of any corrections or updates to the information provided herein.
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