In South Carolina, a limited liability company’s (LLC’s) existence, structure, and operations are governed by the South Carolina Uniform Limited Liability Act of 1996 (“South Carolina LLC Act”). An LLC is formed by filing Articles of Organization with the South Carolina Secretary of State. The Articles of Organization are made a public record and set forth certain limited information about the LLC, primarily its contact information and how it is structured. But other articles might need to be included as well, as required by the South Carolina LLC Act. For example, unless the Articles of Organization limit their authority, any member of a member-managed company or manager of a manager-managed company may sign and deliver any instrument transferring or affecting the company's interest in real property.
An LLC is an increasingly popular business entity form and with good reason. In many instances, LLC’s have several advantages over most other business forms, including corporations. LLCs generally provide: (1) maximum organizational flexibility; (2) personal asset protection to its owners (called “members”) comparable with a corporation; (3) enhanced business asset protection from claims against individual members in a multiple member LLC; and (4) a greater number of choices than any other business form with regard to how the entity is to be taxed.
The greater organizational flexibility of the LLC is owed in part to the fact that LLCs have few, if any, formalities associated with them. Unlike a standard corporation, which must hold annual shareholder meetings, issue annual financial statements to its shareholders, and have its policies establish by a board of directors or risk losing its limited liability protection, LLCs have no such requirements. Although statutory close corporations can largely elect their way out of such formalities, LLCs have no such formalities to begin with. Moreover, whereas the bundle of rights owned by shareholders who hold common shares in a corporation (of any kind) are very rigid (e.g. if a shareholder has 51.0% of the common shares in a corporation, she has 51.0% of both the shareholder voting rights and distributions), the bundle of rights owned by a member in an LLC are very flexible (e.g. an LLC member can own 51.0% of the financial rights, but only 25.0% of the voting rights.)
Similar to a corporation or partnership, the LLC is a separate legal entity that possesses its own assets and debts apart from the assets and debts of its members. The personal assets of individual LLC members are, therefore, generally beyond the reach of creditors. However, torts committed through acts of individual negligence or omission by any member who provides services to the LLC are not free from personal liability, just as shareholder-officers in a corporation have personal liability for the torts they themselves commit. (See Personal Asset Protection of Corporations and LLCs.)
A creditor of a member of an LLC, in suing the member and obtaining a judgment against the member, is generally limited to a court order “charging” the LLC with the obligation to make the member’s distributions of profit payable to the creditor rather than the member. The LLC’s assets and the member’s membership rights, however, are generally protected, though exceptions can be made. The legal rational for making the LLC distribute a member’s profits, but not the member’s proportionate share of the LLCs assets or the member’s membership rights, is that doing so allows a remedy for the judgment holder, but not one that negatively impacts the financial interests of the other innocent members in the LLC. Contrast this to the fact that stock in a corporation is treated like any other asset of the shareholder’s. Thus, a court may not think twice about ordering a defendant-shareholder to transfer his or her stock in the corporation to a prevailing plaintiff for the purpose of potentially subjecting the corporation to a vote on liquidation and the distribution of that shareholder’s percentage of proceeds to the plaintiff.
LLCs also benefit from greater tax flexibility and options. By default, a one-member LLC is simply taxed a sole proprietor and a multiple member LLC is taxed as partnership for federal tax purposes. However, in either case, an LLC may also elect to be taxed under Subchapter “C” or Subchapter “S” (assuming it meets the standard requirements for Subchapter “S” election for the purposes of the latter). It may start out being taxed one way and, when it makes tax sense to do so, elect to be taxed another way. Thus, only the LLC combines the limited liability of a corporation with the pass-through tax advantages and organizational flexibility of a sole proprietorship or partnership.
The LLC business form does have one potential disadvantage Whereas other business forms can rely on a long standing body of legal precedents regarding issues related to their use, some of the legal issues surrounding the use of LLCs have yet to be tried because it is a relatively new business form. For most matters, however, where LLCs are characteristic of corporations, corporate principles of law often apply. Where LLCs are more like partnerships or sole proprietorships, partnership and sole proprietor principles often apply. And the fact that millions of LLCs now exist in the United States suggests that courts are not likely to do anything surprising or extravagant in the interpretation and formulation of LLC law.
The South Carolina 1996 Uniform Limited Liability Company Act (“South Carolina LLC Act”) governs the formation and organization of South Carolina LLCs. The South Carolina LLC Act functions by default as an agreement between the members, guiding the formation, management, and dissolution of South Carolina LLCs. All members of an LLC may also enter into an Operating Agreement. Much like the by-laws of a corporation or a partnership agreement of a partnership, an operating agreement regulates the affairs of the company and governs the relations among its members. Like a partnership agreement, however, it is not required that an operating agreement be in writing. Nonetheless, it is to every member's advantage to have a written operating agreement prepared with the assistance of competent legal counsel. With the exception of a few South Carolina LLC Act provisions that may not be changed, operating agreement provisions can alter the South Carolina LLC Act. Indeed, many LLCs may want to change such default provisions.
For example, the South Carolina LLC Act states that distributions of profit in an LLC are to be made in equal shares, rather than upon a disproportionate percentage basis, such as a 60%-40% split between two members. It also states that each member or manager has equal rights in the management of the company's business. However, the members might prefer to allocate financial rights to distributions and voting rights in management decisions based upon initial capital contributions, rather than in equal shares. To memorialize this, it is best to reduce such additional terms to writing in an operating agreement.
Every LLC must make two fundamental choices with regard to its basic structure. Every LLC must be either “member-managed” or “manager-managed.” It must also choose between being an “at-will” LLC and a “term” LLC. An LLC organized in South Carolina will be presumed to be both member-managed and at-will, unless it elects in its articles of organization to be otherwise. In a member-managed LLC, the members of the company have the authority to make the day-to-day operating decisions of the company. In a manager-managed LLC, one or more parties (who can also be one or more of the members, but who do not have to be the members) have the authority to make the day-to-day operating decisions of the company. Managers must be designated, appointed, or elected by the member or members.
Each member of a member-managed LLC or manager in a manager-managed LLC is an agent of the company for apparently carrying on its activities in the ordinary course of business or business of the kind carried out by the company, including signing a legally binding instrument in the company's name. This agency relationship between the members or managers and the LLC holds unless the member or manager had no authority to act for the company in the particular matter and the person with whom the member or manager was dealing knew or had notice that the member lacked authority. An act by a member which is not for apparently carrying out the ordinary business of the LLC will bind the company only if the act was specifically authorized by the other members or managers.
In addition to choosing between member-managed and manager-managed status, the South Carolina LLC Act also requires that an LLC be either an “at-will” or “term” company. In an at-will LLC each member continues on at his, her, or its will and may quit participating in the activities of the LLC at any time. In a term LLC, each member agrees to continue to participate in the activities of the LLC for a specified period of time or up to a certain event.
The legal term used to designate that a member has quit participating in an at-will or term LLC is “dissociation.” Unless otherwise agreed by the members, the company must either dissolve or purchase the dissociated member's distributional interest (financial rights) for fair value within a specific time period after the member’s dissociation. In a term company, if a member dissolves before the end of the term, the company may either dissolve and wind up its business or continue on. If it does not dissolve and wind up its business on or before the expiration of its specified term, the company must cause the dissociated member's distributional interest to be purchased for fair value on the date of the expiration of the term specified at the time of the member's dissociation, unless the members have agreed otherwise. A term LLC may continue on doing business after the end of its term, but does so as an at-will LLC, unless the member’s have agreed otherwise.
An LLC organized in this state will be presumed to be at-will unless it elects in its articles of organization to be a term company and the duration of its existence is therein specified. The duration of a term company may be specified in any manner that establishes a specific and final date for the dissolution of the company. For example, "40 years from the date of filing" or "December 31st, 2050" are both sufficient. Using the conclusion of an undertaking lasting for an undetermined period of time, however, is not sufficient to create a term company unless the particular undertaking is within a longer fixed period of time. For example, "until December 31st, 2050 or until the building is sold, whichever occurs first.”
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