It seems everyone knows there are two kinds of corporations: S-Corps and C-Corps. This distinction, however, merely scratches the surface of the types of corporations in South Carolina.
Most corporations are created by the states. Most corporations you will encounter, with rare exception, will be created by the authority of one of the fifty states. There was a time when Delaware was the home of most corporations, particularly larger corporations. Now, however, there is very little, if any, advantage to incorporating in one state as opposed to another. In fact, South Carolina has among the most modern corporate laws of any of the states.
S and C Corporations
"S" and "C" Corporations merely describe a federal tax election made by the corporation. The Internal Revenue Code defines an "S corporation" as a corporation meeting certain requirements and for which a certain election has been made. The same code defines a "C corporation" as "a corporation which is not an S corporation for [a taxable] year." Thus, the definitions of a "S" and "C" corporation exist only from the federal government.
Other Types of Corporations
There are several types of corporations available in South Carolina. These include:
- Regular Corporation,
- Statutory Close Corporation,
- Quasi-closed Corporation,
- Professional Corporation, and
- Non-profit Corporation.
Each of the different types of corporations have specific advantages and disadvantages.
The Regular Corporation is one with which most people are familiar. It is owned by stockholder(s). These stockholder(S) elect a Board of Directors which elects officers and hires employees to handle the day-to-day operations. There must be an annual meeting of the stockholders to be held after proper notice is given.
Statutory Close Corporation
A Statutory Close Corporation may operate without a Board of Directors and without annual meetings. There are also other normal corporate requirements which do not have to be met. The law does provide for restrictive "default" positions on many issues, such as who may purchase stock from an existing stockholder.
A Quasi-closed Corporation enjoys the freedoms of the Statutory Close Corporation without the restrictive "default" positions, but it is difficult to start up without significant work on the part of the attorney.
A Professional Corporation is for a professional firm which may not normally be incorporated, such as accountants and lawyers.
A non-profit corporation is formed to carry out some charitable, education, religious, or other activity for the public benefit. It is so formed such that it is tax-exempt from state and federal taxes.
Limited Liability Company
A Limited Liability Company (LLC) is, like a corporation, a creature of statutory law. It was originally created to give limited liability protection to owners while affording owners pass-through tax treatment like a partnership.
LLCs are very flexible. In fact, almost all of the statutory provisions governing interrelationships between individual members (as owners of an LLC are called), and between individual members and the LLC itself can be changed by an operating agreement.
An LLC may be run by its members, a combination of its members and a manager, or a manager. Managers are NOT members. The laws do provide that the members of an LLC enjoy limited liability. This limited liability is equivalent to that enjoyed by stockholders of a corporation - nothing more and nothing less.
LLCs may now elect, using IRS Form 8832, to be taxed as either a corporation or a partnership (or a sole proprietorship if there is only one member).
Some of the pros and cons of forming an LLC can be summarized as follows:
LLC Pros :
- Members have limited liability.
- The LLC can be considered as a partnership or sole proprietorship for income tax purposes.
- Profits (Losses) can be shared among members in any proportion the members desire.
- Members can assign their economic rights in the LLC.
- No limitation on the number of members.
- Members must pay self-employment tax on the profits of the LLC.
- Admission of new members, after the LLC has been in existence for a while, can cause an imbalance in the capital accounts for the members, particularly upon dissolution.
- It may be more difficult to sell a portion of the business to someone else, as compared to just selling someone else shares of stock.
- If a member assigns his/her economic rights, the assignee also receives the right to ask for dissolution of the LLC. if the LLC is at will.
There are many other areas which need to be considered before forming an LLC. These areas should be addressed in advance by the client's professional team: the accountant and the lawyer.
Partnerships and Personal Liability
There are several different types of partnerships in South Carolina. Best known are the General Partnership and the Limited Partnership. There is also the Joint Venture and the Registered Limited Liability Partnership (RLLP).
The South Carolina Code defines a general partnership as "an association of two or more persons to carry on as co-owners a business for profit." The key words here are "business for profit." Just because two or more people commonly own property, and that property produces a profit, does not mean there is a partnership. But, if two or more people intend to jointly own a business enterprise which they hope will be profitable, they will have formed a partnership, whether they meant to or not!
The general partnership is, along with the sole proprietorship, a "default" business entity. As long as two or more people are in business together to make a profit, unless the business has another form of entity, it is a partnership. Ordinarily, most people realize this. What people do not realize is that if they formed a corporation or an LLC or one of the specialized forms of partnership, and they fail to follow and comply with all the technicalities of that form of entity, the company will legally revert to being a partnership. This may result in personal liability where none was intended or expected.
The amount of personal liability a partner has depends on the type of partnership which has been created:
- General Partnership and Joint Ventures - ALL partners have full personal liability for any and all business actions of the other partners, any employees, and of the partnership itself.
- RLLP - ALL partners are liable for all contract actions, no matter who is at fault. A partner has no liability for the tort actions of the other partners, employees, and the partnership itself, unless the partner "renders professional services." In such a case he is just as liable as if he were a sole practitioner, and he is responsible for the actions of himself and whoever he is supervising or with whom he is cooperating.
- Limited Partnership - Basically, a general partner has all the personal liability as if the entity were a general partnership. The limited partner has no personal liability unless he acts as general partner or, in certain situations, takes part in the control of the business or lends his name to the name of the partnership.
Obviously, conducting business as a partnership can be risky for an individual. Although there are situations which may dictate the existence of a partnership, the advice of the client's accountant and attorney should always be sought before anyone operates a business as a partnership. The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.