Business Law FAQ
What are the advantages to forming an entity?
In South Carolina, the main types of business entities are sole proprietorships, partnerships, limited liability companies (LLCs) and corporations. While each entity type offers specific advantages, when deciding which form is best for your business needs, you may want to consider the following: 1) liability protection — how well the business insulates you personally from potential lawsuits aimed at the business, 2) taxation — whether you are required to file a separate tax return for the business or the business proceeds pass through to your personal income tax return, and 3) management and operations — who will run the company, how will the day-to-day operations be managed and what are the goals and duties of the company.
What are the differences between a limited liability company (LLC) and a corporation (Inc.)?
An LLC is the most common form of entity in South Carolina and is governed by the South Carolina Uniform Limited Liability Company Act of 1996 (S.C. Code An. 33-44-101-1208). An LLC offers owners great liability protection because the LLC is treated as its own separate entity, different from its members. As such, an LLC insulates its members from the negligence of employees or the debts and contractual obligations of the company. LLCs allow owners to choose whether the company will be taxed as a pass-through entity or at the entity level. Additionally, the operating agreement, the document that governs the management of the business, can be customized to fit particular needs of the company. LLCs are particularly useful to small-business owners with no outside investors to appease that will help keep costs down.
Corporations in South Carolina are governed by the South Carolina Business Corporations Act of 1988. Like an LLC, a corporation is a legal entity separate from the owners or shareholders. Unlike an LLC, however, state law requires corporations to adhere to specific corporate formalities such as annual meetings and minutes, yearly filings and fees, making business information readily available to shareholders. A corporation is generally taxed at the entity level, but can elect to be taxed as an S corporation with the taxes passing through to the owner’s personal income tax return. Corporations provide a more sophisticated form of governance that offers a level of comfort to outside investors.
What is required to commence the purchase or sale of a business?
When selling a business, you will first look to your governing documents (operating agreement for an LLC, bylaws for a corporation) to determine what steps must be taken. In any sale or purchase, the two parties will usually sign a letter of intent, a nonbinding agreement that serves to show that the parties are serious about a transaction. A formal, final purchase agreement will follow, containing all the important details of the transaction (price, terms, etc.). Sellers must afford potential buyers an opportunity to perform due diligence on the business, allowing a review of the seller’s finances so the buyer can make his/her own determination as to the value of the company.