At minimum, every business incorporated in South Carolina should determine whether: (1) the most beneficial business form (most commonly a sole proprietorship, partnership, corporation, or limited liability company) is being used for the business, (2) legal requirements for that type of entity are being complied with, and (3) its operating procedures risk causing it to lose its limited liability protection or to needlessly incur liability.
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Is your business incorporated?
Has the corporation elected statutory close corporation status?
Has the corporation made a Subchapter “S” election?
Are corporate directors and officers indemnified by the corporation for certain errors or omissions?
Do you know and abide by the financial test under South Carolina law for distribution payments?
Is a copy of the corporation’s Articles of Incorporation in the corporate record book
Is the stock ledger of the corporation current
Were all sales of stock or securities made in compliance with applicable securities laws
Were stock certificates issued?
Do the stock certificates have appropriate legends?
Has the corporation qualified to do business in all states it is required to?
Is your business incorporated? back to top
In many instances, corporations provide limited liability protection for the personal assets of its shareholders, However, important exceptions exist. For example, unless the corporation is incorporated as a statutory close corporation, failure to perform certain corporate formalities such as annual shareholder meetings or the annual distribution of financial statements can cause the corporation to lose its limited liability protection. So can commingling money and other assets of the corporation with those of its shareholders - after all, if the shareholders, directors, or officers of the corporation do not treat it as a separate entity, with its own separate assets and liabilities, courts will not be compelled to do so either. Additionally, each shareholder that provides services to the corporation will always be personally liable for his or her own acts of negligence or omissions in carrying out the activities of the corporation.
Equally important for corporations that have valuable assets and inventory, while incorporating does much to protect the personal assets of shareholders, it may not be in itself the most beneficial business form where business asset protection is concern, which is often better achieved through the use of a holding company or, under certain circumstances, by converting to a limited liability company.
Do not hesitate to contact us if you have any questions or concerns on whether you are currently using in the best possible entity or structure for your business operations.
You may want to consider operating your business as a limited liability entity, such as a limited liability company (LLC) or a statutory close corporation. Limited liability companies and statutory close corporations offer personal asset protection to business owners in certain instances, but can have, or be easily structured to have, a flexible management style similar to a sole proprietorship or partnership.
Do not hesitate to contact us if you have any questions or concerns on whether you are currently using in the best possible entity or structure for your business operations.
Has the corporation elected statutory close corporation status? back to top
Corporations desiring a more flexible management structure will generally choose to be incorporated as a statutory close corporation rather than a standard corporation. Whereas standard corporations are obligated to perform formalities such as holding annual shareholder meetings or to operate under the supervision of a director or board of directors, statutory close corporations are not. This is important, because failing to perform all corporate formalities subjects the corporation to possible loss of its limited liability protection to shareholders. Thus, if you are operating as a standard corporation, you might wish to seriously consider electing statutory close corporation status or converting to a limited liability company.
Shareholders of corporations wishing to avoid double taxation (being taxed on the net profits of the corporation and then again on the distribution of such net profits when paid to the shareholders) may elect to be taxed under Subchapter “S” of the U.S. Tax Code as long as certain requirements are met. To elect treatment under Subchapter “S,” the corporation may not have more than one class of stock, may not have more than 100 shareholders, and may not have any shareholder that is a nonresident alien or nonhuman entity (such as other corporations or partnerships), unless the shareholder is an estate or trust that is authorized to be an S-corporation shareholder under tax law. Under Subchapter “S,” profits or losses of the corporation are not taxed on the corporate level, but “pass through” to the shareholders. Each shareholder is taxed on his or her portion of the corporation’s net income in accordance with the shareholder’s marginal income tax rate and losses may be used to offset any personal income gain.
Has the corporation made a Subchapter “S” election?
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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.
Corporations generally wishing to avoid double taxation (tax on the net profits of the company paid by the corporation, and then again on the distribution of such net profits when paid to the shareholders) may elect to be taxed under Subchapter “S” of the U.S. Tax Code as long as certain requirements are met. To elect treatment under Subchapter “S,” the corporation may not have more than one class of stock, may not have more than 100 shareholders, and may not have any shareholder that is a nonresident alien or nonhuman entity (such as other corporations or partnerships), unless the shareholder is an estate or trust that is authorized to be an S-corporation shareholder under tax law. In general, under Subchapter “S,” profits or losses of the corporation “pass through” to the shareholders. Each shareholder is taxed on his or her portion of the corporation’s net income in accordance with the shareholder’s marginal income tax rate and losses may be used to offset any personal income gain.
Have you determined whether you are required to obtain a business license or licenses, retail sales license, or home occupancy zoning permit?
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Depending on the city, township, or county in which your place of business is located or in which you 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 your local zoning board offices for more information.
Have all conflicting interest transactions between the corporation and the directors been identified and approved?
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The directors of your corporation should determine whether any conflict of interest transactions have occurred. A conflict of interest transaction is a transaction with the corporation in which a director of the corporation has a direct or indirect personal interest. A conflict of interest transaction may be voided by the corporation, unless: (1) the material facts of the transaction and the director’s interest were disclosed or known to the board and the board thereafter authorized, approved, or ratified the transaction; (2) the material facts of the transaction and the director’s interest were disclosed or known to the shareholders and the shareholders; or (3) the transaction was fair to the corporation.
Are any of the corporate directors pursuing opportunities that may be in competition with business of the corporation?
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If a corporate director has pursued an opportunity that may be in competition with the business of the corporation, he or she may have breached his or her fiduciary duty to the corporation and its shareholders. Generally speaking, it is a breach of his or her fiduciary duty for a director to pursue or take a corporate opportunity, unless otherwise authorized, approved, or ratified by the board of directors or shareholders
Are corporate officers and other employees subject to well-drafted non-compete or non-solicitation agreements and other restrictive covenants?
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The corporation should determine whether employees are subject to non-compete or non-solicitation agreements and other 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 corporation. Covenants not to compete are generally disfavored by the law unless reasonably limited and necessary to protect the legitimate interests of the corporation. 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.
Corporations will generally also want to prevent departing officers and 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.
Are corporate directors and officers indemnified by the corporation for certain errors or omissions?
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If your corporate directors and officers are not indemnified by the corporation for certain errors or omissions, the corporation may want to indemnify its directors and officers against claims incurred against them while acting on behalf of the company, including any litigation expenses. A Director’s and Officer’s (D&O) insurance policy can be obtained for this purpose. See the section on Insurance or speak with a qualified business insurance agent for more information.
Has the corporation considered obtaining directors and officers insurance (D&O Insurance) to help indemnify its directors and officers?
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Having indemnification provisions in corporate bylaws may not be sufficient protection for the directors and officers of your corporation. Indemnification provisions in the bylaws of a financially troubled corporation may prove to be meaningless. Corporations, directors and officers therefore should consider taking out directors and officers (D&O) insurance to better protect the directors and officers against claims and liabilities. Contact an insurance agent experienced in business insurance for more information. The corporate directors and officers (D&O) insurance policy of the corporation should be periodically reviewed to monitor the suitability of its exact coverage and exceptions.
If you are a closely held corporation (the shareholders also operate and make the day-to-day management decisions of the corporation), do the shareholders commingle their money and other assets with those of the company or visa versa?
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Shareholders in a corporation generally have limited liability status where their personal assets are concerned to the extent that the corporation is treated as a separate entity. Commingling corporate assets (including cash or other property) or debts with the personal assets or debts of the shareholders is a sign that the boundaries and distinct nature of the corporation are not being observed. If the shareholders do not treat their assets or debts as separate from those of the corporation, then the courts might not either.
For example, if shareholders need cash for personal debts, such debts should not be paid directly by the corporation, but those funds that are lawfully available should be paid, distributed, or loaned to the shareholder, as appropriate, who then may directly pay the debt. If the corporation needs cash for corporate debts, such debts should not be paid directly by the shareholders. Rather, such funds should be contributed or loaned to the corporation, as may be appropriate under the circumstances, which may then directly pay the debt.
Do directors, officers, or shareholders borrow or lend money from the company without documentation or application of appropriate “arm’s length” interest rates?
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If a director, officer, or shareholder borrows money from the corporation 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 shareholder may raise the specter of commingling of assets and cause the corporation to lose its limited liability protection. A favorable loan to a director or office might be viewed as a conflicting transaction which could violate that director’s, or officer’s, fiduciary duty to the corporation and shareholders and place them at risk of liability. Make sure all loans are properly documented and are done at “arm’s length” terms and that the directors, or shareholders if no directors exist, pre-approve the transaction.
Do you know and abide by the financial test under South Carolina law for distribution payments?
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When making distributions of profit to shareholders of the corporation be sure to remember that under South Carolina law no distribution to shareholders may be made if, after the distribution, the corporation: (1) would not be able to pay its debts as they become due in the usual course of business; or (2) the corporation’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 shareholders whose rights are superior to those receiving the distribution.
Is a copy of the corporation’s Articles of Incorporation in the corporate record book
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Because of the fundamental importance of the Articles of Incorporation with respect to corporate structure and management, a copy of the Articles of Incorporation should be kept in the corporate record book, which itself should be kept in a safe place, with copies retained by each shareholder.
Is a copy of a properly signed set of bylaws in the corporate record book?
Unless the corporation is a statutory close corporation that has elected not to have a set of bylaws, corporate bylaws need to be properly signed, authorized, and preferably kept in the corporate record book. The bylaws of a corporation govern the relations between the shareholders, directors and officers. They establish the very structure and operation of the corporate entity itself, including the rights and obligations of the directors, officers, and shareholders.
Has your corporation been careful to hold annual shareholder meetings and furnish its shareholders with annual financial statements?
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Every corporation, other than a statutory close corporation that has specifically eliminated such corporate formalities, is required by state statutory law to hold annual shareholder meetings and to furnish its shareholders with annual financial statements. Failure to do so can result in the loss of the limited liability protection of the corporation. Contact our law firm, should you have any questions or concerns regarding these requirements or your corporation’s past failure to perform them.
Are there either written minutes or consent certificates for all meetings of directors and shareholders?
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Minutes and consent certificates of the directors’ and shareholders’ meetings should be kept in the corporate record book as evidence of the actions each take regarding the corporation.
Is the stock ledger of the corporation current?
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The stock ledger of the corporation should always be kept current. Certain statutory requirements hinge upon who is the holder of record of stock at any given time. For example distributions, financial reports, and meeting notices are to be sent to stock holders of record. Should the corporation become deadlocked or a shareholder become deceased, for example, failure to keep records current can have extreme and unanticipated consequences.
Were all sales of stock or securities made in compliance with applicable securities laws?
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You have indicated some sales of corporate stock may not have been made in compliance with applicable securities laws, or that you are unsure of whether they were. Generally, stock and securities sold in violation of federal or state securities laws can be returned to the corporation and subject the corporation to reimbursement of attorney’s fees and interest. In addition, corporate officers issuing securities may be held personally liable for securities sold in violation of securities laws, as well as subject to possible criminal prosecution. For this reason, you should always seriously consider having an attorney experienced in securities matters assist you with any sale of securities.
Were stock certificates issued?
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If you operate as a corporation, stocks sold to investors should be both issued and certificated.
Do the stock certificates have appropriate legends?
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Corporate stock certificates should include appropriate legends. Stock certificates legends are generally printed on the back of the certificate. They let the holder of the certificate know important information about the rights of that holder. For example, if the stock is non-transferable, the certificate should be clearly marked as such. In many cases to comply with securities laws stock should not be transferred for a specified period of time. If the corporation is taxed under Subchapter “S” of the Internal Revenue Code, then there should be transfer restrictions. Similarly, every statutory close corporation must provide a certain statutorily prescribed notice in its stock certificates.
Has the corporation qualified to do business in all states it is required to?
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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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