Any time you are running a business you have a greater exposure to liability. It is important that you develop a structure or entity for your business to protect your personal assets from being subject to any potential judgment against your business. This is called asset protection.
One type of legal entity in South Carolina we commonly use to achieve this goal for small businesses is the Limited Liability Company, also known as an LLC. LLC’s are popular because they provide protection from liability and flexibility in taxation. Additionally, they have less formal requirements than corporations.
Governed by the Uniform Limited Liability Act of 1996, South Carolina law provides for the organization of an LLC by simply filing the Articles of Organization with the South Carolina Secretary of State. To best set up your LLC for asset protection, you will need to 1) ensure you properly organize your LLC with the Secretary of State; 2) have an attorney prepare the requisite company documents; 3) consult with a tax specialist on specific tax election you should make for your LLC, and 4) operate the LLC according to the law’s requirements to maintain protection.
To be properly organized, we recommend you always hire an attorney to complete this process for you. The Articles of Organization will identify the name of your LLC as well as the registered agent for your business. In addition to the Articles of Organization, you will need to have prepared an Operating Agreement, retrieve a federal tax identification number for your business and open up a banking account separate from your personal accounts.
The operating agreement is highly recommended to ensure your company operates smoothly. The operating agreement can be very simple to complex. This is the legal document that outlines the membership of your company. An LLC’s owners are called members. You may form a single-member LLC or have multiple members. You may also structure your LLC to be manager-managed which would allow a manager who is a non-member to act on behalf of the company. Your operating agreement needs to address membership, who has authority to act on behalf of your company, capital contributions of the members, dissolution of the company and more.
It is important to note that you should consult with a tax specialist, CPA or accountant regarding your business and personal taxes. One of the great attributes of an LLC is the flexibility it provides in taxation. You can elect the tax treatment that best suits your business and your personal circumstances without changing the legal structure of the company. You may elect to be taxed as a sole proprietor or as an s-corporation, or any other type of available tax election that you may choose based on your needs and goals. A CPA can assist you with making this decision and file the appropriate paperwork to be sure you achieve the best tax treatment for your business.
Operating Your LLC
Asset protection requires that you not only create the proper entity but that you operate it according to the laws of the state to maintain those protections over time. South Carolina case law has recognized an equitable remedy available to Plaintiffs referred to as piercing the corporate veil. This remedy can be achieved by the Plaintiff if the requisite elements are established allowing the Plaintiff to set aside the protections of the legal entity and reach the personal assets of the owner. Operating your LLC according to the requirements of the law is necessary to be sure you avoid this type of remedy in the event of a lawsuit. In operating your LLC you will need to be sure your personal and business funds, expenses and accounts are kept separate at all times; you observe formalities required of businesses, such as keeping meeting notes and minutes, agreements of the members in written form, have readily available company records; be sure your company is properly capitalized and insured; and further take steps to ensure the business is not simply a mere façade for the operations of the owner.