Last Updated: November 2013 SOUTH CAROLINA FORMS OF ORGANIZATION Wyche, P.A. Eric K. Graben, Esquire Table of Contents 1. Nonprofit Corporations 2. For-Profit Corporations 3. Benefit Corporations 4. Limited Liability Companies 5. Low Profit Limited Liability Companies 6. Joint Ventures 7. Partnerships and Limited Partnerships 8. Sole Proprietorships 9. New Forms of Hybrid Organizations 10. Resources The most common legal form of organization utilized by the social sector is the nonprofit corporation although for-profit corporations, limited liability companies (LLCs), joint ventures and various kinds of partnerships, including limited partnerships, are increasingly being used-- typically to accommodate plans to earn revenues or access capital markets. Each of these forms of organization has advantages and disadvantages and sometimes, with the help of experienced counsel, they are used in combination to maximize strengths and minimize weaknesses of a particular form. The following chart provides a high-level overview of various organizational forms that can be used in the social sector. More detailed descriptions of each form follow in the subsequent text. www.lexmundiprobono.org 1
Nonprofit 501(c)(3) Corporation For-Profit Corporation Formation File articles or certificate of incorporation (containing specific info required by IRS) with state and pay filing fee. File application on Form 1023 for tax-exempt status unless below gross receipts threshold. Recruit directors, draft bylaws and hold organizational meeting. Take steps to comply with license, tax and employment law/regs. File articles or certificate of incorporation with state and pay filing fee. Decide on board of directors, draft bylaws, hold organizational meeting and issue stock. Take steps to comply with license, tax and employment laws/regs. Management and Control Liability Tax Factors Capital and Loans Managed by directors Members, directors, who appoint officers officers and employees to run day-to-day are generally not liable operations as specifiedfor debts and in bylaws. Some obligations of the nonprofit corporationscorporation, including have members (like shareholders) who elect directors. Managed by directors that are elected by shareholders. Directors appoint officers to run dayto-day operations as specified in bylaws. for unlawful acts of others involved in the affairs of the corporation. They can be held liable for injuries due to their own misconduct but some states provide limited immunity to such persons and also to volunteers. Shareholders are generally not liable for debts and obligations of the corporation, including for unlawful acts of others involved in the business. Unless indemnified by the corporation, directors, officers and employees can be held liable for injuries caused by their own acts or failures to act. Generally exempt from federal and state taxes if receive 501(c)(3) exemption. Liable for tax on unrelated business income, and other taxes such as property and sales (unless local and state exemptions apply). Donors can deduct contributions A C Corporation is subject to corporate tax on net income. If net income is paid to shareholders as dividends, the individual shareholders are taxed. If a corporation elects to be a S corporation and meets several criteria, it can receive pass through taxation. Can accept charitable donations and grants. Eligible for program related investments (PRIs) by foundations. Can borrow money and issue debt instruments but cannot raise capital by issuing stock. Can raise capital by issuing stock (equity) and by borrowing money through loans or other debt instruments. Corporation may be able to accept PRIs from foundations in the form of loans or equity. www.lexmundiprobono.org 2
Benefit Corporation (a for-profit corporation that also declares a social mission and is statutorily required to consider factors beyond profitability when making management decisions. LLC L3C (low-profit LLC) Partnership Formation Same as for-profit corporation except abenefit Corporation must elect to be a Benefit Corporation in, and name a specific public benefit purpose in, its Articles of Incorporation. File articles of organization or certificate of formation with state and pay filing fee. Negotiate and execute operating agreement. Take steps to comply with license, tax and employment law/regs. Similar to LLC but must be formed for a charitable or educational purpose. Only permitted in certain states (e.g., VT, IL, MI,UT,ME,WY) No filing requirements unless limited partnership (LP) or limited liability partnership (LLP), but Management and Control Liability Tax Factors Capital and Loans See for-profit The standards See for-profit See for-profit corporation. The applicable to officers corporation. corporation. A Benefit South Carolina and directors of forprofit Corporationshould be in corporations Benefit Corporations a better position to Act requires the apply. Directors and attract PRIs from corporation to officers receive foundations in the form incorporate specific additional protections of loans or equity. socially beneficial when considering their performance public benefit standards into its constituencies, and governing only specified persons documents and can bring actions for operating principles. failure to pursue public benefits. Flexible structure like a partnership with management responsibilities specified in operating agreement (usually management committee or single manager). Same as a corporation. Usually not taxed as Can raise capital an entity because most through contributions LLCs choose pass by member/owner. through treatment Otherwise, same as forprofit corporation. whereby the member/owners report profits and losses on personal tax returns. Tax-exempt member/owners treat their share of income as exempt or subject to unrelated business taxable income, depending on the character of the income. See LLC Same as a corporation See LLC. Same as for-profit corporation except L3C enabling legislation is written to comply with PRI regs and is thus intended to attract equity or debt investments by foundations. Partners have equal, full control unless otherwise specified in partnership agreement. Partners are personally liable for the debts and obligations of the partnership, including for unlawful acts of Generally not taxed as an entity. Partners report profits and losses on personal tax returns. Can raise capital through contributions by partners and by borrowing money www.lexmundiprobono.org 3
Formation Management and Control Liability Tax Factors Capital and Loans partners should sign partnership agreement. Take steps to comply with name, license, tax and employment law/regs. other partners and employees. Risk can be limited by creating an LP or LLP. through loans or other debt instruments. Owner has full control. Sole Proprietor No filing requirements. Has no legal existence apart from owner. Take steps to comply with d/b/a name, license, tax and employment law/regs. Owner is liable for all debts and obligations, including for unlawful acts of employees. Not taxed as an entity. Owner reports business profits and losses on personal tax return. Owner provides funds for capital investment and owner can borrow money through loans or other debt instruments. 1. Nonprofit Corporations a. Overview The South Carolina Nonprofit Corporation Act of 1994, as amended (S.C. Code Ann. 33-31-101 et seq.) governs the formation, operation and dissolution of nonprofit corporations in South Carolina. A nonprofit corporation in South Carolina is governed by its board of directors and managed and operated by its officers and employees. Instead of shareholders, a nonprofit corporation may, but is not required to, have members. Nonprofit corporations, of course, are specifically organized to not earn profits. No part of the income or surplus of a South Carolina nonprofit corporation may be distributed to its members, directors or officers; however, reasonable compensation may be paid for services rendered. A nonprofit corporation has an existence of its own, independent of the terms of office or employment of members, directors or officers. It can sue or be sued in its own name and can own real estate in its own name. b. Advantages of Incorporation: pros and cons of nonprofit vs for-profit The principal advantage of incorporation is that it protects the shareholders or members from personal liability for the obligations and liabilities of the corporation, including unlawful actions of officers, directors and staff acting on its behalf. In addition, incorporation establishes continuity; corporations (both nonprofit and for-profit) are subject to a body of statutes that provide very specific guidance as to their formation and operation; and incorporation brings stature to the organization and implies stability. www.lexmundiprobono.org 4
Where profit is not a goal and the enterprise can be funded without the need for access to capital markets, the nonprofit corporation is the preferred vehicle for pursuing social objectives. Although nonprofit corporations are not prohibited from engaging in commercial activities, the directors of a nonprofit are duty-bound to devote primary attention to the promotion of the social mission of the corporation rather than the production of net income. On the other hand, if access to capital markets is needed, a for-profit corporation (or limited liability company, discussed below) is likely to be the preferred option because nonprofit corporations cannot issue capital stock. The directors of a for-profit corporation, however, owe strict duties to the shareholders to maximize profits and value. Therefore, unless the directors and managers can tie the social mission of their for-profit corporation directly to its business purpose, the directors and managers can be sued for breach of their duties to shareholders and for misuse of corporate assets if they focus too much on the social mission and forego profits. This problem can be avoided where all shareholders agree to pursue a social mission or devote a percentage of revenues to charitable causes but such agreements may be temporary because a change in control or a drop in earnings can lead to amendment or abrogation of shareholder agreements. In 2012, South Carolina adopted a new Benefit Corporation Act (SC Code 33-38-110 et. seq.) described below, to offer a better solution. This Act allows a for-profit corporation to elect in its Articles of Incorporation to serve the interests of other parties in addition to the profit interests of its shareholders. c. Formation A nonprofit corporation attains its separate legal status through the filing and approval by South Carolina of its articles of incorporation. This document is in essence a contract between the state and the nonprofit corporation in which South Carolina grants individual legal status to the corporation in exchange for the corporation s commitment to follow its rules. One or more persons (where legal entities like corporations as well as natural persons are included in the definition of person ) may form a South Carolina nonprofit corporation by filing articles of incorporation with the South Carolina Secretary of State. There is no requirement that any incorporator be a South Carolina resident. The Articles of Incorporation must include (i) the nonprofit corporation s name, (ii) a statement as to whether it is a public benefit corporation, a mutual benefit corporation or a religious corporation, (iii) the street address of the nonprofit corporation s initial registered office and the name of its initial registered agent at that office, (iv) the name and address of each incorporator, (v) whether the nonprofit corporation will have members and (vi) the address of the proposed principal office of the nonprofit corporation (which does not have to be located in South Carolina). The articles of incorporation may include any www.lexmundiprobono.org 5
other provisions the incorporators choose to include so long as such additional provisions are not inconsistent with applicable law, such as the purposes for which the corporation is organized and the identities and addresses of the initial directors. Each incorporator and director named in the articles of incorporation must sign them. There is a $25 filing fee. Political Associations must also submit to the South Carolina Secretary of State an initial report to the Department of Revenue on Form CL-1 with the articles of incorporation and pay an additional $25 fee. The corporate name must be distinguishable from the name of any other nonprofit or forprofit business entity organized in or qualified to do business in South Carolina and may not contain language stating or implying that the corporation is organized other than for a purpose permitted by the South Carolina Nonprofit Corporation Act and the articles of incorporation. A South Carolina nonprofit corporation must have at least three directors, with the number specified in or fixed in accordance with the articles of incorporation or the bylaws. Public benefit corporations may or may not have members and generally exist to benefit the general public welfare or engage in acts of charity to persons other than the corporation s officers, directors and members. Mutual benefit corporations, such as a homeowners association, have members and generally exist to benefit their members. Public benefit corporations may qualify to be exempt from federal and state income tax pursuant to Section 501(c)(3) of the Internal Revenue Code and may also qualify to receive donations which are tax deductible to their donors. Mutual benefit corporations may qualify for exemption from federal and state income taxation under a provision of the Internal Revenue Code other than Section 501(c)(3), but donations to such organizations generally are not tax deductible. The Office of the South Carolina Secretary of State provides blank forms in PDF format for nonprofit corporation articles of incorporation, CL-1 forms and other filings at its web site located at www.scsos.com. If the nonprofit corporation intends to obtain exemption from federal and state income taxation, the articles of incorporation must conform with applicable statutes and regulations (discussed below in section 1(g)) and should include either the following provision or else identify by name a 501(c)(3) entity to which all assets will be distributed if the corporation is dissolved: Upon dissolution of the corporation, assets shall be distributed for one or more exempt purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code, or the corresponding section of any future Federal tax code, or shall be distributed to the Federal government, or to a state or local government, for a public purpose. Any such asset not so disposed of shall be disposed of by the Court of www.lexmundiprobono.org 6
Common Pleas of the county in which the principal office of the corporation is then located, exclusively for such purposes or to such organization or organizations, as said court shall determine, which are organized and operated exclusively for such purposes. d. Management and Control After the articles of incorporation are filed, if initial directors are named in the articles, the initial directors hold an organizational meeting at the call of a majority of the initial directors, at which the initial directors appoint officers, adopt bylaws and carry on other initial business. If the articles of incorporation do not name initial directors, then the incorporators hold the organizational meeting at the call of a majority of the incorporators, and the incorporators then either elect directors and officers, adopt bylaws and complete the organization of the corporation or else elect the initial directors and then let them complete the organization of the corporation. A unanimous written consent of the incorporators or initial directors named in the articles of incorporation can take the place of an organizational meeting. Typically, the bylaws of a nonprofit corporation contain provisions governing member, director and officer qualifications, powers, and duties; voting; filling of vacancies; meetings; property holding and transfer; indemnification of directors and officers; committees; bank accounts; fiscal year audits and financial reports; conflicts of interest; and amendment and dissolution procedures. e. Liability of Members, Directors and Officers Under Section 33-31-612 of the South Carolina Nonprofit Corporation Act, a member of a nonprofit corporation is not, as such, personally liable for the acts, debts, liabilities, or obligations of the corporation. However, in South Carolina, a court may permit a plaintiff to pierce the corporate veil and impose the liabilities of the nonprofit corporation on the members if (1) the dominant members have failed to treat the entity as a truly separate legal person and (2) it would be unjust or fundamentally unfair to protect the dominant members from the plaintiff. Sections 33-31-830 and 33-31-842 of the South Carolina Nonprofit Corporation Act provide that directors and officers, respectively, of South Carolina nonprofit corporations must discharge their duties (1) in good faith, (2) with the care of an ordinarily prudent person in a like position would exercise under similar circumstances and (3) in a manner he or she reasonably believes to be in the best interests of the corporation. These fiduciary duties are discussed in more detail in the South Carolina LawForChange summary of Governance Principals. Section 33-31-834 of the South Carolina Nonprofit Corporation Act provides that all directors, trustees and other members of governing www.lexmundiprobono.org 7
bodies of South Carolina nonprofit corporations are immune from suit arising from the conduct of the affairs of the corporation unless their misconduct is willful, wanton or grossly negligent. The South Carolina Nonprofit Corporation Act (in Sections 33-31-850 et seq.) permits a South Carolina nonprofit corporation to indemnify a director against liability if the director (i) conducted himself or herself in good faith, (ii) reasonably believed (a) in the case of conduct in his or her official capacity, that the conduct was in the best interest of the corporation and (b) in all other cases was at least not opposed to the corporation s best interest and (iii) in the case of criminal proceedings, had no reasonable cause to believe his or her conduct was unlawful. A South Carolina nonprofit corporation may not indemnify a director (1) in connection with a derivative proceeding in which the director was found to be liable to the corporation or (2) in connection with any other proceedings where the director is found to have received an improper personal benefit. Unless limited by its articles of incorporation, a South Carolina nonprofit corporation may indemnify its officers and employees to the same extent as it may indemnify its directors. Unless the corporation s articles of incorporation provide otherwise, a South Carolina nonprofit corporation must indemnify a director or officer for his or her defense costs and expenses if he or she was wholly successful on the merits in defending himself or herself. South Carolina nonprofit corporations may purchase director and officer liability insurance. f. Mergers, Acquisitions and Dissolution The South Carolina Nonprofit Corporation Act (Sections 33-31-1101 et seq.) permits a South Carolina nonprofit corporation to merge with (i) a for-profit corporation, (ii) another nonprofit corporation, (iii) a limited liability company, (iv) a partnership or (v) a limited partnership, subject to the limitation that the approval of the Court of Common Pleas of Richland County (one of the two counties in which the state capital of Columbia is located) in a proceeding in which the South Carolina Attorney General has been given written notice is required for a public benefit or religious corporation to engage in a merger generally in which the surviving entity will not be a public benefit, religious or similar nonprofit entity. Unless the articles of incorporation or bylaws require a greater vote or voting by class, any plan of merger must be approved (a) by the corporation s board of directors, (b) if the corporation has members, by two-thirds of the votes cast by members or a majority of the voting power of members, whichever is less, and (c) any third party whose approval is required by any provision of the corporation s articles of incorporation. If the corporation does not have members or any members entitled to vote on a merger, the dissolution must be approved by a majority of directors then in office. If a plan of merger is properly approved, articles of merger must be filed with the South Carolina Secretary of State. www.lexmundiprobono.org 8
Under Sections 33-31-1401 et seq. of the South Carolina Nonprofit Corporation Act, a South Carolina nonprofit corporation may be dissolved (unless the articles of incorporation or bylaws require a greater vote or voting by class) with the approval of (i) the board of directors, (ii) if the corporation has members, by two-thirds of the votes cast by members or a majority of the voting power of members, whichever is less, and (iii) any third party whose approval is required by any provision of the corporation s articles of incorporation. If the corporation does not have members or any members entitled to vote on dissolution, the dissolution must be approved by a majority of directors then in office. At any time after dissolution is authorized, the corporation may then dissolve by delivering articles of dissolution to the South Carolina Secretary of State. A public benefit or religious corporation must give written notice of its intent to dissolve to the South Carolina Attorney General at or before the time it delivers articles of dissolution to the South Carolina Secretary of State. No assets may be transferred or conveyed by the public benefit or religious corporation in dissolution until 20 days after it has given such notice to the Attorney General unless the Attorney General earlier consents in writing to the dissolution or the transfer of assets. g. Recordkeeping, State Reports and State Taxes i) Recordkeeping The South Carolina Nonprofit Corporation Act (Sections 33-31-1601 et seq.) requires a nonprofit corporation to keep minutes of the meetings of its members and board of directors, a record of all actions taken by the members or directors without a meeting and a record of all actions taken by committees of the board of directors. Nonprofit corporations must also maintain appropriate accounting records and a record of its members in a form that permits preparation of a list of the names and addresses of all members in alphabetical order by class and the number of votes each is entitled to cast. A nonprofit corporation must keep at its principal office copies of (1) its articles of incorporation (with all amendments), (2) its bylaws (with all amendments), (3) resolutions adopted by the board of directors relating to member classes and rights, (4) minutes of all member meetings and actions for the past 3 years, (5) all written communications to members generally within the past 3 years, (6) a list of the names and business or home addresses of its current directors and officers and (7) the most recent report of each type that it is required to file with the South Carolina Secretary of State. The South Carolina Nonprofit Corporation Act also requires nonprofit corporations (except as provided in the articles or bylaws of a religious corporation) to provide, upon written demand from one of its members or from the South Carolina Attorney General, the corporation s latest annual financial statements (including a fiscal-year-end balance sheet and statement or www.lexmundiprobono.org 9
ii) iii) iv) h. Insurance operations for that year). If the financial statements are reported on by a public accountant, the accountant s report must accompany the financial statements. If the nonprofit corporation indemnifies or advances expenses to a director in a derivative action, the corporation must report the indemnification or advance of expenses in writing to its members with or before notice of the next meeting of members. South Carolina Income Tax South Carolina s income tax law is designed to piggyback on federal income tax law. Accordingly, nonprofit corporations which are recognized as exempt from federal income taxation under Section 501(c)(3) of the Internal Revenue Code are exempt from South Carolina income taxes. Nonprofit corporations not recognized as exempt for federal income tax purposes, and therefore taxable as C-corporations for federal income tax purposes, are also taxed as C- corporations for South Carolina income tax purposes. Exempt corporations are taxable in South Carolina on any unrelated business taxable income which is taxed at the federal level. South Carolina Property Tax Nonprofit corporations which are recognized as exempt for federal income tax purposes are also generally exempt from property tax on property used in the performance of the corporation s exempt purpose. Also, exempt corporations are entitled to a limited exemption from property tax on real property held for future use so long as the property does not generate rental or other income. Property held for investment or rental by an exempt corporation is subject to property tax. A number of specific property tax exemptions apply to various named charitable organizations. South Carolina Sales Tax Nonprofit corporations which are recognized as exempt for federal purposes may sell items free of sales tax so long as the net proceeds are used exclusively for the organization s exempt purpose. Sales to nonprofit corporations are generally not exempt. Nearly every type of activity by a nonprofit corporation can become the target of some kind of a claim by a firm or an individual that alleges damage or injury by the corporation or individuals responsible for it (i.e., directors, officers or employees). Even if the claim is without merit, the costs of defending against the claim can be very substantial. To encourage qualified individuals to accept positions as directors and officers, many nonprofit corporations purchase insurance to cover director and officer (D&O) liability. In addition, most responsible nonprofit corporations purchase a basic comprehensive www.lexmundiprobono.org 10
general liability policy that covers liability for accidents in the corporation s offices, at sponsored meetings and the like. Liability insurance for nonprofit corporations is often a very complicated matter. Consultation with an experienced and knowledgeable agent or consultant is essential in order to obtain the right coverage at the lowest premium. i. Resources Oleck and Stewart, Nonprofit Corporations, Organizations & Associations (Prentice-Hall, 1994, Cum. Supp. 2002) Jacobs, Jerald A., Association Law Handbook (ASAE & The Center for Association Leadership 4th ed., 2007) Nonprofit Governance and Management (American Bar Association and American Society of Corporate Secretaries, 2002) Guide to Nonprofit Corporate Governance in the Wake of Sarbanes-Oxley (American Bar Association Section of Business Law, 2005) Guidebook for Directors of Nonprofit Corporations (American Bar Association Section of Business Law 2d ed., 2002) Takagi, Gene. Nonprofit Bylaws - Common Issues Nonprofit Law Blog http://www.nonprofitlawblog.com/home/2009/09/nonprofit-bylaws-common-issues.html Web site of the Office of the South Carolina Secretary of State www.scsos.com. South Carolina Association of NonProfit Organizations (SCANPO) www.scanpo.org. 2. For-Profit Corporations a. Using For-Profit Corporations to Pursue Social Objectives The for-profit form of organization can be, and frequently is, used as a vehicle for conducting a business that also has a social mission or objective. Although for-profit corporations are usually formed for the purpose of making money and distributing it to shareholders, there is no reason why a for-profit corporation cannot include a social mission in the purposes clause of its articles of incorporation. While such a provision would authorize the corporation to pursue social objectives, it would not require the corporation to do so only the shareholders/owners have this power. And unless all shareholders agree to pursue social aims, dissenters could sue the www.lexmundiprobono.org 11
corporation s directors and managers for failing to operate the corporation in the best economic interests of the shareholders. A shareholders agreement is probably the best way to address this problem. Such an agreement, entered into by all shareholders and the corporation, would require the corporation to be managed and operated so as to pursue specified social objectives thereby overriding fiduciary duties and similar legal principles that govern normal behavior of for-profit corporations. But even the most skillfully drafted shareholders agreement is not a perfect solution because agreements can always be abrogated and amended and the owners of the shares can change via sale, gift or inheritance. Moreover, a tightly drafted shareholders agreement which makes it difficult to respond to business changes over time would tend to render the for-profit corporation much less attractive to investors (potential new shareholders). b. Formation The South Carolina Business Corporation Act of 1988, as amended, governs the formation, operation and dissolution of for-profit corporations in South Carolina. Any person (where legal entities like corporations as well as natural persons are included in the definition of person ) may form a South Carolina for-profit corporation by filing articles of incorporation with the South Carolina Secretary of State. There is no requirement that any incorporator be a South Carolina resident. The articles of incorporation must include (i) the corporation s name, (ii) the number of shares the corporation is authorized to issue, itemized by classes, (iii) the street address of the corporation s initial registered office and the name of its initial registered agent at that office, (iv) the name and address of each incorporator, (v) the signature of each incorporator and (vi) a certificate, signed by an attorney licensed to practice in South Carolina, that all of the requirements of Section 33-2-102 of the Act have been complied with. The Articles of Incorporation may include any other provisions the incorporators choose to include so long as such additional provisions are not inconsistent with applicable law, such as the purposes for which the corporation is organized and governance provisions. There is a $135 filing fee. For-profit corporations must also submit to the South Carolina Secretary of State with the articles of incorporation an initial report to the Department of Revenue on Form CL-1. The corporate name must be distinguishable from the name of any other nonprofit or forprofit business entity organized in or qualified to do business in South Carolina. The name of the corporation must include the word corporation, incorporated, company or limited, the abbreviation corp., inc., co., or ltd., or words or abbreviations of www.lexmundiprobono.org 12
like import in another language. The board of directors of a South Carolina for-profit corporation consists of one or more individuals with the number specified in or fixed in accordance with the articles of incorporation or bylaws of the corporation. The Office of the South Carolina Secretary of State provides blank forms in PDF format for for-profit corporation articles of incorporation, CL-1 forms and other filings at its web site located at www.scsos.com. c. Management and Control A for-profit corporation has a hierarchical control structure. It is managed by or under the direction of a board of directors and its officers, although its shareholders vote on important corporate issues, such as election of directors, mergers, sale of all assets and dissolution. Similar to a nonprofit corporation, once the for-profit corporation has been established, the incorporators or initial board of directors meets (in person or by consent), ratifies the acts in connection with initial formation of the corporation and adopts bylaws which set forth the rules and procedures governing the operation and management of the corporation consistent with the applicable statutes of South Carolina and the articles of incorporation. In general, the bylaws of a for-profit corporation contain provisions governing director and officer qualifications, powers and duties; voting; meetings of shareholders, directors and officers; filling of vacancies; committees; property holding and transfer; indemnification of directors and officers; bank accounts; fiscal year audits and financial reports; conflicts of interest; and amendment, merger and dissolution procedures. d. Liability of Shareholders, Directors and Officers Under Section 33-6-220 of the South Carolina Act, a shareholder of a for-profit corporation is not personally liable for the acts or debts of the corporation except that he or she may become personally liable by reason of his or her own acts. However, in South Carolina, a court may permit a plaintiff to pierce the corporate veil and impose the liabilities of the corporation on the dominant shareholders if (1) the dominant shareholders have failed to treat the entity as a truly separate legal person and (2) it would be unjust or fundamentally unfair to protect the dominant shareholders from the plaintiff. Sections 33-8-300 and 33-8-420 of the South Carolina Act provide that directors and officers, respectively, of South Carolina for-profit corporations mush discharge their duties (1) in good faith, (2) with the care an ordinarily prudent person in a like position www.lexmundiprobono.org 13
would exercise under similar circumstances and (3) in a manner they reasonably believe to be in the best interests of the corporation and its shareholders. Articles of incorporation of certain publicly-traded or widely-held corporations may contain a provision eliminating personal liability of a director to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director provided that such provision does not eliminate or limit the director s liability (i) for any breach of his or her duty of loyalty to the corporation or its shareholders, (ii) for acts or omissions not in good faith or which involve gross negligence, intentional misconduct, or a knowing violation of law, (iii) for unlawful distributions or (iv) for any transaction from which he or she derived an improper personal benefit. The South Carolina Act (in Sections 33-8-500 et seq.) permits a South Carolina for-profit corporation to indemnify a director against liability if the director (i) conducted himself or herself in good faith, (ii) reasonable believed (a) in the case of conduct in his or her official capacity, the conduct was in the best interest of the corporation and (b) in all other cases was at least not opposed to the corporation s best interest and (iii) in the case of criminal proceedings, had no reasonable cause to believe his or her conduct was unlawful. A South Carolina for-profit corporation may not indemnify a director (i) in connection with a derivative proceeding in which the director was found to be liable to the corporation or (ii) in connection with any other proceedings where the director is found to have received an improper personal benefit. Unless limited by its articles of incorporation, a South Carolina for-profit corporation may indemnify its officers and employees to the same extent as it may indemnify its directors. Unless the corporation s articles of incorporation provide otherwise, a South Carolina for-profit corporation must indemnify a director or officer for his or her defense costs and expenses who was wholly successful on the merits in defending himself or herself. South Carolina for-profit corporations may purchase director and officer liability insurance. e. Raising Capital For-profit corporations (and LLCs) offer the most flexibility in raising capital, ranging from various kinds of equity (common stock, preferred stock, options, warrants) to numerous types of debt instruments (convertible notes, subordinated notes, bonds, commercial paper). f. Recordkeeping and State Reports The South Carolina Act (Sections 33-16-101) requires a for-profit corporation to keep minutes of the meetings of its shareholders and board of directors, a record of all actions taken by the shareholders or directors without a meeting and a record of all actions taken by committees of the board of directors. A for-profit corporation must also maintain appropriate accounting records and a record of its shareholders in a form that permits www.lexmundiprobono.org 14
preparation of a list of the names and addresses of all shareholders in alphabetical order by class and the number of votes each is entitled to cast. A for-profit corporation must keep at its principal offices copies of (i) its articles of incorporation (with all amendments), (ii) its bylaws (with all amendments), (iii) resolutions adopted by the board of directors relating to classes of shares and the rights of those shares, (iv) minutes of all shareholder meetings and actions for the past 10 years, (v) all written communications to shareholders generally within the past 3 years, (vi) a list of the names and business addresses of its current directors and officers, (vii) its most recent annual report delivered to the South Carolina Department of Revenue and (viii) its federal and state income tax returns for the last 10 years. Section 33-16-200 of the South Carolina Act also requires for-profit corporations to furnish its shareholders annual financial statements that include the corporation s yearend balance sheet, income statement and statement of changes in shareholders equity. If the financial statements are reported on by a public accountant, the accountant s report must accompany the financial statements. The corporation must mail the annual financial statements to each shareholder within 120 days after the close of each fiscal year. Under Section 33-16-210 of the South Carolina Act, if a for-profit corporation indemnifies or advances expenses to a director in a derivative action, the corporation must report the indemnification or advance of expenses in writing to its shareholders with or before notice of the next shareholders meeting. In addition, generally if the corporation issues or authorizes the issuance of shares for promissory notes or for promises to render services in the future, the corporation must report to its shareholders in writing the number of shares authorized or issued and the consideration received with or before the notice of the next shareholders meeting. The corporation is also required to file an annual report with the South Carolina Department of Revenue. g. Taxation A for-profit corporation is generally subject to income tax on its income and capital gains under both federal and South Carolina law unless it makes an election to be taxed under subchapter S of the federal income tax code. A corporation making the subchapter S election is generally referred to as an S-corporation for income tax purposes, and a corporation that does not make such an election is generally referred to as a Ccorporation for income tax purposes. Shareholders of C-corporations are often said to be subject to double taxation on corporate income and capital gains. The C-corporation is taxed when it earns income or has capital gains, and the shareholders are taxed a second time if and when the corporate income or gains are distributed to shareholders. South Carolina has a corporate income tax, so shareholders of a South Carolina for-profit corporation that is not an S-corporation would be subject to such double-tax at both the federal and state level. www.lexmundiprobono.org 15
If a for-profit corporation has 100 or fewer shareholders, none of whom are nonresident aliens (or married to a nonresident alien who has a current ownership interest in the stock under local law) and has only one class of stock and meets certain other requirements, the corporation can elect to be taxed under subchapter S of the federal income tax code (which generally also causes it to be similarly taxed under the South Carolina income tax law). Generally an S-corporation does not pay income tax itself but rather determines its taxable income, losses, capital gains and other tax items, which then get passed through and allocated directly to its shareholders (generally pro rata in accordance with the number of shares they hold and the portion of the tax year they have held them) and included in the shareholders taxable income and gains. Under Sections 12-20-10 et seq. of the South Carolina Code, (a) a South Carolina forprofit corporation and (b) a foreign for-profit corporation that is either qualified to do business in South Carolina or is required to file income tax returns in South Carolina, must file an annual report with the South Carolina Department of Revenue by the 15 th day of the third month following the close of its taxable year and pay an annual franchise tax equal to $15 plus $1 for each thousand dollars, or fraction of a thousand dollars, of capital stock and paid-in or capital surplus of the corporation shown by its records on the first day of the taxable year in which the report is filed. Paid in or capital surplus and related terms have statutory definitions. h. Resources Web site of the Office of the South Carolina Secretary of State www.scsos.com. 3. Benefit Corporations In 2012, South Carolina adopted the South Carolina Benefit Corporation Act, SC Code 33-38- 110, et seq. The SC Benefit Corporation Act generally permits a South Carolina for-profit corporation to elect, either upon formation or by amendment to its articles of incorporation, to conduct its business for the benefit of constituencies other than just its shareholders. The SC Benefit Corporation Act is an add-on to the SC Business Corporation Act that governs regular for-profit corporations. SC Benefit Corporations are subject to and governed by the provisions of the SC Business Corporations Act except to the extent those provisions are inconsistent with the SC Benefit Corporation Act. a. Formation A South Carolina for-profit corporation can elect to be a benefit corporation in its original articles of incorporation, or an existing for-profit corporation can amend its articles of incorporation to become a benefit corporation. The articles of incorporation must include an identification of a specific public benefit purpose. An amendment to the existing www.lexmundiprobono.org 16
articles of incorporation of a for-profit corporation to make it a benefit corporation must be approved by two-thirds of each class and series of its outstanding stock voting as separate groups regardless of any limitations in the corporation s articles of incorporation or bylaws on the voting rights of such classes or series. Similarly, if another entity is a party to a merger, conversion or share exchange with a benefit corporation in which the benefit corporation is the surviving entity, the merger must be approved by (a) the same two-thirds vote described above of the other entity if it is a for-profit corporation, (b) by two-thirds of the members entitled to vote of the other entity if it is a non-profit corporation and (c) by the same vote required for any merger of the other entity if the other entity is a limited liability company or partnership unless otherwise provided in the other entity s operating agreement or limited partnership agreement, as applicable. The South Carolina Secretary of State s office has created special forms for the Articles of Incorporation and other filings of SC Benefit Corporations which are available on the South Carolina Secretary of State s website at www.scsos.com. b. Management and Control Benefit Purposes. In addition to the purposes for which for-profit corporations exist, a benefit corporation must have as one if its corporate purposes the creation of a general public benefit. The benefit corporation must also include in its articles of incorporation one or more specific public benefit purposes. The corporation may amend its articles of incorporation to add, amend or remove specific public benefits with the approval of twothirds of each class and series of its outstanding stock voting as separate groups regardless of any limitations in the corporation s articles of incorporation or bylaws on the voting rights of such classes or series. "General public benefit" is defined to mean a material positive impact on society and the environment taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation, where Third-Party Standard is defined by fulsome statutory criteria that generally requires a standard that is publicly available and transparent and was developed by a credible, competent independent organization. "Specific public benefit purpose" is defined to mean a benefit that serves one or more public welfare, religious, charitable, scientific, literary, or educational purposes, or other purposes or benefits beyond the strict interest of the shareholders of the benefit corporation, including: (a) providing low-income or underserved individuals, families, or communities with beneficial products, services, or educational opportunities; www.lexmundiprobono.org 17
(b) promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business; (c) preserving or improving the environment; (d) improving human health; (e) promoting the arts, sciences, or advancement of knowledge; (f) increasing the flow of capital to entities with a public benefit purpose; or (g) conferring any other particular benefit on society and the environment. Accountability. In discharging their duties as directors, the directors of a benefit corporation must consider the effects of their actions (or inaction) on: (1) the corporation s shareholders; (2) the corporation s and its suppliers workforces; (3) the interests of customers to the extent they are beneficiaries of the general or specific public benefit purposes of the corporation; (4) community and societal factors, including the interests of each community in which offices or facilities of the corporation or its suppliers are located; (5) the local and global environment; (6) the short-term and long-term interests of the corporation, including benefits that may accrue to the corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the corporation; and (7) the ability of the corporation to accomplish its general and any specific public benefit purpose. In addition, directors may consider: (a) the resources, intent, and past, stated, and potential conduct of any person seeking to acquire control of the benefit corporation and (b) other pertinent factors or the interests of any other group that the director in good faith considers to be appropriate. Directors are not required to give priority of consideration to any one category over another unless the corporation s articles of incorporation require otherwise. Officers are generally required to consider the effects of their actions or inactions on the same constituencies. Benefit Director. The SC Benefit Corporation Act requires the corporation s board of directors to designate one director who is an independent person to be the Benefit Director. Generally, a person is an independent person if he or she has no material relationship (as defined in detail in the SC Benefit Corporation Act) with the benefit corporation or any of its subsidiaries. The Benefit Director may also be the www.lexmundiprobono.org 18
corporation s Benefit Officer (as described below). The Benefit Director is responsible for preparing an opinion for inclusion in the corporation s Annual Benefit Report (described below) as to (a) whether the benefit corporation acted in accordance with its general and any specific public benefit purpose in all material respects during the period covered by the report; (b) whether the benefit corporation actually conferred a general public benefit and any specific public benefit during the period covered by the report; and (c) whether the directors complied with the corporation s accountability duties described above. If the Benefit Director finds a failure under item (a), (b), or (c), the benefit director shall include in the annual benefit report a description, to the extent relevant, of the ways in which the benefit corporation or its directors failed to act or comply. Benefit Officer. A benefit corporation may have an officer designated as the Benefit Officer. The duties of the benefit officer include (a) monitoring the benefit corporation's pursuit of the general and any specific public benefits purposes of the corporation, and (b) preparing the corporation s Annual Benefit Report. c. Liability of Shareholders, Directors and Officers Generally, directors and officers of an SC Benefit Corporation do not owe duties to beneficiaries of the corporation s general public benefit or any of its specific public benefits. Directors and officers are also generally not liable for money damages for the failure of the corporation to pursue or create a general or specific public benefit. Directors and officers are similarly not liable for monetary damages for acts or omissions if they perform their duties in compliance with the standards generally imposed, in the case of directors, on directors of forprofit corporations in SC Code Sections 33-8-300 through 33-8-330, and, in the case of officers, on officers of for-profit corporations in SC Code Section 33-8-420. A Benefit Director is not personally liable for monetary damages for any act or omission taken in that capacity unless the act or omission constitutes a transaction from which the director derived an improper personal benefit, willful misconduct, or a knowing violation of law. The benefit duties of directors under the SC Benefit Corporation Act may be enforced only in a benefit enforcement proceeding, and the only persons or entities that may bring a benefit enforcement action are the corporation itself or, derivatively, its shareholders, directors, persons or groups beneficially owning 5% or more of the equity interests of a parent company of the corporation or persons specified in the corporation s articles of incorporation or bylaws. www.lexmundiprobono.org 19