23 Oct Starting a New Business in South Carolina – Which Structure is Best?
Once you have a great idea and a solid business plan, the next step is to choose your business structure and register with the South Carolina Secretary of State. Your business structure largely impacts how your business is run and taxed. The right business structure will protect you from personal liability if something goes wrong and ensure that your profits are taxed at the lowest rate possible.
Here is a list of the typical top four options for business structures in South Carolina. Below we will cover each structure in detail to help you decide which business structure is right for you. Before selecting your business structure, we recommend that you talk to an accountant to determine the best taxation method for your business. Taxes are a key element in making your business structure decision.
1) Limited Liability Company (LLC);
2) Sole Proprietorship;
3) C-Corporation; and
Option 1 – Limited Liability Company (LLC)
LLCs are the most common entity for business owners. Most entrepreneurs form an LLC because it has the benefits of a corporation without the disadvantages of double taxation, board of directors, or corporate officers. An LLC separates you, your partners, and your LLC from a business and liability perspective. What does this separation mean? It means that a creditor can typically only attack the LLC’s assets. A creditor of your LLC cannot come after your personal assets, such as your home, property, or personal cash. Finally, an LLC provides you a significant amount of flexibility to run your business and to set up the taxes in a way that is best for you. Generally, the income and taxes flow through to the individual members in a percentage set forth in the Operating Agreement.
To open an LLC in South Carolina, you must first file a set of Articles of Organization with the South Carolina Secretary of State. If you are going to be handling money or owning property, we strongly recommend that you obtain a Federal EIN number and open a business bank account. Finally, you need a clear Operating Agreement outlining the responsibilities of each member of the LLC, how the business will be run, and how any upcoming issues will be handled. Again, an LLC is the most commonly used business structure.
Option 2 – Sole Proprietor.
If you are providing a product or service to customers, do not have any partners, and have not set up any other legal entity for your business – then you are automatically a Sole Proprietor. As you can see, a Sole Proprietorship is the simplest business structure, but it does have a few drawbacks. First, there is no difference between your business and your personal liability as a Sole Proprietor. As a Sole Proprietor, you are personally liable for debts, mistakes, or any other risk taken on by your business. Second, you will pay taxes on all earnings from your business at your personal income tax rate. Finally, you generally will not be able to raise money from investors as a Sole Proprietorship. If your business has a very small risk of liability, then operating as a Sole Proprietorship might be the right choice.
Option 3 – C-Corporation.
The biggest advantage to a C-Corporation over an LLC is the ability to raise money by taking the company public. Similar to an LLC, a C-Corporation treats the individual business owner(s) and the corporation’s assets separately from a liability standpoint. However, filing taxes as a C-Corporation will require more paperwork than an LLC and any income generated is typically taxed twice. This is a huge drawback to a C-Corporation. Also, C-Corporations have shareholders and a Board of Directors. A word of wisdom, operating as a C-Corporation requires you to file a lot of paperwork with the IRS and can quickly get complicated. Our general recommendation is for you to open an LLC unless you are planning to raise a lot of outside money or to take your company public.
To start a C-Corporation in South Carolina you must file a set of Articles of Incorporation with the South Carolina Secretary of State. Also, you will need to obtain a Federal EIN number and open a business bank account. Finally, you should have a clear set of By-Laws which function similar to an LLC’s Operating Agreement.
Option 4 – S-Corporation.
An S-Corporation is a mix or hybrid between a C-Corporation and an LLC. Before the LLC was created, S-Corporations were used to protect business owners from double taxation. Like an LLC, the profits and losses in an S-Corporation flow through to the individual owners and are only taxed once. However, most businesses choose to operate as an LLC because of the LLC’s simplicity and flexibility, with similar taxes results. If you do choose to operate as an S-Corporation, you cannot have more than 100 certain types of allowable shareholders. Unless your accountant specifically recommends that you operate as an S-Corporation, we generally recommend that you operate as an LLC.
To start an S-Corporation in South Carolina you must file a set of Articles of Incorporation with the South Carolina Secretary of State and then timely file Form 2553 with the IRS indicating you wish to operate as a small business. Also, you will need to obtain a Federal EIN number and open a business bank account. Finally, you should have a clear set of By-Laws which function similar to an LLC’s Operating Agreement.
Which Option is Best for Your Business?
The majority of businesses today operate as LLCs because of the freedom, protection of individual assets from creditors, and tax benefits provided by this structure. However, as the end of the day the choice of how to structure your business is yours. If you have questions or need assistance setting up your business, please contact our office. We would be happy to assist you.
Lauren Williams is an attorney with Russell P. Patterson, P.A. in Hilton Head, SC. She can be reached at (843) 341-9300 or firstname.lastname@example.org.
Information or interaction on this page should not be construed as establishing a client-attorney relationship or as legal advice. For advice about your specific situation, please consult one of our attorneys.