Vol. 6, No. 2, Pg. 22. Limited Liability Companies A New Item on South Carolina's Business Menu.

• Author: By Martin C. McWilliams Jr.

South Carolina Lawyer

1994.

Vol. 6, No. 2, Pg. 22.

Limited Liability Companies A New Item on South Carolina's Business Menu

22Limited Liability Companies A New Item on South Carolina's Business MenuBy Martin C. McWilliams Jr.The menu of ways to do business in South Carolina has just grown longer. Professionals can now do business in the Palmetto State not only as "C corps" and "S corps"--and statutory close corps, professional corps, partnerships and limited partnerships--but also as limited liability companies (LLCs) and limited liability partnerships (LLPs).

In the waning days of the 199394 legislative session the General Assembly passed legislation creating, as new forms of doing business, the fairly well known LLC and the much less well known LLP. Both forms of business were created by one bill, H.R. 4283, signed by Gov. Campbell on June 16, 1994.

The LLC path is pretty well worn. About 40 states have enacted some sort of LLC statute, and at least six other states are considering legislation. By contrast, South Carolina is in the forefront with the LLP; fewer than a dozen states have legalized this business form.

The LLC

The LLC's essential characteristics are comparable, on one hand, to those of a general partnership in which the partners have limited liability and, on the other hand, to a statutory close corporation electing subchapter S of the Internal Revenue Code but without the limitations that subchapter S imposes on ownership. In short, the LLC combines limited member liability with partnership taxation.

From the point of view of American lawyers, the LLC is a novel concept--a hybrid somewhere between a corporation and a general partnership. For the rest of the world, however, the LLC is business as usual. American LLCs are based roughly on the German GmbH model of privately held, limited liability business enterprises. Foreign LLCs have always done business in the United States, and a good deal of domestic LLC law will probably develop by analogy to the courts' past treatment of the foreign variety.

South Carolina's LLC statute, drafted by a committee organized by Secretary of State Jim Miles, is a highly modified version of the November 1993 draft of the ALI/ABA model LLC statute. In organization and in some details, it parallels the South Carolina Business Corporation Act, which is also based on an ALI/ABA model. Anyone who can find his or her way around in the Business Corporation Act will be able to do the same in the LLC statute.

"For those who can afford to be well advised, the LLC will be appealing because of the greater protection from personal liability that it affords and the concomitant ability to raise more capital."

An LLC is formed in the same way as a corporation, by filing fill-inthe-blanks "articles of organization" with the Secretary of State's office. S.C. Code Ann. § 33-43-202. As with a corporation, existence begins when the articles are date and time stamped by the Secretary.

Although LLCs are formed like corporations, their governance is more like that of the general partnership. The LLCs fundamental governance document is the "operating agreement"--a contract among the LLC's members that will look very much like a partnership agreement. An LLC can be managed without an operating agreement about as satisfactorily as a general partnership can be managed without a partnership agreement.

The Management Choice

Promoters filing LLC articles of organization will discover that they must make an election unlike anything in the present corporate or partnership statutes. They must elect to be either member-managed or manager-managed. § 33-43-202(A)(4). This is a very significant election, because a member-managed LLC can be bound by any member (just as a general partnership can be bound by any general partner), whereas a management-managed LLC cannot be bound by its members but only by a manager (as with a business corporation).

If an LLC wishes to be managed by some members, but not all, it should elect to be management-managed.

In addition to the obvious governance ramifications of this election, there are very significant tax and securities regulations ramifications, discussed later.

Member Liability

Like shareholders in a business corporation, the members of an LLC are not, solely by reason of being members, liable for obligations of the LLC. § 33-43-304(A). Members will, as always, be liable for their own torts but...