Vol. 8, No. 3, Pg. 32. 1996 Limited Liability Company Act.

• Author: By Scott Y. Barnes, James R. Burkhard, Richard C. Handel and Burnet R. Maybank III

South Carolina Lawyer

1996.

Vol. 8, No. 3, Pg. 32.

1996 Limited Liability Company Act

321996 LIMITED LIABILITY COMPANY ACTBy Scott Y. Barnes, James R. Burkhard, Richard C. Handel and Burnet R. Maybank IIIEffective June 1, 1996, every Limited Liability Company (LLC) formed in South Carolina and every foreign LLC that now wishes to do business in South Carolina must be formed or qualified under, and be governed by, the new South Carolina Uniform Limited Liability Company Act (Act).

This new law is a complete revision and makes significant changes to the old law. Existing LLCs may elect to be governed by the new law, or, until January 1, 2001, they may continue to be governed by the "old" LLC statute.

Almost simultaneously with South Carolina's adoption of this new law, the IRS announced on May 10, a proposed major change, the so-called "check the box" rules for qualifying an LLC for partnership taxation. Therefore, this article will first explore the changes of the South Carolina statute and then move to an important consideration of the many existing and proposed tax changes which affect LLCs.

WHAT IS AN LLC? WHY USE ONE?

An LLC might be thought of as a general partnership none of whose partners have personal liability for the obligations of the partnership. Conversely, it might be thought of as a corporation, which is taxed as a partnership.

The two primary advantages of the LLC which will likely make it the entity of choice for many South Carolina businesses, are: ( 1) limited liability of members and (2) the ability to use partnership taxation.

WHAT ARE THE MOST SIGNIFICANT CHANGES IN THE NEW LAW?

The new law is a wholesale adoption of the Uniform Act. As such there are significant changes. The most significant include the following.

Operating Agreement May Change The Statute. Total flexibility is the hallmark of the Act. Almost every provision in the Act can be changed by a contrary provision in the operating agreement. However, provisions that impact creditors may not be changed, and the operating agreement may not: (1) unreasonably restrict a member's right to information of records, (2) vary certain rights to expel a member, (3) vary the requirement to wind up the LLC for certain reasons, (4) eliminate the duty of loyalty, care, good faith and fair dealing, and (5) restrict rights of persons who are not members, managers or their transferees. There will likely be some controversy as to which sections may and which sections may not be changed by the operating agreement.

Term Or At-Will Duration. The LLC must decide whether it will last for a fixed period or whether it is to be an "at-will" LLC. Often the preferred choice will be fixed period, for a "term."

Members Can Be "Locked-In." The LLC may be structured so that when a member leaves, he or she does not get money out until the LLC later ends.

Buy-Sell Agreements And Transfer Restrictions Can Be Utilized. The old law effectively prevented members from entering into buy-sell agreements and agreements permitting the transfer of memberships to others. These restrictions have been removed in the new Act. (The new Act continues to

34 require unanimous consent before a transferee is admitted as a new member, but this is easily modified in the operating agreement.)

Professional LLCs Treated The Same-Desirable Form For Lawyers. There are no longer special provisions governing professional LLCs. Some law firms have already converted to the LLC form of business. Unless the Bar or Court issues an unfavorable ruling, many law firms will likely find the LLC form better than the LLP form because of differing the liability protection provisions.

Recent Favorable Tax Changes Are Reflected In The Act. The IRS has recently relaxed its requirements for properly forming a LLC and has proposed additional, more favorable changes. The new statute fits nicely with these changes, and South Carolina LLCs will be able to take advantage of these favorable rulings.

Broad Authority, But Special Limits On Power To Transfer Real Estate. The signature (apparently, whether or not properly authorized) of any one member (in a member-run) or any manger (in a manager-run) is sufficient to transfer the LLC's real property. However, if the articles contain a provision limiting the power of one or more members or managers to transfer real estate, this provision is binding on all third parties whether or not they have actual notice of the restriction. It is advisable to...