South Carolina is a great place to start a small business. There are few other states where the cost of doing business is so reasonable. Taxes are low, and the South Carolina Department of Commerce offers grants and other initiatives to help small businesses get started. Still, you need to understand a few basics to legally set up a business in the most beneficial way possible. Here are six legal questions that entrepreneurs should ask as they launch their new South Carolina business ventures.
1. What Should My Legal Structure Be?
The legal structure under which you organize your business determines which taxes you will pay and how much liability you personally have for the business’s losses.
- A sole proprietorship is the simplest business form. You don’t have to file any paperwork or do any reporting. Your profits are taxed as personal income on your individual tax returns. However, you have unlimited liability exposure, and you could lose personal assets such as your home or your bank account if your business has major losses or loses a lawsuit.
- There are different kinds of partnerships. A general partnership is similar to a sole proprietorship in taxes and liability.
- A corporation is more formal, and it may be necessary if you plan to have outside investors in your business. In a corporation, your liability is limited to your investment in the business. However, C-Corporations are subject to double taxation: the business pays corporate income tax, and you must pay individual income tax if you receive dividends. An S-Corporation allows profits to pass through to the owners without taxation, but there are restrictions on who can be an owner.
- A limited liability company (LLC) enjoys benefits both in liability and taxation. As with corporations, your liability is limited to your investment. However, there is no corporate income tax; profits pass though and are taxed as income to the owners.
Many small businesses today are choosing to become LLCs. While there’s some effort and expense in setting up an LLC, an LLC in South Carolina can cost less than in other states. There are step-by-step instructions available for getting started as an LLC.
2. How Do I Register My Business with South Carolina?
The first step is to choose a name for your business. You’ll need a unique name that’s not “confusingly similar” to any other business name.
You will complete your registration with the South Carolina Secretary of State. The process varies depending on your legal structure. No matter what your structure, however, you’ll be asked to provide the business name, address and purpose, along with the ownership details. If you are a corporation or LLC, you’ll have to provide the name and address of your registered agent, who will be the contact point with the state for any official matters. In some cases, you can be your own registered agent if you live in the state.
3. What Licenses and Permits Do I Need?
All South Carolina businesses must file for a general business license. It’s sometimes called a business tax certificate. These are issued locally, and the cities and municipalities in the state vary in their requirements. If you operate your business in multiple South Carolina locations, you will need a business license in each.
If your business includes selling goods, you will need a seller’s permit, sometimes called a sales tax certificate. You have the ability to gather and submit sales tax.
Some lines of business require professional licenses. This licensing is handled by the Department of Labor, Licensing and Regulation. The department is responsible for licensing, regulation, enforcement, education and training.
There may also be local permits such as zone permits, health and safety permits, home business permits and building permits if you plan to renovate a physical location. Your city or town office is the place to inquire about specific local licensing and permit requirements.
4. What Operating Agreements Do I Need?
If you are the sole owner of your business, you may want to document in writing how you will operate the business. However, if there are multiple owners, operating agreements are vital. Handshake agreements may be permitted by law, but they’re a recipe for disaster when unexpected events occur in any kind of partnership.
Partners sometimes fail to ask questions about challenging situations until such situations arise. For example, what will you do if the company needs to raise more capital? What happens if your company wants to add partners? What is the process for a partner cashing out? What happens if a partner dies or becomes unable to fulfill their business responsibilities? How will the business be managed? If there’s a disagreement about company management, it’s important to have as much detail as possible in the operating agreement. These are hard questions requiring difficult discussions, and you need to settle them before the circumstances arise.
Also, it’s helpful to have contracts with vendors and other businesses that you interact with. A lot of people would prefer to conduct business with a handshake, but it’s all too easy to have misunderstandings about each company’s obligations in a business relationship.
5. Can I Do My Own Taxes?
There’s no law against it, but, unless business taxation is your area of expertise, doing your own taxes is a questionable idea. There are not only the tax laws themselves that need to be complied with and the required forms that must be filed. There are opportunities to take advantage of credits and deductions. There are decisions you’ll make all during the year that affect your obligation when it’s time to pay.
Your South Carolina business may pay income tax, sales tax, franchise tax, and employer taxes such as worker’s comp and unemployment insurance. In addition, there could be industry-specific taxes and local taxes such as property tax.
Here are some of the South Carolina taxes you may be obligated to pay:
- The franchise tax, or corporate license tax, is $15 plus $1 for each $1,000 of capital or paid-in surplus.
- C-corporations are subject to the five percent state corporate tax.
- Pass-through entities (those that don’t pay corporate tax) must withhold five percent of distributions to non-resident shareholders.
- State sales tax in South Carolina is six percent, and there may be local sales tax of up to one percent. Not all products and services are subject to this tax.
- Profits that pass through to owners are subject to individual state income tax, which ranges up to 6.5 percent of taxable income.
- Companies with employees must pay employment taxes, workers’ comp and unemployment insurance.
- Companies that own real property must pay local property tax.
The advice of a tax professional can not only keep you in compliance with tax law but also help to minimize the amount you pay.
6. What Is the Difference Between an Employee and an Independent Contractor?
There are many advantages to engaging independent contractors rather than hiring employees. You don’t have to pay employment taxes, unemployment insurance or workers’ comp. Your liability is reduced. There’s less record-keeping and generally less work.
However, you can’t make a worker an independent contractor merely by calling them one. The South Carolina Supreme Court has ruled that whether a worker is an employee depends on the employer’s right to control the manner in which the worker does their job. There is a four-point test to determine whether this is the case. If you closely control how the person works, they’re an employee.
If you misclassify an employee as an independent contractor, you could at some point be required to pay past wages and benefits and could also be subject to significant financial penalties.
The Right Legal Answers for Your South Carolina Business
Starting a small business in the Palmetto State can be a satisfying and remunerative experience. As you can see, however, there are a number of legal considerations that present a challenge for the average new business owner. Properly addressing the legal questions not only keeps you on the right side of South Carolina regulations. Decisions around issues such as business structure and operating agreements have long-term implications for taxation, liability and other factors that affect the health and profitability of your venture.
