Can I Offer Ownership Options in My LLC?


You created a Limited Liability Corporation (LLC) in South Carolina, and now you want to raise capital by bringing in investors. Unlike a corporation, however, an LLC cannot sell shares. Since an LLC has some characteristics of both corporations and partnerships, you may be wondering whether you can sell ownership interests in your LLC. A business organization lawyer can help sort out the complexities.

Limited Liability Corporations in South Carolina

A limited liability corporation is a unique business structure that can protect you from legal liability in many situations, unlike a partnership or sole proprietorship, but an LLC is not a traditional corporation. An LLC does not issue shares. Since there are no shares, LLC ownership is determined by the percentage of ownership. The LLC can have different categories of voting rights among the owners. The owners can make unequal capital contributions and distribute profits unequally. An LLC can be taxed either at the corporate level, like a corporation, or on the owner’s tax return, similar to a partnership.

To offer ownership options in your South Carolina LLC, you must be a manager of your LLC and get the consent of all the LLC members before admitting a new member. To “buy in” to your LLC, a member may contribute tangible property, intangible property, or other benefits to the LLC. The contributions can be in the form of money or promissory notes. Other acceptable forms include performing services for the LLC, agreeing to contribute money or property, or contracting to perform services.

Thing to Consider Before Bringing in a New Member

All members of LLCs in South Carolina, whether they are managers or not, have a right to information from the LLC. If you bring in a new member, you have to give that member, as well as his agents and attorneys, access to inspect and copy the LLC’s records.

Filing an Amendment

You have to update your operating agreement when you bring new members into your LLC, but since South Carolina law allows your operating agreement to be either written or verbal, updating your agreement can be quite simple. If you need to change your articles of incorporation to reflect the new ownership arrangement, you will file an amendment to your articles with the Secretary of State and pay a $110 fee.

Tax Consequences of Selling LLC Interests

People often overlook the tax consequences when selling LLC interests. Because LLCs are a hybrid business form, the tax consequences of interest transfers can be bizarre. If you purchase a unit of ownership of an LLC for $20,000 then sell it for $20,000, you might assume that you would break even and there would be no tax consequences. That is the way it works in an LLC taxed as a corporation, but in an LLC taxed as a partnership, it is far more complicated.

A member’s basis in an LLC is in constant flux, changing whenever the LLC earns income, sustains losses, incurs debt, receives capital contributions, and makes distributions. A member’s gain can be a capital gain or ordinary income, and partly long-term and partly short-term. There are many other potential tax consequences of selling LLC interests, which is why you should get professional advice before entering into this transaction.

Since the laws are constantly changing, you should get the advice of a South Carolina business attorney before making any changes to your LLC. If you have questions about LLC membership shares and would like to speak with one of our attorneys, contact Willcox, Buyck & Williams, P.A. today for a consultation.

Employee vs. Independent Contractor – Beware the IRS Audit

One of the most important questions for any business owner is whether to classify a worker as an employee or an independent contractor.

The United States Department of Labor says that the misclassification of employees and independent contractors is one of the “most serious problems facing affected workers, employers, and the entire economy.” This is one problem that an experienced labor and employment lawyer can help you avoid.

Why Is Misclassification Important?

Many laws have been enacted to protect the rights and privileges of employees in the United States.

Some business owners deliberately misclassify employees as independent contractors so they do not have to pay things like payroll taxes or provide certain types of benefits. It can also give business owners more flexibility and power over staffing, hiring, and firing workers.

The IRS requires business owners to withhold taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages for employees. They do not have to withhold or pay taxes on payments to independent contractors.

Some of the claims that can be avoided if workers are classified as independent contractors include:

  1. Claims for overtime compensation, stipulated under legislation like the Fair Labor Standards Act
  2. Claims for harassment and discrimination, as stipulated by legislation like Title VII
  3. Claims for wrongful termination
  4. Claims for alleged violations of legislation like the Family and Medical Leave Act

Additionally, misclassification can result in lower tax revenues, which can put a strain on individual states and the federal government.

What Can Happen If I Misclassify an Employee?

The IRS takes the misclassification of employees extremely seriously, and business owners can get in big trouble with the federal and state governments if they are caught. Businesses who are caught may have to pay big fines, and/or additionally compensate workers, depending on their status.

Additionally, South Carolina law does not provide an established definition of independent contractors. If you are a business owner, or just have questions regarding employee status, working with an experienced business and corporate lawyer will be able to help you navigate the current case law in South Carolina regarding independent contractors

What Can I Do To Avoid An Audit?

The IRS does provide stipulations and definitions to help you classify employees. The key factors that business owners need to consider are:

  1. The degree of control the company has over the worker and their job
  2. The degree of control the workers’ payer has over the business aspects of the job
  3. Any sort of employee benefits or contracts in effect

Employers or workers can also file forms with the IRS if they are unsure about their status. However, it can be a while before a decision is rendered.

The legal stipulations surrounding independent contractors versus employees are often nebulous.  A business or corporate lawyer will be able to advise you if you have any questions, and will be able to use their experience and professional knowledge to help you avoid an IRS audit.

Are You Using Independent Contractors?

Willcox, Buyck & Williams, P.A. assists individuals and organizations with labor and employment issues of all types. Our labor and employment attorneys can help you make the right determination between employees and independent contractors and help keep you out of hot water. Contact us today to schedule your free initial consultation by calling us in either of our offices in Florence at (843) 536-8050 or Myrtle Beach at (843) 461-3020.

You’re more likely to get audited as IRS adds 700 employees to chase tax cheats

The Internal Revenue Service is hiring up to 700 new employees to do audits and go after delinquent taxpayers in an effort to turn around years of what the agency has acknowledged is lax enforcement.

“When you look at the IRS overall, every dollar invested in us returns at least $4 to the Treasury,” Commissioner John Koskinen told his employees in a memo Tuesday. “The numbers are even higher when it involves enforcement.”

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