Suppose you’re starting a business and forming a limited liability company (LLC) in South Carolina. In that case, you’re not required to have an operating agreement, but it’s a good idea to have one in your records.
An operating agreement is significant if your LLC has more than one owner, or member, as it establishes ownership shares, profit and loss distributions, and member roles and responsibilities.
Why You Need an Operating Agreement
A smartly drafted operating agreement can help you in many situations, such as when your LLC merges with another business or a member is no longer capable of working.
The operating agreement establishes each member’s ownership share in the LLC, profit and loss distribution percentages, and how proceeds will be divided if the business is sold. An operating agreement also defines how decisions and member disputes will be resolved.
It also defines each member’s role and responsibilities and how the LLC is managed, clarifying who oversees which aspects of LLC operations.
Without an operating agreement, South Carolina laws will apply by default, and disputes may have to be settled in court, which can have serious negative consequences for the business.
What Should the South Carolina Operating Agreement Include?
The South Carolina Operating Agreement charts the internal procedures of an LLC in the state. For effective operation and mitigating potential disputes, understanding its core elements is fundamental.
- Each member’s rights and responsibilities: Clearly state the duties and obligations of each member. South Carolina allows flexibility here, so ensure each member’s role aligns with the business’s goals and objectives.
- Capital contribution requirements for each member: Detail the expected contributions of each member. Whether it’s monetary, property, or services, be explicit about the value and expected future contributions.
- Procedures for adding and removing members: South Carolina’s LLC Act provides default rules, but you may want to create custom provisions on how members can join and under what circumstances they can exit or be removed.
- What happens when a member sells their interest, becomes disabled, or dies: Draft a detailed plan for various contingencies. Consider including buy-sell provisions or specifying how a member’s heirs will be treated.
- Conditions under which a member might become bankrupt or insolvent: Define the process and consequences for a member’s bankruptcy, keeping the business’s stability in mind.
Management and Voting:
- Management structure and roles of members: Will it be member-managed or manager-managed? South Carolina allows both, so decide which fits best and clarify the roles.
- Voting rights of each member: Typically based on the proportion of ownership or capital contribution. However, you can structure it differently if desired.
- Rules for meetings and voting: Mention how often meetings will be held, the notification process, quorum requirements, and decision-making processes.
- Rules for managing potential conflicts of interest among members: Outline how conflicts will be disclosed and addressed, promoting transparency and fairness.
- Allocation of profits, losses, and distributions: This often aligns with ownership percentages, but you can specify different allocation methods if desired.
- Provision for periodic financial audits or reviews: Regular audits can promote transparency and build trust among members.
- Tax treatment of the LLC: By default, an LLC is a pass-through entity, but members can opt for different tax classifications, like S-corp or C-corp.
Changes and Amendments:
- Process for amending the operating agreement: Specify how changes can be proposed and ratified. Consider a supermajority vote for significant changes.
- Guidelines for company management during transition events: Define how the business will navigate significant changes, ensuring continued smooth operation.
- Conditions under which the LLC might be sold or merged: Lay out procedures and conditions for larger business decisions, ensuring clarity for all members.
Disputes, Legalities, and Policies:
- Clauses for dispute resolution or mediation: A dispute resolution clause can prevent costly litigation, fostering a collaborative approach.
- Guidelines for non-compete and confidentiality agreements: While non-competes must be reasonable in duration and scope, detailing expectations can prevent future disputes.
- Provision for indemnification and limitation of liability: Clarify protections for members and managers, promoting confidence in decision-making.
Record Keeping and Communication:
- Details about record keeping requirements: While South Carolina mandates certain records be kept, specifying where and how this will be done ensures clarity.
- Guidelines for how company-related decisions will be documented or communicated: Ensure all members are informed of significant decisions, fostering transparency.
Company Information and Dissolution:
- Description of the business’s purpose and activities: Although not strictly necessary, it can provide clarity for members and third parties.
- Identification of the registered agent and office: A requirement in South Carolina, specify who will be the point of contact for legal communications.
- Procedures for dissolving the LLC: South Carolina requires certain steps for dissolution. Make sure these are outlined, including notifying creditors and settling claims.
- Procedures for winding down or liquidating the company’s assets: Detail how assets will be handled upon dissolution.
How to Draft a South Carolina Operating Agreement
You can find operating agreement templates online from services like ZenBusiness, which will ensure the standard legal language and allow you to fill in the blanks. You’ll probably be able to find free templates online as well, but it’s advisable not to use those as they may include errors.
Consider having an attorney draw up your operating agreement if your business has multiple members. An attorney will ensure that all bases are covered and all member’s rights are protected. They can also include language that is specific to South Carolina laws.
This could cost anywhere from $500 to $2,500, but it could save you much more.
Articles of Organization vs. Operating Agreement
The operating agreement should not be confused with your LLC’s articles of organization. The articles of organization officially form your LLC with the state and include no information about member roles or financial interests.
Also, the articles of organization are filed with the state and part of the public record, while an operating agreement is kept in your LLC’s records and referred to as needed.
Though you may attach provisions to your articles of organization that overlap with the issues covered in an operating agreement, if your operating agreement and articles of organization contradict each other, the operating agreement will apply to LLC members. In contrast, the articles of organization will use by parties outside your LLC.
Keep Your South Carolina Operating Agreement Up to Date
It’s a good idea to review your operating agreement periodically. Circumstances change, and the safest approach is to ensure your operating agreement is entirely up to date. Generally, your operating agreement will state that members have to vote to approve amendments to the operating agreement.
Don’t Skip the Operating Agreement
You’re not required to have an operating agreement in South Carolina, but the wise entrepreneur would never do business without one. It’s a document that could be critical to the future of your business. You may think a dispute will never arise, but times and people change.
You don’t want to end up in a bitter court battle because you pushed off creating an operating agreement. It’s a document that will protect the rights and interests of your LLC members and ensure smooth, continued operations in the event of any unexpected hurdles or pitfalls.
Does an LLC operating agreement need to be notarized in South Carolina?
No, operating agreements do not have to be notarized. They are not filed with the state, just kept in your records.
What happens if a South Carolina LLC does not have an operating agreement?
South Carolina’s default rules for LLCs will apply, but in cases of dispute, the law may be vague, and your members could end up in court.