Beware the Default Provisions of the South Carolina LLC Act

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The current version of the South Carolina Limited Liability Company Act (the "LLC Act") has seen very little revision since its passage in 1996. The Uniform Law Commission's model act, on which the LLC Act is based, has changed substantially since that time, as it was rewritten in 2006 and revised in 2011 and 2013, to clarify issues posed by the original model act.

Two of the most concerning provisions of the LLC Act and its implementation are the continued use of "at-will" LLCs and the perpetuation of the option in the form Articles of Organization for members to be individually liable for the debts and obligations of an LLC.

1. Term

The LLC Act still contains the option to form an LLC as either a "term" or "at-will" company. The revised model act and a number of states' acts no longer permit "at-will" LLCs but, rather, provide that all LLCs will have perpetual duration unless a term is specified (consistent with most corporation statutes).

In the LLC Act, if a member of an at-will LLC is dissociated, the LLC must repurchase that member's interest in the LLC. In addition to potentially causing a company to incur liability that it didn't anticipate, if a member voluntarily dissociates, this requirement also strips away certain creditor protections. Section 33-44-601(7)(iv) provides that a member of an LLC is dissociated if a receiver is appointed for that member and such receivership is not vacated or stayed within ninety days. This creates an additional avenue for creditors other than the traditional charging order remedy under section 33-44-504 of the LLC Act, as in a number of instances creditors have been able to have a receiver appointed for a member and then compelled the repurchase of that member's LLC interest after the passage of ninety days. This is an unintended and unwelcome consequence to fellow members.
While artful drafting of an operating agreement should, or could, close this window, it remains a real concern for any companies that choose the default provisions of the LLC Act to govern their operations.

2. Form Articles of Organization

Section 33-44-203(7) requires that an LLC's articles of organization must set forth whether any members of an LLC are to be personally liable for its debts and obligations. This requirement, which is reflected in a line item on the current form Articles of Organization available on the South Carolina Secretary of State website, is a vestige of old tax law and was designed to help the LLC in qualifying for treatment as a partnership rather than an association taxable as a corporation.

With the passage of the IRS "check-the-box" regulations, this provision became obsolete. As a practical matter, no member of an LLC should ever opt to be personally liable for the company's debts and obligations, but members occasionally confuse this provision with the company's internal capital contribution requirement and check this provision, thereby obviating all of the individual protection offered by the LLC form. Members may also check this assuming that lenders will require them to be so liable; however, this is best left to a personal guaranty.

Recent attempts to modernize the LLC Act to conform to the revised model act have stalled in the South Carolina state legislature. A slightly revised version of the model act was introduced in the South Carolina Senate December 13, 2016, and is currently referred to committee.

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