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STARTING AND OPERATING A BUSINESS IN SOUTH CAROLINA Copyright © 2008, Michael D. Jenkins CHAPTER 18
CONTENTS OF THIS CHAPTER:
I. INTRODUCTION I. INTRODUCTION South Carolina has a fairly typical tax and legal structure under which businesses must operate. Taxes and business regulations are generally much less burdensome than in most other states. For example, South Carolina has no state minimum wage law -- and does have a right-to-work law. In addition, in 2004 the state legislature repealed the fictitious business name filing requirements for all businesses except corporations and limited partnerships. Like most states, South Carolina imposes an income tax, an annual license tax (income tax) on corporations, a sales and use tax, various excise taxes, with property taxes imposed at the local level. The state has also adopted a limited liability company (LLC) law, and a limited liability partnership (LLP) law, so that businesses operating in South Carolina in LLC or LLP form may obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. To encourage small businesses in the state, South Carolina has enacted a reduction in the normal 7% maximum individual income tax rate on active business income received from a pass-through entity (a sole proprietorship, partnership, S corporation or a limited liability company). The maximum South Carolina tax rate for individuals on such business income has been reduced 1/2% a year in 2006, 2007, and 2008, to 6 1/2% in 2006, 6% in 2007, and 5 1/2% in 2008, and is eventually reduced to 5% after 2008. This tax break does not apply to C corporations or to LLC's that choose to be taxed as C corporations, which are already taxed at a low rate of 5%. Nor does the reduced tax rate apply to certain types of business income, such as capital gains and losses, passive investment income, and compensation for services. For more details, see Section IV(c). At present, the state's economy is somewhat sluggish, and steadily worsening in recent months, in terms of the level of unemployment and other economic measures. For example, in August, 2008, the state's unemployment rate was 7.6%, well above the 5.8% unemployment level a year earlier. This compares unfavorably to a national unemployment rate which was 6.1% for August, 2008. However, South Carolina has a very low cost of living, compared to national averages, thus making it an attractive place to do business or attract employees. To view the latest federal Bureau of Labor Statistics unemployment rate data for South Carolina or any other state, visit the BLS website. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in South Carolina can do so as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. In addition, like the federal tax law, the state income tax law also recognizes S corporations, for income tax purposes, and generally allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level, rather than taxing the corporation itself as an entity. South Carolina also provides for limited liability partnerships, in which no partner is liable for certain debts of the partnership, somewhat like a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV below. (b) Sole Proprietorships. In general, sole proprietorships in South Carolina can be established with no formalities. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. In addition, if you sell any kind of tangible personal property at retail or provide certain types of services, you may be required to obtain a sales tax license and collect sales tax, as discussed in Section IV(d). No separate tax form filing is required, generally, for a sole proprietorship under the South Carolina income tax law. Instead, as with the Schedule C on your federal Form 1040, you simply report the net income or loss from your sole proprietorship on your state personal income tax return. See Section IV(c) for information on the South Carolina income tax and filing requirements for individuals. Doing business as a sole proprietor in South Carolina is generally much simpler than operating as any other kind of business legal entity. As a sole proprietor, if you have no employees, you are not required to pay any unemployment taxes, withhold any federal or state income tax from wages, or obtain workers' compensation coverage for yourself. (c) Partnerships. South Carolina partnership laws allow creation of either a general partnership, in which all partners are liable for the debts of the business, or a limited partnership, in which only the general partners are liable for debts, while the liability of limited partners is limited to the amount they have invested, usually. State law also allows for the creation of a limited liability partnership, in which no partner has personal liability (subject to certain exceptions). As is discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. Partnerships, as entities, are not subject to state income tax in South Carolina. Instead, the income or losses of the partnership, as allocated among the partners, must be reported on the personal income tax returns of the individual partners (or on the corporate tax returns of any corporate partners). However, partnerships and other pass-through entities, such as S corporations and LLC's that are taxable as partnerships, must withhold a 5% state income tax on the taxable amount allocable to any nonresident owners, unless the partner or other owner has entered into an agreement (Form I-309) to pay South Carolina income tax on his or her share of the entity's South Carolina taxable income. Partnerships are required to file an annual tax information return with the state. For more on South Carolina partnership tax return filing requirements, see Section IV(c). A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
As a rule, general partnerships in South Carolina can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. In addition, any partnership or other business that has employees will generally have to register for, and pay, state unemployment tax on wages paid, as discussed in Section V(b), and withhold state income tax, as discussed in Section V(a). A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for partnership debts), may also be formed under South Carolina law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement and must file a certificate of limited partnership with the secretary of state, together with a filing fee of $10. Foreign limited partnerships must also register before being allowed to do business in South Carolina and must also pay a filing fee of $10. The name of each limited partnership must contain the words "limited partnership" or the abbreviation "LP", or "L.P." For information on limited partnership filing requirements, see the contact information for the offices of the South Carolina Secretary of State, listed in Section VI(a). LIMITED LIABILITY PARTNERSHIPS Limited liability partnerships (LLP's) are a new form of partnership permitted under the laws of South Carolina. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and South Carolina state income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization, but also provides less liability protection than an LLC. A general partnership can, however, achieve some degree of limited liability by simply registering the partnership with the state as an LLP. A partner in a registered limited liability partnership is not liable for debts, obligations, and liabilities that arise from negligence, wrongful acts, or misconduct in the course of the partnership business by another partner or an employee, agent, or representative of the partnership. However, an LLP does not generally offer the same degree of liability protection as a corporation or LLC in South Carolina. While a number of other states have enacted a Revised Uniform Partnership Act that provides much broader liability protection to partners in an LLP, South Carolina has not yet done so. Thus, LLP's are mainly utilized by professional partnerships, as South Carolina's LLP law provides considerably less liability protection than the LLP laws in many other states. To form an LLP in South Carolina, you must register and pay a filing fee of $100 to the secretary of state. Foreign LLP's, those created under the laws of another state, must register with the secretary of state and also pay a fee of $100. Every LLP operating in South Carolina must carry a liability insurance policy with a minimum coverage of at least $100,000, or set aside that amount of funds in a segregated account for the payment of liability claims, or obtain some other form of security such as a bank letter of credit or insurance bond. Professional firms must carry whatever amount of additional coverage that may be required by the appropriate licensing authority for each such profession. Every LLP doing business in South Carolina, including both domestic and foreign LLP's, must renew its registration annually and pay the annual $100 registration fee. The name of a registered limited liability partnership must contain the words "Registered Limited Liability Partnership" or the abbreviation "L.L.P." as the last words or letters of its name. For more information on LLP registration and reporting requirements, see the contact information for the offices of the secretary of state, listed in Section VI(a). Note that one potential drawback of LLP's, if you will do business in other states besides South Carolina, is that you may not enjoy limited liability with regard to creditors of the LLP if you do business in some such states. Some other states, like California and New York, only recognize certain types of professional partnerships as LLP's. Such other states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. (d) Corporations. To form a corporation in South Carolina, you must file articles of incorporation with the South Carolina Secretary of State and pay a fee of $135, which includes the minimum annual license fee of $25. ($100 plus $10 document fee, plus $25 minimum annual license fee = $135.) A foreign corporation (one formed under the laws of another state or a foreign country), must obtain a certificate of authority before it may legally conduct business in South Carolina, by filing an application for a certificate of authority and paying a filing fee of $135, which includes the initial minimum corporate license fee. The name of a corporation must contain "Inc", "Corp", "Incorporated", or "Corporation" and should not include "bank" or "finance". The name of a professional corporation must contain the words "professional corporation", "professional association", "service corporation", or "chartered" or the abbreviation "P.C.", "PC", or "P.A.", or "PA". For more information on filing articles of incorporation or applying for a certificate of authority to do business in South Carolina, see the contact information for the offices of the secretary of state, listed in Section VI(a). In addition, once your corporation is formed, it will be required to file annual reports and pay an annual licensing fee of $15 plus $1 per $1,000 of authorized stock and paid-in capital each year. There is a minimum annual fee of $25. The corporate license fee is paid, along with the annual state corporate income tax return, to the state Department of Revenue. Failure to file this report on a timely basis could result in suspension or revocation of your corporation's charter. In addition to paying federal income taxes on its income, a corporation that does business in South Carolina must also file corporate income tax returns with the state. See Section IV(c) for a discussion of state corporate income tax rates and tax return filing requirements. For tax forms and more information on corporate income taxes in South Carolina, see the contact information for the offices of the South Carolina Department of Revenue, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. South Carolina recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment. No separate state S corporation election is required, but a corporation that files a federal S corporation election on IRS Form 2553 should file a copy of the federal election form with the state Department of Revenue. S corporations must withhold 5% state income tax on the taxable amount allocable to any nonresident shareholder, unless the shareholder has entered into an agreement to pay South Carolina income tax on his or her share of the S corporation's South Carolina taxable income. (f) Limited Liability Companies. South Carolina, like every other state in the U.S., has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in South Carolina may also choose to operate in the form of an LLC. In most states, including South Carolina, LLC's are very attractive entities for many small businesses, in that they offer the same liability protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes. See Section IV(c) for a discussion of the income tax treatment of LLC's under South Carolina tax laws. To form an LLC under the laws of South Carolina, one or more persons must file articles of organization with the secretary of state, which must be accompanied by filing fees of $110. South Carolina state law allows for the formation of single-owner LLC's, which now qualify for treatment as sole proprietorships for federal and South Carolina tax purposes. The name of a limited liability company must contain "limited liability company" or "limited company" or the abbreviation "L.L.C.", "LLC", "L.C.", or "LC". "Limited" may be abbreviated as "Ltd.", and "company" may be abbreviated as "Co.". Foreign LLC's, those formed under the laws of another state, must obtain a certificate of authority to do business in South Carolina, by filing an application for a certificate of authority with the secretary of state and paying a filing fee of $110. In addition to initial filing fees, an LLC formed in South Carolina or a foreign LLC was formerly required, before May 1, 2004, to file an annual report and pay a filing fee. However, this requirement has been repealed, and LLC's are no longer required to file annual reports or pay an annual fee. For more information on filing articles of organization for an LLC or registering a foreign LLC, see the contact information for the offices of the secretary of state, listed in Section VI(a). III. BUSINESS ACQUISITIONS (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, and other state tax laws, such as sales/use tax or property tax laws. UPDATE NOTE: Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. South Carolina is one of the business-friendly states that has repealed its bulk sale law, effective as of July 1, 2001, so that you no longer need to comply with a bulk sale law when you purchase assets of an existing business in South Carolina. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business transpires. In South Carolina, you should obtain tax releases for state unemployment tax and sales and use taxes, from the South Carolina Employment Security Commission and Department of Revenue, respectively. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. If you acquire "substantially all" (defined as 95% or more) of an existing business, you will automatically be treated as a successor to its experience rating, but you must notify the South Carolina Employment Security Commission (SCESC) in writing within 30 days after the transfer. Otherwise, to obtain a seller's favorable experience rating as a successor employer, you will need to apply on a timely basis (not later than 30 days after the end of the quarter in which the transfer occurred) to the SCESC, requesting that you be treated as a successor employer. In addition, the selling business must also provide the SCESC with certain required information regarding the transferred portion of its business. PLANNING POINT: EXAMPLE: (e) Withholding Tax on Real Estate Purchases. South Carolina requires any purchaser of South Carolina real estate (or associated tangible personal property) to withhold South Carolina income tax from payments to any of the following persons or entities:
There are a number of types of exempt transactions, including the purchase of an individual's principal residence where the gain is excluded from federal income tax or a purchase of real property from a tax-exempt organization or insurance company that is exempt from South Carolina tax. The seller must provide you, as the purchaser, a "Seller's Affidavit" (Form I-295) providing information on the seller's state of residence or, in the case of organizations, whether the corporation is a "deemed resident" or an organization is tax-exempt. The Seller's Affidavit may also, optionally, state the amount of the seller's taxable gain, if any, on the transaction. You should retain the Seller's Affidavit, but are not required to file it with the Department of Revenue. The amount of tax to be withheld is 5% if the seller is a corporation or 7% if the seller is an individual or other type of entity. The withholding rate is applied to the taxable gain shown on the Seller's Affidavit; if the amount of the gain is not stated, then the withholding rate applies to the entire amount realized on the sale of the property. Special rules apply to like-kind exchanges where some taxable gain is recognized and to installment sales. Payment of the withheld tax to the South Carolina Department of Revenue must be made by the 15th day of the month after the transaction takes place, using Form I-290. IV. SOUTH CAROLINA TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General. South Carolina presents a small business with a minimum of government regulation and a relatively favorable tax environment, with no property taxes on either business inventories or intangible assets, combined with comparatively low state income and sales tax rates (although the state sales tax increased from 5% to 6% on June 1, 2007). In addition, the state has enacted a reduction in the maximum tax rate on the active business income an individual receives from a pass-through entity (sole proprietorship, partnership, S corporation or LLC), beginning in 2006, as described in Section IV(c). As discussed in Section IV(c), each type of pass-through entity (except a sole proprietorship) is required to withhold state income tax on income allocable to any nonresident partners or S corporation shareholders, unless the nonresident executes an affidavit and agreement to be subject to South Carolina's income taxing jurisdiction, on Form I-309, which must be submitted to the entity, which must attach it to the appropriate S corporation or partnership form that is filed with the Department of Revenue. South Carolina also requires withholding, at a 2% tax rate, on payments to nonresident contractors where payments under the contract exceed $10,000, unless the payment is for tangible personal property when those payments are not accompanied by services to be performed in the state. Payments of rentals or royalties to nonresidents are also subject to withholding tax, at the rate of 5% if paid to a corporation, or 7% otherwise. Payments of less than $1,200 a year are not subject to withholding. In addition, nonresident contractors or recipients of rent or royalty payments can avoid such withholding if they execute and provide you a signed Form I-312 affidavit, certifying that they are currently registered with either the South Carolina Secretary of State or the Department of Revenue. For state tax forms and tax information, see the contact information for the South Carolina Department of Revenue in Section VI(a). (b) State and Local Licensing. Nearly any business, operated anywhere in the United States, will have to have at least one government license of some kind. In most cases, this will be a local license, issued by your city or county. Before you open your business, contact your local city or county hall and find out if your particular business needs one or more local licenses. Most kinds of local business licenses are granted upon payment of a fee, with no further requirements, except possibly for annual or other periodic renewal fees. However, if you are engaging in any kind of food business, you will usually need to also obtain a health department permit and show that you are in compliance with health department food-handling requirements. In addition, be sure to check with an attorney or local government zoning or planning department officials to determine if your business will be in compliance with all local zoning and planning restrictions. If you own or rent any type of facility, you will generally need fire department permits, showing that you meet fire safety codes and, of course, any construction or improvements to an existing structure will almost always require a building permit. Even if you intend to simply operate your business from your home, you may be in violation of local zoning requirements, but this is less likely to be a concern if you don't have clients, customers, suppliers, or employees coming to your house on business, on a regular basis. State governments have traditionally required special licenses for many kinds of professionals, such as physicians, dentists, lawyers, and accountants. To further protect consumers, South Carolina has expanded the list of occupations that must be licensed by the state to include many other occupations. Most state licenses not only require payment of fees, but are only issued for a given profession or occupation upon showing that you have completed certain educational or experience requirements, or passed certain tests, or some combination of the foregoing. For assistance with state licensing and business registration requirements in South Carolina, see the contact information for the offices of the state Department of Labor, Licensing and Regulation, listed in Section VI(a). The Professional and Occupational Licensing Boards section of this government department can help you with questions you may have about state licensing. Also, contact the Department of Revenue's Business One Stop Registration and the Department of Revenue's web site, where you can register for most state taxes online. See the links to the Department of Revenue web site and the Business One Stop site in Section VI(c). (c) Income and Franchise Taxes. South Carolina has both an individual income tax and a corporate income tax, as well as a franchise tax imposed on corporations (the corporation license fee, based on capital stock and paid-in capital). TAXATION OF SOLE PROPRIETORS AND PARTNERSHIPS The South Carolina individual income tax is imposed at a maximum tax rate of 7%. Individual taxpayers generally pay state income tax on their business earnings from a sole proprietorship, or on their share of the earnings of a pass-through entity, such as a partnership, S corporation, or LLC. However, in 2006 and later years, the maximum individual tax rate on active business income from such a pass-through entity is gradually being reduced, to 5% by 2009. The maximum individual tax rate on such income was 6.5% in 2006, 6% in 2007, is 5.5% in 2008 and will be 5% in 2009, once this tax incentive for small businesses is fully phased in. This tax break does not apply to:
Any loss from an active trade or business must be offset against income from other active trades or businesses, to compute the net amount that qualifies for the reduced tax rate. The South Carolina personal income tax return is Form SC-1040, which must be filed with the Department of Revenue by April 15th for the preceding year, in the case of calendar year taxpayers. Taxable income for state income tax purposes is closely based on federal taxable income under South Carolina's simplified individual income tax system. However, certain business incentives under the federal law, such as the domestic production activities deduction, are not allowed for South Carolina income tax purposes. Partnerships, or entities taxable as partnerships, such as LLC's, are not subject to state income taxation in South Carolina, but must file an information return with the Department of Revenue each year, showing each partner's share of taxable income, losses, and credits, on Form SC-1065. The partnership information return is due by April 15th of the following year, in the case of a calendar year partnership. In addition, a partnership must withhold state income tax on the taxable amount allocable to any nonresident partners, unless the partner has entered into an agreement (Form I-309) to pay South Carolina income tax on his or her share of the partnership's South Carolina taxable income. Alternatively, a composite South Carolina income tax return can be filed on behalf of all the nonresident partners, with a tax payment being made with respect to each such nonresident's share of the South Carolina-source income of the partnership. Individual taxpayers doing business as sole proprietors (or who are partners in partnerships, members of LLC's, or shareholders in S corporations), who have taxable income from the business, will generally be required to make advance payments of estimated South Carolina individual income taxes, on Form SC-1040-ES, if their net tax liability (not covered by withholding) exceeds $100. Estimated tax payments are due in four installments, on the 15th day of the 4th, 6th, and 9th months of the taxable year, and the 15th day of the first month of the following year. Underpayment penalties will apply unless the amount of estimated tax paid in is at least 90% of the current year tax liability that exceeds withholding, generally. However, no underpayment penalty applies if your total withholding and estimated tax payments (made on a timely basis) are at least equal to 100% of the prior year's tax, or 110% of the prior year's tax if your prior year South Carolina adjusted gross income was more than $150,000. UPDATE NOTE: The South Carolina corporate income tax rate, imposed on corporations other than S corporations, is a flat 5% (or 4.5% for banks). The state corporation income tax return is Form SC-1120, which must be filed with the Department of Revenue by the 15th day of the third month following the end of the taxable year, or by March 15th in the case of a corporation whose taxable year is the calendar year. Corporations are required to make estimated tax payments of their state corporate income tax in advance, if their tax liability for the year equals or exceeds $100. Estimated tax payments are due in advance, in four equal installments on the 15th day of the 4th, 6th, 9th, and 12th months of the taxable year. However, if the preceding year was a full year of 12 months, the current year payments need only be equal to 100% of the prior year's tax liability, if less than the current year estimated tax that would otherwise be required. Estimated tax payments will be deemed to apply first to corporate income tax, then to corporate license fees. Penalties are imposed for failure to make the required estimated tax payments on a timely basis. In addition to corporate income tax, a corporation is required to file annual reports and pay an annual corporation licensing fee of $15 plus $1 per $1,000 of authorized stock and paid-in capital each year. The minimum annual fee is $25. The corporate license fee is paid, along with the annual state corporate income tax return, to the state Department of Revenue. While S corporations are exempt from the South Carolina corporate income tax, they are not exempt from the annual licensing fee on authorized stock and paid-in capital. Thus, S corporations must file an annual tax return on Form SC-1120S to pay the annual license fee on their capital and to report their income that is taxable to shareholders. Also, an S corporation with nonresident members is required to withhold South Carolina income tax on their share of the company's taxable income at a 5% tax rate, whether or not the income is distributed to them. Such withholding is required unless the shareholder has entered into an agreement with the state on Form I-309 to pay South Carolina income tax on his or her share of the S corporation's South Carolina taxable income. Alternatively, a composite South Carolina income tax return can be filed on behalf of all the nonresident shareholders, with a tax payment being made with respect to each such nonresident's share of the South Carolina-source income of the S corporation. TAXATION OF LIMITED LIABILITY COMPANIES In South Carolina, a limited liability company (LLC) will be treated as a partnership and will thus not be taxed, if so treated for federal purposes, thus avoiding the possible double taxation of income that can occur with a corporation. Note that under IRS regulations, effective since 1997, an LLC is able to elect to be treated as a partnership if it has more than one owner, or as a sole proprietorship if it does not, for federal tax purposes. South Carolina law recognizes the validity of a one-owner LLC, and the state, like the IRS, will disregard the existence of a one-owner LLC, for tax purposes, if it is not taxable as a corporation. Although an LLC is not a taxable entity under South Carolina's tax laws, it must withhold state income tax on the taxable amount allocable to any nonresident members, unless the member has entered into an agreement on Form I-309 to pay South Carolina income tax on his or her share of the LLC's South Carolina taxable income. Alternatively, a composite South Carolina income tax return can be filed on behalf of all the nonresident members, with a tax payment being made with respect to each such nonresident's share of the South Carolina-source income of the LLC. Note that it is not always entirely clear whether an LLC is a "single-member LLC" or not, where the "single owner" is a married couple who hold the entire ownership of the LLC in some form of co-tenancy, such as joint tenants with right of survivorship, tenants by the entirety, or as tenants in common. The federal Internal Revenue Service (IRS) has taken a very lenient position in Rev. Proc. 2002-69, where a couple hold the LLC interest as community property, ruling that the IRS will accept whatever choice the couple make, either to disregard the LLC as an entity (treating it as a "single-member LLC") or to treat it as a partnership between the husband and wife. However, South Carolina is not a community property state, so where the LLC is owned by a husband and wife in some form of co-tenancy, it is unclear whether the IRS treatment would be as lenient as for community property owners, since the IRS has not issued any published rulings on whether an LLC can be a disregarded entity if held in one of the various forms of co-tenancy by a married couple, rather than being held as community property. Thus, it is also unclear, where an LLC is owned by a husband and wife as co-tenants, whether South Carolina would treat the LLC as a single-member LLC or as a partnership. (d) Sales and Use Tax. South Carolina imposes a general sales tax on retail sales of tangible personal property and certain types of services at the statewide rate of 6% (5% prior to June 1, 2007). In addition, local governments are allowed to adopt local sales taxes and a number of counties have local taxes of up to 2%. Under 2006 legislation that limits increases in property taxes, the future loss of property tax revenues is to be offset by the 1% increase in the sales tax, effective June 1, 2007, except on accommodations and on unprepared food that can lawfully be purchased with food stamps. The tax rate on such unprepared food was reduced from 5% to 3%, effective October 1, 2006. Effective November 1, 2007, the 3% tax rate on such groceries was reduced to zero (but local taxes will still apply to food, unless specifically exempted by the locality). Higher tax rates apply to receipts from transient lodging (7%) and car rentals of up to 31 days are subject to an additional 5% surcharge, which increases the total tax state rate on such rentals to 11%). Unlike some states, South Carolina generally treats delivery charges as part of the sales price of goods, and thus subject to sales tax. In addition, since October 1, 2005, sales tax applies to amounts received as payments for sales or renewals of warranty contracts. There are numerous exemptions from the sales tax, the most important of which is the resale exemption. If you are a wholesaler or retailer who purchases goods that you will resell, your purchase of such goods may qualify as an exempt sale for resale. Similarly, if you sell goods to wholesalers or retailers for resale by them, your sale may also qualify as an exempt sale for resale. In any such transaction, the exemption is ordinarily available only if the purchaser gives the seller a valid resale certificate, certifying that the items are being purchased for resale, and not for use or consumption by the buyer. South Carolina does not impose sales and use tax on Internet access charges, and will not do so unless the Internet Tax Freedom Act is allowed to expire (it was extended again by Congress in 2007 by Congress, for another 7 years, until November 1, 2014) and unless the state legislature enacts legislation or approves a regulation that would tax such access charges after the federal moratorium expires. South Carolina's sales and use tax law also contains an unusual provision that exempts purchases by a person age 85 or older from 1% of the 6% state sales tax, if he or she purchases tangible personal property for his or her personal use and provides proof of age to the vendor. A shadow tax, the use tax, is also imposed at the same rate as the sales tax. It is primarily intended to tax property that is acquired from sources outside of the state, in transactions not subject to sales tax, when such property is used or consumed within South Carolina. Use tax may also apply to items purchased on an exempt basis, such as for resale, if such items end up being used or consumed, instead of being resold. Before making any taxable sales, you will need to register for a seller's permit with the Department of Revenue on Form SCTC-111 and pay an annual license fee of $50 per business location. Retailers without a permanent retail sales location in the state may be required to make a cash deposit or post a bond in an amount equal to the estimated tax liability for a year. All sales and use taxes that are collected must be paid over to the South Carolina Department of Revenue. Vendors are allowed a discount, a percentage of the sales and use tax collected which they are allowed to retain, to compensate them for their administrative costs for collecting and paying over the taxes. The discount is allowed only if sales and use taxes are paid and reported on a timely basis. Recent (2005) legislation has extended this discount to include local jurisdiction sales and use taxes, where they are administered and collected by the state. The discount is 3% if the total tax due is less than $100, or 2% if the total tax is $100 or more. The maximum discount allowed to a vendor may not exceed $3,000 ($3,100 if filing electronically) in a single state fiscal year, generally. However, if an out-of-state business that is not required to register for sales and use tax in South Carolina nevertheless does so and collects use tax on sales to South Carolina residents, it may be allowed to retain a discount of up to $10,000 a year. For more information on South Carolina sales and use tax registration and compliance, see contact information for the offices of the Department of Revenue in Section VI(a). (e) Real and Personal Property Taxes. In South Carolina, as in every other state, any business real estate you own will generally be subject to real property taxes, except that certain new manufacturing facilities and corporate headquarters may be exempted from some county property taxes for five years. In general, there is little that you must do in the way of compliance, unless you wish to challenge your assessed valuation, since the assessor will bill you for each year's real property taxes as they come due. Beginning in 2007, property tax millage rates can generally be increased each year only to the extent of increases in the consumer price index and the percentage increase in population of the locality for the past year, and assessed valuations can generally be increased by only a maximum of 15% over any 5-year period, unless an "assessable transfer" (such as a sale) of the property occurs. In case of any such assessable transfer, the property can be re-assessed at its current fair market value. In addition, improvements to a property will increase its assessed value. PLANNING POINT: South Carolina also imposes personal property taxes on tangible personal property. ("Personal property" is any kind of property that is not real estate.) However, certain types of business personal property, such as business inventories, are exempt from personal property tax in South Carolina. Manufacturers are treated differently than individuals, merchants, and other businesses. Most of their property is assessed by the Department of Revenue instead of by the county assessor or auditor. Unless exempted or specifically changed by statute, manufacturers are assessed at 10.5% on both their real and personal property. Depreciation on tangible personal property is set under a statutory schedule of depreciation, subject to a 10% residual value. Manufacturers may adopt accounting years that differ from the calendar year. While South Carolina generally taxes tangible personal property, it does not impose a property tax on intangible personal property, such as stocks, bonds, promissory notes, and other such paper assets. Property owners may wish to obtain a copy of the 2007 edition of the property tax guide, South Carolina Property Tax, 2008 Edition, from the Department of Revenue. To obtain a copy, see the contact information for the offices of the Department of Revenue in Section VI(a). (f) Other Business Taxes. South Carolina imposes a number of excise and other taxes on businesses, some of which may affect you. These include:
(g) Trade Names. A trade name, also known as a fictitious or assumed name, is any name used in the course of business that does not include the actual legal names of all the owners of the business. Thus, if your business goes by any name other than your own real name, it is operating under a trade name. The same is true of a corporation, if it operates under a name other than its legal name. A trade name might also be one that suggests the existence of additional owners, by using such words as "company," "associates," or "group." In most states where you do business, it will be necessary to register a trade, fictitious, or assumed name, so that people who do business with you can find out who the actual owners of your business are. You may also want to register any such trade name, as a means of protecting against other companies usurping that particular trade name. Under South Carolina law, a limited partnership or a foreign corporation that uses an assumed business name or fictitious name must file a name registration form with the secretary of state, plus a $10 filing fee. All other businesses that use an assumed name, other than corporations, were formerly required to file an assumed name statement with the clerk of court of the county in which the principal place of business was located, and failure to do so could result in penalties including imprisonment for up to five days for each day a firm did business under an assumed name without registering it. However, this section of the law was recently repealed by the legislature, in 2004. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. Once you hire the first employee in your business, you must comply with numerous Federal and state laws. One of the first things you will need to be concerned about as a new employer is withholding personal income taxes from the wages of your employees. As an employer, you are responsible for withholding the taxes and paying them over to the state government on behalf of the employee. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. Since South Carolina imposes a state income tax on the income of individuals, you will need to also withhold South Carolina income tax from the wages of your employees. Before you begin to pay wages, you must register as an employer with the Department of Revenue on Form SCTC-111, Business Tax Application. You will also need to file a separate registration for state unemployment tax, with the Employment Security Commission, as discussed in Section V(b). IMPORTANT NOTE: The South Carolina Department of Revenue has issued a bulletin reminding taxpayers that South Carolina withholding taxes are generally due to be deposited on the same dates as federal withholding tax deposits are due under federal tax regulations. For more information on South Carolina income tax withholding and registration requirements for employers, see the contact information for the offices of the Department of Revenue, listed in Section VI(a). (b) Unemployment and Other State Payroll Taxes. If your business employs one or more individuals in each of 20 weeks during any calendar year or if your payroll amounts to $1,500 in any calendar quarter, you, as an employer will be required to pay state unemployment tax based on the amount of such wages paid. Employers subject to the South Carolina unemployment tax are required to register with the South Carolina Employment Security Commission, by filing a South Carolina Employer Status Report. New employers are required to pay tax at a rate of 3.4% in 2008 on the first $7,000 of wages paid to each employee (3.34% tax rate plus 0.06% contingency fee). After you have been subject to unemployment tax for 12 months, you will be assigned an unemployment tax experience rating. This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulas. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. All state unemployment taxes are imposed upon you as the employer, and, under South Carolina law, cannot be charged to your employees or withheld from their wages. Wages paid to a spouse of the employer are exempt from South Carolina state unemployment tax, as are wages paid to a child under 18 by a parent or wages paid to a parent who works for his or her child. For more information on your South Carolina unemployment tax obligations as an employer, see the contact information for the offices of the Employment Security Commission, listed in Section VI(a). (c) Workers' Compensation. In South Carolina, virtually all businesses with four or more employees are required by law to have workers' compensation insurance, except those able to self-insure. Note, however, that a sole proprietor or a partner in a partnership is generally not considered an employee. The workers' compensation law also exempts licensed real estate agents or brokers who are paid on a straight commission basis and who have signed an independent contractor agreement with the brokerage firm. Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. CAUTION: As an employer, you must notify injured employees of their benefits and post a notice in the workplace informing your employees of their workers' compensation coverage. For more detailed information regarding your obligations as an employer under the South Carolina workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the Workers Compensation Commission, listed in Section VI(a). (d) State Wage and Hour Laws. Unlike most states, South Carolina does not have a minimum wage law governing the hourly wage that you must pay to your employees. However, in most cases, your business will be subject to the federal minimum wage and overtime laws, and thus required to pay at least $6.55 an hour ($7.25 on and after July 24, 2009) and time-and-a-half for overtime hours, for any non-exempt employee who works more than 40 hours in a week. Most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must also be cognizant of similar state child labor laws, in South Carolina. South Carolina state law prohibits "oppressive child labor," which means employment of a minor in any occupation declared by the Department of Labor, Licensing and Regulation to be particularly hazardous or detrimental to the health or well being of minors, as well as employment of any child under the age of 14 (with certain exceptions for child performers, newspaper delivery, or working for parents). "Oppressive child labor" also includes employment of minors who are 14 or 15 years old under the following conditions:
No hourly restrictions apply to employment of minors who are 16 or older, although federal child labor laws may apply to children of ages 16 or 17. However, South Carolina law prohibits hiring 16- and 17-year-olds to work in a number of specified hazardous occupations. Besides the federal wage-hour posters that you must display in the workplace, you must also display a state labor law poster regarding child labor and other South Carolina labor laws, which you can obtain from the South Carolina Department of Labor, Licensing and Regulation. The state poster must be displayed in a room where 5 or more persons are employed. For more information on South Carolina's child labor law and other state labor laws, contact the Department of Labor, Licensing and Regulation at the address listed in Section VI(a). (e) State Occupational Safety and Health Laws. Approximately half of the states have their own OSHA-like agency, charged with administering the state's own occupational safety and health laws. The remaining states have no such enforcement agency, and thus rely instead on the federal Occupational Safety and Health Administration (OSHA) to administer the federal job safety rules within such states. South Carolina is one of the states that has its own OSHA-type agency. To determine if your workplace is in compliance with federal and South Carolina job safety requirements, you may wish to contact the South Carolina Occupational Safety and Health Administration, part of the South Carolina Department of Labor, Licensing and Regulation, and request a free on-site safety consultation. You will not be cited for any violations detected, provided that you promptly correct the unsafe conditions. This differs from the rules for consultations by federal OSHA inspectors, who are required to cite you for any violations they find. For information on your job safety and health obligations as an employer, required posters, and possible on-site safety consultations, see the contact information for the offices of the South Carolina Occupational Safety and Health Administration, listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other South Carolina labor laws which employers must heed include the following: (1) Wage payments to employees. A South Carolina employer of five or more employees must either post a notice in the workplace as to when wages are paid, or else notify each employee in writing, at the time of hire, as to when wages are paid. The Department of Labor, Licensing and Regulation website (see link in Section VI(c)) contains a downloadable form you may fill in and use to notify employees. An employee who is discharged from service must be paid his or her final wages in 48 hours or by the next payday, in general. (2) Right-to-work laws. South Carolina is one of almost half the states that have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. South Carolina's right-to-work law prohibits the denial of the right to work on account of either membership or non-membership in a labor organization. (3) State anti-discrimination laws. In addition to complying with federal anti-discrimination laws, employers must also be aware of and comply with state civil rights laws in South Carolina. State law prohibits discrimination in employment on the basis of race, religion, color, sex, age, national origin, and disability. Employers must display a poster informing employees of their rights. You can obtain this poster from the Columbia office of the South Carolina Human Affairs Commission, at the address listed in Section VI(a). (4) Reporting new hires. Under federal welfare reform laws, employers in all states must now report newly-hired (or rehired) employees to a designated state agency (the Child Support Enforcement Division of the South Carolina Department of Social Services for South Carolina employers) within 20 days after the date of hire. Employers who file electronically must file twice a month (if necessary), on dates not more than 16 days nor less than 12 days apart. See Section VI(a) for contact information or Section VI(c) for a link to the New Hire Reporting Program web site. (5) Employment of illegal aliens. Effective as of January 1, 2009, South Carolina will disallow any income tax deduction for wages or remuneration paid to unauthorized alien workers, if the worker is paid $600 or more during the year. Businesses must also withhold state income tax at the rate of 7% on payments reported on federal Form 1099 to a person who either:
VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. South Carolina has established the South Carolina Business One-Stop web site to help new businesses in the state register for taxes and various state licenses. See the web site link in Section VI(c). South Carolina does not have a single agency to whom you can go to handle all your licensing and permitting requirements for your business under the laws of South Carolina. Accordingly, you will need to use the Business One-Stop web site, or else contact the various South Carolina government agencies that are mentioned in this book or listed below on an individual basis, to obtain needed forms, official posters, information, and other assistance from each such agency. A list of addresses and other contact information for such key agencies is set forth below for your convenience. BUSINESS STARTUP INFORMATION. A key agency that can provide helpful information on getting your business up and running in South Carolina is the state Department of Commerce, which provides assistance and information to companies considering South Carolina as a business site. They can answer many of your questions about doing business in the state and refer you to appropriate agencies for permits, licenses, registration, and other requirements. Contact them at: South Carolina Department of Commerce SECRETARY OF STATE. Contact the office of the secretary of state for information on:
South Carolina Secretary of State TAXES. Obtain state income, sales and use tax, and other miscellaneous business tax forms, instructions and information from the South Carolina Department of Revenue, which is the main tax collection agency in South Carolina. Also register with this agency as an employer, for state income tax withholding purposes. You may also want to request a copy of their helpful 2007 South Carolina Business Tax Guide. South Carolina Department of Revenue STATE LABOR LAWS. Contact the following agency to obtain required posters on state labor laws and state OSHA safety requirements, and about your obligations as an employer under various state labor laws, including:
There is no state minimum wage or overtime pay law in South Carolina. Department of Labor, Licensing and Regulation STATE SALES TAX. Obtain your sales and use tax license or permit and information on the South Carolina sales and use tax law, from the Department of Revenue, at the address listed above for that agency. EMPLOYER WITHHOLDING. Contact the state Department of Revenue, at the address listed above for that agency, to register as an employer, for purposes of South Carolina income tax withholding. STATE UNEMPLOYMENT TAX. Contact the following state agency to determine whether you are an employer subject to payment of state unemployment taxes, and for registration as an employer if you are subject. Employment Security Commission NEW HIRE REPORTING. Employers in South Carolina must report newly hired or rehired employees within 20 days to the following state agency: South Carolina Department of Social Services WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the following agency for further information: South Carolina Workers' Compensation Commission STATE OSHA PROGRAM. For information on both federal and state occupational safety and health laws that affect you as an employer in South Carolina, contact: South Carolina Occupational Safety and Health Administration STATE ANTI-DISCRIMINATION LAWS. Contact the following state agency for more detailed information on South Carolina civil rights laws that may apply to your business, and to obtain anti-discrimination notices you are required to post in the workplace: Human Affairs Commission (b) Small Business Development Centers. A number of Small Business Development Centers (SBDC's) are located throughout South Carolina to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the South Carolina lead office below for information, or for the location of other SBDC's nearer to you. South Carolina Small Business Development Center (c) Internet Sites. For anyone with access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major South Carolina state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in South Carolina. Since new sites are appearing frequently, you might also want to search for other South Carolina government Web sites by using one of the popular Internet search engines, such as Google or Yahoo. To start your Internet search for South Carolina government information, you may want to begin with the following Internet sites: State of South Carolina home page: South Carolina Business One-Stop web page: South Carolina Department of Revenue (tax information and forms): South Carolina Secretary of State (corporate and other business filings): South Carolina Department of Labor, Licensing and Regulation (state labor laws, professional and occupational licensing): State of South Carolina Department of Commerce: State Employment Security Commission (unemployment taxes): New Hire Reporting Program, Department of Social Services (new hire reporting requirements): South Carolina Workers' Compensation Commission: (d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration office in South Carolina, or contact the following certified development corporation: Certified Development Corporation of South Carolina The address of the main SBA Office in South Carolina is: U.S. Small Business Administration |
Copyright © 2008 Michael D. Jenkins
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