table of contents · 2020. 6. 10. · table of contents v 3. example # 2, obtaining additional...
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Table of Contents
Chapter 1 - Choice of Business Entity: Weighing the LLC Against the Alternatives
A. Considerations Favoring Use of an LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. Limited Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Pass-Through Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3. Nonrecognition Treatment on Formation . . . . . . . . . . . . . . . . . . . . . . . . 2
4. Taxation of Distributions of Appreciated Property . . . . . . . . . . . . . . . . . 3
5. No Restrictions on Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6. Preferred Returns Permitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
7. Special Allocations Permitted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
8. Inclusion of Entity Debt in Member’s Outside Basis . . . . . . . . . . . . . . . 5
9. Potential for Step-Up in Basis of LLC Assets . . . . . . . . . . . . . . . . . . . . . 6
10. Full Deduction for Health Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
11. Creditor Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
12. No Annual Reporting Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
B. Reasons to Consider Using Something Other Than an LLC . . . . . . . . . . . . . . 8
1. Self-Employment Tax Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2. Lower Initial Brackets of C Corporations . . . . . . . . . . . . . . . . . . . . . . . 11
3. Compensatory Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4. Lack of Well-Developed Law on Piercing the LLC Shield . . . . . . . . . 12
5. Accounting Complexity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6. Venture Capital / Private Equity Demands . . . . . . . . . . . . . . . . . . . . . . 12
Chapter 2 - Capitalizing the Corporation, Tax Issues at Formation, and Distributing Funds from the Corporation
A. Establishing the Capital Structure for the Corporation . . . . . . . . . . . . . . . . . 14
1. Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2. Issuing Stock Other Than Common Shares . . . . . . . . . . . . . . . . . . . . . . 15
3. Par Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4. Issuing Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
B. Federal Tax Problems to Avoid in Capitalizing the Corporation . . . . . . . . . 23
1. Tax Problems Created in Issuing Shares Worth More Than the Amount Contributed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2. Tax Problems Created in Issuing Shares for Past or Future Services . . 24
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3. Tax Problems Relating to Deducting Legal, Accounting and Other Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4. Tax Problems Created in Incorporating a Proprietorship . . . . . . . . . . . 28
5. Tax Considerations in Incorporating a Partnership or LLC . . . . . . . . . 29
6. Tax Considerations if the Corporation Borrows Money at Formation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7. South Carolina Tax Issues at Formation . . . . . . . . . . . . . . . . . . . . . . . . 32
C. U.C.C. Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
D. Mechanics of Transferring Assets into the Corporation . . . . . . . . . . . . . . . . 33
E. Dividends, Share Repurchases, and Other Distributions . . . . . . . . . . . . . . . 34
1. Rules Governing When Distributions May be Legally Made . . . . . . . . 34
2. Directors and Shareholders May be Personally Liable for Improper Dividends and Repurchases . . . . . . . . . . . . . . . . . . . . . . . 35
F. Status of Shares Repurchased by the Corporation . . . . . . . . . . . . . . . . . . . . 36
G. Share Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Chapter 3 - Control Arrangements
A. Corporations That Need Control Arrangements . . . . . . . . . . . . . . . . . . . . . . 37
B. Control Arrangements Need Not Always Be Custom Drafted . . . . . . . . . . . 37
C. Common Patterns of Shareholdings That Can Reasonably Be Governed by Standardized Control Arrangements . . . . . . . . . . . . . . . . . 37
1. The 50-50 Split . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2. The Majority – Minority Division . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
3. The Multiple-Shareholder Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
D. Standard Control Arrangements to Minimize the Potential Problems of the Common Patterns of Shareholdings . . . . . . . . . . . . . . . . . . 38
1. The Simplest Solution: Statutory Close Corporation . . . . . . . . . . . . . . 38
2. Ordinary Corporations: Classes of Voting Stock and Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
E. Organic Control Devices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
1. Classes of voting shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
2. Voting and Non-Voting Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
3. Supermajority Voting and Quorum Requirements . . . . . . . . . . . . . . . . 45
4. Cumulative Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
F. External Control Devices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
1. Voting Trusts and Shareholder Voting Agreements . . . . . . . . . . . . . . . 50
2. Shareholder Management Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 51
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3. Employment Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
4. Irrevocable Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
G. Maintaining the Investment and Control Balance in a Closely-held Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
1. Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
2. Shareholder Power to Veto Issuance of Additional Shares . . . . . . . . . . 57
H. Avoiding or Resolving Deadlock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
1. Use of Outsiders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Chapter 4 - S Corporations
A. S Corporations vs. C Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
1. Both Are Corporations Under State Law . . . . . . . . . . . . . . . . . . . . . . . 62
2. Both Are Eligible for the Benefits of Section 1244 . . . . . . . . . . . . . . . 63
3. Both Provide Limited Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
4. Reorganizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
5. S Corporation Advantages: a C Corporation Is Separately Taxable, While an S Corporation Is a “Pass-Thru” Entity . . . . . . . . . . 64
6. C Corporation Advantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
7. Choosing the Right Entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
B. S Corporation Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
1. Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
C. Making a Subchapter S Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
1. In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
2. Timing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
D. Types of Clients That Should Consider Operating as an S Corporation . . . . 76
1. Closely Held, Profitable Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
2. Corporation with Accumulated Earnings . . . . . . . . . . . . . . . . . . . . . . . 76
3. Shareholder Who Wishes to Shift Income and Wealth to Children . . . 76
4. Start-Up Business with Anticipated Losses . . . . . . . . . . . . . . . . . . . . . 77
5. Corporate General Partner of Limited Partnership . . . . . . . . . . . . . . . . 77
E. Tax Treatment of S Corporations and Their Shareholders . . . . . . . . . . . . . . 77
1. S Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
2. S Corporation Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
F. Conversion from a C Corporation to an S Corporation . . . . . . . . . . . . . . . . . 85
1. Built-In Gains Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
2. Last-In, First Out (“LIFO”) Inventories . . . . . . . . . . . . . . . . . . . . . . . . 86
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3. Tax on Passive Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
4. Unused Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
G. Revocation and Termination of S Corporation Status . . . . . . . . . . . . . . . . . . 87
1. Revocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
2. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
3. S Termination Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
4. Inadvertent Terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Chapter 5 - Prior to Incorporation: Issues and Liability
A. The Incorporators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
B. Organizing the Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
C. Pre-Incorporation Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
D. Subscription Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
E. Securities Exemption for Pre-incorporation Agreements . . . . . . . . . . . . . . . 93
F. Risks of Using Pre-incorporation Agreements . . . . . . . . . . . . . . . . . . . . . . . 94
G. Risks of Conducting Any Business Prior to Incorporation . . . . . . . . . . . . . . 94
1. Strict Statutory Liability for Pre-incorporation Obligations . . . . . . . . . 94
2. No "De Facto Corporation" Doctrine . . . . . . . . . . . . . . . . . . . . . . . . . . 95
3. Common Law Contractual Liability of Promoters . . . . . . . . . . . . . . . . 96
4. Fiduciary Duty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
5. Estoppel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Chapter 6 - Corporate Name
A. Basic Requirements for the Corporate Name . . . . . . . . . . . . . . . . . . . . . . . 100
1. Name must be Distinguishable and Designate Corporateness . . . . . . 100
2. Prohibited Names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
B. Obtaining Permission to File Under a Particular Name . . . . . . . . . . . . . . . 101
1. Telephone Verification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
2. Reserving a Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
3. Registering Versus Reserving a Name . . . . . . . . . . . . . . . . . . . . . . . . 102
4. Obtaining Permission to Use an Existing Name . . . . . . . . . . . . . . . . . 102
C. Corporate Name Does NOT Give Corporation Right to Use the Name in Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
D. Obtaining Exclusive Right to Use the Corporate Name . . . . . . . . . . . . . . . 103
1. Basics of Common Law Name Protection . . . . . . . . . . . . . . . . . . . . . 103
2. Example # 1, Obtaining Corporate Name Protection by Use . . . . . . . 110
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3. Example # 2, Obtaining Additional Protection by Registering the Name as a Service Mark . . . . . . . . . . . . . . . . . . . . 111
4. Registering a Service Mark Name in South Carolina . . . . . . . . . . . . . 114
5. Determining That Your Client is the First User of the Name . . . . . . . 114
6. Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
E. Failure of the Company to Operate Under its Official Name . . . . . . . . . . . 114
1. Corporation is Not Required to Operate Under the Name Filed on Its Articles of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . 114
2. Risks to Owner(s) in Failing to Conduct Business Under Their Official Filed Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
3. Avoiding Personal Liability and Still Using a “Fictitious” Name . . . 117
F. Determining Who Owns a Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
G. Suing the Wrong Party; Suing Only the “Name” . . . . . . . . . . . . . . . . . . . . 118
H. Name Changes May Require Filings in the Register of Deeds Office . . . . 124
I. Name Requirements for Foreign Corporation Doing Business in South Carolina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
1. Name Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
2. Registering a Name Prior to Qualifying to Do Business . . . . . . . . . . . 125
3. Foreign Corporation Registers a Service Mark or Trademark in South Carolina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Chapter 7 - Articles of Incorporation
A. Form Articles of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
B. Corporate Name--Line #1, Standard Articles . . . . . . . . . . . . . . . . . . . . . . . 127
C. Registered Office & Agent--Line # 2, Standard Articles . . . . . . . . . . . . . . 127
1. Requirements as to the Registered Office . . . . . . . . . . . . . . . . . . . . . . 127
2. Duties of the Registered Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
3. Who Should Serve as Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
4. Signature of Registered Agent--Not Required . . . . . . . . . . . . . . . . . . 128
5. How Does an Agent Resign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
6. Appointment of a New Agent, and Notification that the Office Has Moved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
D. How Should the Company be Capitalized — Line # 3, Standard Articles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
1. Required Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
2. "Simplest Form"--Only Common Shares--How Many Shares Should be Authorized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
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3. Shares Should Not Have Par Value . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
4. More Complex Financial Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
5. What is the Concept of the "Voting Group” . . . . . . . . . . . . . . . . . . . . 132
6. Shares for a Subchapter S Corporation . . . . . . . . . . . . . . . . . . . . . . . . 133
7. Types of Shares Which May be Authorized . . . . . . . . . . . . . . . . . . . . 133
8. Drafting Tips For Creating Classes of Stock . . . . . . . . . . . . . . . . . . . . 140
E. Effective Date–Line # 4, Standard Articles . . . . . . . . . . . . . . . . . . . . . . . . . 141
F. "Optional" Provisions Often Included in the Articles–Line # 5, Standard Articles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
1. List of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
2. Most Common Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
3. Drafting the Optional Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
G. Who Should be the Incorporator--Line # 6, Standard Articles . . . . . . . . . . 154
H. Attorney Must Sign the Articles–Line # 7, Standard Articles . . . . . . . . . . 155
I. Statement of Corporate Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
J. Corporation Automatically Has Perpetual Duration . . . . . . . . . . . . . . . . . . 156
K. Directors Should Not be Named in the Articles . . . . . . . . . . . . . . . . . . . . . 156
L. Directors of Public Corporations May be Insulated from Certain Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
Chapter 7 Forms List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
Form 7.1 Secretary of State Articles of Incorporation . . . . . . . . . . . . . . . . . . . . 159
Chapter 8 - Organizational Minutes
A. Initial Minutes of the Incorporators and Directors Organizing the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
B. Form Incorporator Minutes with Explanatory Comments . . . . . . . . . . . . . . 163
C. Form Director Minutes with Explanatory Comments . . . . . . . . . . . . . . . . . 166
D. Shareholder Minutes Usually Are Unnecessary for the Organization of the Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
E. Forming the Corporation if There Will Be Actual Meetingsof the Directors and Incorporators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
1. Procedures for Holding an Actual Incorporator Meeting . . . . . . . . . . 182
2. Procedures for Holding an Initial Director’s Meeting . . . . . . . . . . . . 183
Chapter 8 Forms List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186
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Chapter 9 - Bylaws
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
B. Three Required Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
C. Alternative Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
D. Form Bylaws and Explanatory Commentary . . . . . . . . . . . . . . . . . . . . . . . . 189
Chapter 10 - Initial and Subsequent Annual Reports
A. Initial Annual Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
B. Statutory Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
C. Public Disclosure of the Information Filed on the Initial and Subsequent Annual Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
D. Preparing the Initial Annual Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242
1. Name and Address of Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . 242
2. Filing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242
3. IRS Employer Identification Number and Business Code . . . . . . . . . 242
E. Preparing Subsequent Annual Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246
Forms: Initial Annual Report of Corporations (CL-1) . . . . . . . . . . . . . . . . . . . . 248
Chapter 11 - Stock Certificates and Corporate Records
A. Basic Requirements for All Stock Certificates . . . . . . . . . . . . . . . . . . . . . . 251
B. Sample Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252
C. Certificates for Common Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252
D. Common Shares with Classed Voting Rights . . . . . . . . . . . . . . . . . . . . . . . 253
E. Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253
F. Shareholder’s Proper Name on the Certificate . . . . . . . . . . . . . . . . . . . . . . 254
G. Shares Without Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255
H. Maintenance of Stockholder Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258
1. General shareholder list . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258
2. Shareholder list for meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258
3. Stock Transfer Record . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259
4. Certificate stubs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262
5. Record of “redeemed” shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262
I. Transferring Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262
1. Insuring the company recognizes the transfer . . . . . . . . . . . . . . . . . . . 264
2. Standard steps to reflect the transfer on the corporate books . . . . . . . 265
3. Using stock powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265
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4. Assuring that the Signature is Authentic, Appropriate, and Authorized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266
J. Restricting Stock Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272
K. Lost Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
L. Records Required to be Maintained by Each South Carolina Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
M. Shareholders’ Inspection Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276
1. Right to inspect shareholder list at a meeting . . . . . . . . . . . . . . . . . . . 276
2. Absolute right to inspect certain documents . . . . . . . . . . . . . . . . . . . . 276
3. Qualified inspection rights for certain documents . . . . . . . . . . . . . . . 277
4. Copy process, agent’s rights, and rights during litigation . . . . . . . . . 277
N. Reports Which Must be Prepared Each Year . . . . . . . . . . . . . . . . . . . . . . . 278
1. Financial report for the shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . 278
2. Annual report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279
Chapter 11 Forms List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280
Sample Stock Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281
Chapter 12 - Statutory Close Corporations Articles
A. Basic Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
1. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
2. The Statute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
3. “Short-Form” Articles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
4. “Long-Form” Articles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
5. Features Automatically Included in All Statutory Close Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284
6. Additional Features Available By Checking Boxes or Using “Short-Form” Articles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285
7. Additional Features Available By Individual Drafting . . . . . . . . . . . . 287
B. Preparation and Features of the “Short-Form” Close Corporation . . . . . . . 290
1. Features of the “Short-Form” Articles . . . . . . . . . . . . . . . . . . . . . . . . 290
2. Pre-Incorporation Decisions in Preparation of “Short-Form” Articles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293
3. Preparation of “Short-Form” Articles . . . . . . . . . . . . . . . . . . . . . . . . . 293
C. Preparation of “Long-Form” Articles and Adoption of Additional Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295
1. Restrictions on Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295
2. Type(s) of Stock to Authorize . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297
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3. Additional Protections for Subchapter S Elections . . . . . . . . . . . . . . . 298
4. Mandatory Redemption on Death and Determining the Price . . . . . . 300
5. Option of Whether to Have a Board of Directors and Limiting Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302
6. Shareholder Management Agreements . . . . . . . . . . . . . . . . . . . . . . . . 302
7. Pre-emptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307
8. Cumulative Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308
9. Voting Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308
10. Creation of New Shares By Directors . . . . . . . . . . . . . . . . . . . . . . . . . 308
Chapter 12 Forms List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309
Chapter 13 - Statutory Close Corporations Minutes
A. Organizational Procedures After Filing the Articles . . . . . . . . . . . . . . . . . . 310
1. “Short-Form” Minutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310
2. “Long-Form” Minutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311
3. Written Consents for “Short-Form” and “Long-Form” Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312
4. Organizational Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312
B. Organizational Minutes of “Short-Form” Close Corporation . . . . . . . . . . . 312
C. Preparing the “Short-Form” Organizational Director Minutes . . . . . . . . . . 313
1. Mandatory Resolutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313
2. Optional Resolutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315
D. Shareholder Minutes in the “Short-Form” Close Corporation . . . . . . . . . . 317
E. Formation and Organizational Procedures for the “Long-Form” Close Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318
1. Organizational Minutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318
2. Incorporator Minutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319
3. Shareholder Organizational Minutes . . . . . . . . . . . . . . . . . . . . . . . . . . 320
Chapter 13 Forms List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324
Chapter 14 - Professional Corporations Articles
A. The Professional Corporation Supplement and the Licensing Statutes . . . 325
B. Articles of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326
1. Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326
2. Corporate Purpose to be Designated in Articles . . . . . . . . . . . . . . . . . 327
3. Condition to Commencement of Business . . . . . . . . . . . . . . . . . . . . . 328
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4. Registered Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328
C. Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329
1. Required features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329
2. "Simplest Form" - Only common shares are authorized, but how many shares should be authorized . . . . . . . . . . . . . . . . . . . . . 330
3. Shares should not have par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330
4. Legend on the Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330
5. Alternative of More Complex Financial Structure . . . . . . . . . . . . . . . 331
6. Voting Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331
7. Types of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333
D. Incorporator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333
E. Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333
F. Attorney Certification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334
G. Mandatory PC Buy-Out Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334
1. Share Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334
2. Additional Restrictions for Statutory Close Corporation PCs . . . . . . 337
3. Procedure for Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338
4. Drafting Share Transfer Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . 338
H. Optional Provisions for PC Articles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341
1. Available Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341
2. Usual Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 342
3. Drafting the Optional Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 342
I. Other Optional Provisions for the Articles . . . . . . . . . . . . . . . . . . . . . . . . . 347
1. Statutory Close Corporation Election . . . . . . . . . . . . . . . . . . . . . . . . . 347
2. Elimination of or Restrictions on Board . . . . . . . . . . . . . . . . . . . . . . . 348
3. S Corporation Tax Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349
Chapter 14 Forms List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350
Chapter 15 - Professional Corporations Organizational Minutes and Bylaws
A. Incorporator and Director Minutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351
1. Written Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352
2. Organizational Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352
3. Procedure if Directors Named in Articles . . . . . . . . . . . . . . . . . . . . . . 352
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B. Incorporator Consent Minutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353
1. Date of incorporator meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353
2. Name directors (50% must be licensed professionals) . . . . . . . . . . . . 353
3. Sign the minutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353
C. Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353
D. Preparing Director Minutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354
1. Mandatory Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354
2. Resolutions for S Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357
3. Optional PC Director Resolutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359
E. Shareholder Minutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361
F. Forming the PC with Organizational Meetings . . . . . . . . . . . . . . . . . . . . . . 361
G. Documents Required to be Maintained by the PC . . . . . . . . . . . . . . . . . . . 361
H. Repeal of Statutes Requiring Filings with Licensing Authorities . . . . . . . . 362
I. Minutes Required for Statutory Close Corporations . . . . . . . . . . . . . . . . . . 362
1. Transfer Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362
2. Statutory Buy-Out Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362
3. Qualified Persons for Certain Positions . . . . . . . . . . . . . . . . . . . . . . . 363
4. S Corporation Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363
5. Minutes Acknowledging Unique Aspects of the PC Statutory Close Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363
Chapter 15 Forms List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364
Chapter 16 - Securities
A. Regulatory Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366
B. Registration of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367
C. Exemption from Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368
1. Federal Exemptions for Issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368
2. South Carolina Exemptions for Issuers . . . . . . . . . . . . . . . . . . . . . . . . 373
3. Exemptions for Resales of Securities . . . . . . . . . . . . . . . . . . . . . . . . . 376
D. Disclosure Obligations – "Antifraud" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 378
E. Broker-Dealers and Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379
Chapter 17 - Shareholder Meetings and Written Consents
A. Shareholder Action Without a Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381
1. Formal Shareholder Meetings Rarely Needed . . . . . . . . . . . . . . . . . . 381
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2. Preparation and Execution of Consents . . . . . . . . . . . . . . . . . . . . . . . 381
3. Consents for Fundamental Corporate Changes . . . . . . . . . . . . . . . . . . 382
4. Equivalence to Shareholder Meeting Vote . . . . . . . . . . . . . . . . . . . . . 382
B. Annual Meetings of the Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383
1. Statutory Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383
2. Requirements in Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383
3. Shareholder Right to Meet Annually . . . . . . . . . . . . . . . . . . . . . . . . . . 384
4. Effect of Failure to Hold Annual Meeting . . . . . . . . . . . . . . . . . . . . . 384
C. Special Meetings of the Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385
1. Power to Call . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385
2. Shareholders’ Demand for Special Meeting . . . . . . . . . . . . . . . . . . . 385
3. Time of Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387
D. Place of Shareholder Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388
1. Bylaw Specification of Place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388
2. Bylaw Specification of Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388
3. Holding Meeting at Corporation's Principal Executive Office . . . . . . 388
4. Holding Meeting Out of State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388
E. Notice Required for Shareholders Meeting . . . . . . . . . . . . . . . . . . . . . . . . . 389
1. Advance Written Notice of Date, Time, and Place . . . . . . . . . . . . . . 389
2. Notice of Purposes of the Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . 389
3. Shareholders Entitled to Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 391
4. Shareholder Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392
F. Permissible Action at Shareholder Meetings . . . . . . . . . . . . . . . . . . . . . . . 393
1. Annual Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393
2. Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394
G. Voting Entitlement of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395
1. Record Holders of Voting Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395
2. Non-Voting Shares and Hybrid Securities . . . . . . . . . . . . . . . . . . . . . 395
3. List of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395
H. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396
1. Majority of the Outstanding Common Shares . . . . . . . . . . . . . . . . . . . 396
2. Increased Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397
3. Required Quorum for Voting Group . . . . . . . . . . . . . . . . . . . . . . . . . . 397
4. Quorum for Separate Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 398
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5. Adjournment of Meeting Without Quorum . . . . . . . . . . . . . . . . . . . . . 399
I. Use of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399
1. Shareholder Voting in Person or by Proxy . . . . . . . . . . . . . . . . . . . . . 399
2. Method of Appointing a Proxy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399
3. Delivery to the Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400
4. Period of Validity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400
5. Limitation of Proxy’s Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401
6. Appointment Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401
J. Shareholder Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402
1. One Share, One Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402
2. Informal Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402
3. Voting by Ballot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402
4. Voting for Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 403
5. Approval of Other Ordinary Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 404
6. Approval of Fundamental Corporate Changes . . . . . . . . . . . . . . . . . . 405
7. Voting by Voting Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 405
K. Conducting Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 406
1. Routine Informality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 406
2. Large Meetings or Contested Matters . . . . . . . . . . . . . . . . . . . . . . . . . 407
L. Agenda for Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408
1. Elections and Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408
2. Ratification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408
3. Approval of Significant Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 409
4. Fundamental Corporate Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 410
M. Minutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 410
1. All Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 410
2. Formal Record . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 410
3. Prepared by Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411
N. Role of the Corporation's Lawyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411
1. Remind the President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411
2. Prepare Notice, Minutes, and Written Consents . . . . . . . . . . . . . . . . . 411
3. Keep the Official Minute Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411
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Chapter 18 - Shareholder Powers and Rights
A. Powers of the Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413
1. Power to Elect Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413
2. Power to Remove Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413
3. Power to Change Board Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 414
4. Power to Approve Fundamental Corporate Changes . . . . . . . . . . . . . 414
5. Power to Amend Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415
6. Expansion of Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415
B. Rights of a Shareholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415
1. Information Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415
2. Inspection Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417
3. Meeting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 421
4. Proposal Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 421
5. Dividend Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 422
6. Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 422
7. Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423
8. Derivative Action Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 425
9. Judicial Protection Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427
Chapter 19 - Directors
A. Role of Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430
1. Statutory Pattern of Corporate Governance . . . . . . . . . . . . . . . . . . . . 430
2. Overseers or Active Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430
3. Single Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430
B. Board not Mandatory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430
C. Number of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431
1. Appropriate Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431
2. Fixing the Number of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432
3. Changing the Number of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . 432
4. Variable Range Board Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432
D. Choosing the Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 433
1. Selection in Closely-Held and Publicly-Traded Corporations . . . . . . 433
2. Election by Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 433
3. Length of Directors’ Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 433
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E. Resignation, Removal, Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434
1. Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434
2. Removal by Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434
3. Judicial Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434
4. Filling Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434
F. Compensation of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 435
G. Power of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 435
H. Power of Individual Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 436
I. Duties of Director to Corporation and Shareholders . . . . . . . . . . . . . . . . . . 436
1. Common Law Fiduciary Duties of Loyalty and Care . . . . . . . . . . . . . 436
2. Statutory Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 437
3. Provisions in Articles of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . 439
4. Reliance upon Reports and Information from Others . . . . . . . . . . . . . 440
5. Procedures for Conflict of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 440
J. Regular Meetings of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440
K. Holding Directors Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 441
1. Scheduled Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 441
2. Calling Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 441
3. Meet Anywhere . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442
L. Business at Board Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442
M. Quorum and Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442
1. Quorum is a Majority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442
2. Action by Majority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443
N. Telephone Meetings of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443
O. Board Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444
P. Board Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444
1. Committees of Two or More Directors . . . . . . . . . . . . . . . . . . . . . . . . 444
2. Same Procedures as Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 445
Q. Board Minutes and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 445
Chapter 20 - Corporate Officers
A. Required Corporate Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 446
1. No Requirement of Usual Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . 446
2. Corporation Must Have a Corporate Secretary . . . . . . . . . . . . . . . . . . 446
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B. Choice of Corporate Offices and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . 446
1. In Bylaws or By Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . 446
2. Officer Appointment of Officers or Assistant Officers . . . . . . . . . . . . 447
C. The Usual Corporate Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447
1. Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447
2. Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447
3. Corporate Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 448
5. Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 448
D. Appointment of Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 448
1. Authority of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . 448
2. Appointment by Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449
E. Resignation and Removal of Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449
1. Resignation by an Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449
2. Removal by Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450
3. Removal by Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450
F. Compensation and Contract Rights of Officers . . . . . . . . . . . . . . . . . . . . . . 450
1. Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450
2. Employment Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 451
G. Power of Officers to Bind the Corporation . . . . . . . . . . . . . . . . . . . . . . . . . 451
1. Authority of Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 451
2. Authority of Chief Executive Officer . . . . . . . . . . . . . . . . . . . . . . . . . 452
3. Apparent and Implied or Express Authority of Secretary . . . . . . . . . . 452
4. Course of Conduct Creating Implied or Apparent Authority . . . . . . . 453
5. Corporate Ratification of Unauthorized Acts . . . . . . . . . . . . . . . . . . . 453
H. Officers’ Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 454
1. Fiduciary Duties of Loyalty and Care . . . . . . . . . . . . . . . . . . . . . . . . 454
2. Standard of Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 454
3. Modifying Officers’ Fiduciary Duties . . . . . . . . . . . . . . . . . . . . . . . . . 455
I. Indemnification and Insurance for Officers . . . . . . . . . . . . . . . . . . . . . . . . . 455
1. Officer-Director Subject to Director Indemnification Rules . . . . . . . . 455
2. Mandatory and Court-Ordered Indemnification of Non-Director Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455
3. Indemnification of Non-Director Officers . . . . . . . . . . . . . . . . . . . . . . 456
4. Officer Liability Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456
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Chapter 21 - C Corporation Tax Fringe Benefits
A. Advantages of Providing Fringe Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . 457
1. Fringe Benefits which are Tax Free to the Employee and Tax Deductible by the Employer . . . . . . . . . . . . . . . . . . . . . . . . . 457
2. Fringe Benefits which are Tax Deferred to the Employee and Tax Deductible by the Employer . . . . . . . . . . . . . . . . . . . . . . . . . 457
3. Fringe Benefits which are Tax Deferred to the Employee and for which the Employer Receives a Deferred Tax Deduction . . . . . . . 457
4. Fringe Benefits which provide a Tax Benefit to the Employer but are Taxable to the Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 457
5. Fringe Benefits which provide a Tax Benefit to the Employee but no Tax Benefit to the Employer . . . . . . . . . . . . . . . . . . . . . . . . . . 458
B. Laws Affecting Fringe Benefits, Choice of Entity, and Income and Employment Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 458
1. Fringe Benefits and ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 458
2. Other Laws Affecting Fringe Benefits . . . . . . . . . . . . . . . . . . . . . . . . 459
3. Choice of Entity and Fringe Benefits . . . . . . . . . . . . . . . . . . . . . . . . . 460
4. Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462
C. Benefits that are both Tax Deductible by the Employer and Tax Free to the Employee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462
1. Medical Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462
2. Group Term Life Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 464
3. Disability Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 464
4. Long-Term Care Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 465
5. Dependent Care Assistance Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 466
6. Adoption Assistance Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 466
7. Business Travel, Meals and Entertainment . . . . . . . . . . . . . . . . . . . . . 467
8. Educational Assistance Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 468
9. Qualified Transportation Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 468
10. Working Condition Fringe Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . 469
11. De Minimis Fringe Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469
12. No Additional Cost Services and Qualified Employee Discounts . . . 469
13. Moving Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470
14. Retirement Planning Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470
15. Cafeteria Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 471
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D. Qualified Retirement Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 471
1. Tax Benefits of a Qualified Retirement Plan . . . . . . . . . . . . . . . . . . . 471
2. Types of Qualified Retirement Plans . . . . . . . . . . . . . . . . . . . . . . . . . 472
3. Who must be covered by the employer’s plan? . . . . . . . . . . . . . . . . . . 475
4. Special Rules Applicable to Qualified Retirement Plans . . . . . . . . . . 475
5. Investment of Plan Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477
6. Participants’ Access to Funds Prior to Retirement . . . . . . . . . . . . . . . 477
7. Qualified Retirement Plan Documents . . . . . . . . . . . . . . . . . . . . . . . . 478
8. Tax Credit for Startup Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 479
9. Alternatives for Small Companies Who Can Not Afford a Regular Qualified Retirement Plan . . . . . . . . . . . . . . . . . . . . . . . . . . 480
E. Nonqualified Deferred Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 482
1. Nonqualified Deferred Compensation . . . . . . . . . . . . . . . . . . . . . . . . . 482
2. “Funded” versus “Unfunded” Nonqualified Deferred Compensation Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 484
3. Advantages and Disadvantages of Nonqualified Deferred Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 484
F. Stock Options and Split Dollar Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 485
1. Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 485
2. Split-Dollar Life Insurance Arrangement . . . . . . . . . . . . . . . . . . . . . . 488
Chapter 22 - Foreign Corporations
A. Qualification in South Carolina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 490
B. Forms for Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 492
1. Application for Certificates of Authority . . . . . . . . . . . . . . . . . . . . . . 492
2. Initial Annual Report of Corporations . . . . . . . . . . . . . . . . . . . . . . . . . 493
3. Certificate of Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493
4. Additional Information for the Foreign PC . . . . . . . . . . . . . . . . . . . . . 493
C. Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 494
1. Foreign Corporation’s Name Missing Words of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 494
2. Foreign Corporation Name Indistinguishable or Otherwise Improper in South Carolina . . . . . . . . . . . . . . . . . . . . . . 494
3. Foreign Corporation May Seek Permission to Use an Existing Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 494
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D. Reserving Corporate Name by Foreign Corporation . . . . . . . . . . . . . . . . . . 495
E. Registered Agent and Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495
1. Resignation of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495
2. Appointment of New Agent and Changing Registered Office . . . . . . 496
F. Effect of Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496
1. Regulation of Internal Affairs of Foreign Corporations . . . . . . . . . . . 496
2. Foreign Corporations’ Exposure to Service of Process in South Carolina . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 497
3. Obligation to Pay Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 498
G. Consequences for Failing to Qualify . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 498
H. Withdrawal From Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499
I. Revocation of Certificate of Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499
J. Required Amendment to Certificate of Authority . . . . . . . . . . . . . . . . . . . . 500
K. Service of Process on Foreign Corporation . . . . . . . . . . . . . . . . . . . . . . . . . 501
Chapter 22 Forms List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 502
Chapter 23 - Dissolution
A. Nature of Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503
1. Winding up and Liquidating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503
2. Three Kinds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503
B. Steps for Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503
1. Same as Other Fundamental Corporate Changes . . . . . . . . . . . . . . . . 503
2. Unanimous Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 505
C. Administrative Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 505
1. Failure to Pay Taxes or Make Required Filings . . . . . . . . . . . . . . . . . 505
2. Notices and Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 505
D. Judicial Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 506
1. Grounds for Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 506
2. Judicial Dissolution Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 506
E. Post-Dissolution Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 507
F. Post-Dissolution Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 507
1. Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 507
2. Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 508
3. Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 508
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G. Liability for Continuing in Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 508
H. Voluntarily Dissolving a Close Corporation . . . . . . . . . . . . . . . . . . . . . . . . 510
Chapter 24 - Liability of Officers, Directors, and Shareholders
A. Pre-Incorporation Liability to Third Persons . . . . . . . . . . . . . . . . . . . . . . . 511
B. Liability of Promoters for Breach of Fiduciary Duty . . . . . . . . . . . . . . . . . 511
C. Liability of Directors and Officers to the Corporation and Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 512
1. Liability for Violating Fiduciary Duties . . . . . . . . . . . . . . . . . . . . . . . 512
2. Liability for Failing to Object to Violations of Others . . . . . . . . . . . . 513
3. Liability for Unlawful Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . 513
D. Liability of Directors and Officers to Third Parties . . . . . . . . . . . . . . . . . . 513
1. Various Common Law and Statutory Liabilities . . . . . . . . . . . . . . . . . 513
2. Direct Personal Liability for Torts and on Contracts . . . . . . . . . . . . . 515
3. Liability When Corporate Veil Pierced . . . . . . . . . . . . . . . . . . . . . . . 515
4. Liability in Derivative Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 518
E. Indemnification and Insurance for Directors and Officers . . . . . . . . . . . . . 518
1. Permissive Indemnification by Corporation . . . . . . . . . . . . . . . . . . . . 519
2. Mandatory and Court-Ordered Indemnification . . . . . . . . . . . . . . . . . 520
3. Director and Officer Liability Insurance . . . . . . . . . . . . . . . . . . . . . . 521
F. Liability of Shareholders to Third Parties . . . . . . . . . . . . . . . . . . . . . . . . . . 522
1. Direct Personal Liability for Torts and on Contracts . . . . . . . . . . . . . 522
2. Liability for Pre-Incorporation and Post-Dissolution Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 522
3. Liability When Corporate Veil Pierced . . . . . . . . . . . . . . . . . . . . . . . 522
4. Liability for Unlawful Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . 522
5. Liability for Claims Against Dissolved Corporation . . . . . . . . . . . . . 523
Chapter 25 - Domestications and Conversions
A. The Domestication Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 524
1. Reason for Domestication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 524
2. Filing Requirements for Domestication . . . . . . . . . . . . . . . . . . . . . . . 524
3. Effect of Domestication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 526
4. Comparison with domestication procedures adopted in other states . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 528
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5. Income Tax Effect of Domestication . . . . . . . . . . . . . . . . . . . . . . . . . 529
B. Conversions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 531
1. Converting a Corporation into an LLC . . . . . . . . . . . . . . . . . . . . . . . . 532
2. Converting an LLC into a Corporation . . . . . . . . . . . . . . . . . . . . . . . . 537
Chapter 26 - Administrative, Tax and Regulatory Matters Affecting Incorporation of New Businesses
A. Workers’ Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542
B. Employment Discrimination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 543
1. Federal Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 543
2. State Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 545
C. Federal Employment Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 546
D. State Employment Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 547
E. The Occupation Safety and Health Act (OSHA) . . . . . . . . . . . . . . . . . . . . 547
F. Labor Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 548
G. Licenses and Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 549
H. Other Web Sites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 549