Download pdf - Table of Contents · 2020. 6. 10. · Table of Contents v 3. Example # 2, Obtaining Additional Protection by Registering the Name as a Service Mark . . . . . . . . . . . . . .

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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 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 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 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 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 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