South Carolina is home to a thriving technology and entrepreneur boom, particularly in Charleston. From the Chamber of Commerce and SCORE to countless other organizations like the Harbor Accelerator, there is no shortage of support for small companies in Charleston. References like Silicon Harbor and the Digital Corridor abound, but what role does the law play in establishing a successful Tech Company? Our firm has been fortunate enough to help dozens of startups so far this year, which has provided us with some insight on what Tech Companies should know about the law in South Carolina.
Below are five legal considerations Tech Companies should take into account when starting up in South Carolina:
- Select the Correct Form of Business
- Protect Your Intellectual Property
- Draft a Good Operating Agreement/ Partnership Agreement
- Don’t Be Afraid of Contracts
- Be Mindful of Employment Laws
Select the Correct Form of Business
When it comes to deciding what form of business will work best for your company, it usually comes down to deciding between a partnership, limited liability company, or corporation. State law governs entity formation, so understanding South Carolina Law is crucial. The most important considerations are liability protection and tax filings.
Partnerships come in a variety of forms: general partnerships, limited partnerships, and limited liability partnerships. Each offers flexibility in formation and management, but the level of liability protections varies greatly between them.
LLCs provide liability protection for the owner(s), multiple tax options, and flexible management opportunities. With an LLC, your business gets the flexibility of a partnership while gaining the liability protection of a corporation. Over the past decade, most companies in South Carolina have organized as an LLC.
If your company needs to attract a diverse group of investors or would benefit from a formal structure, a corporation may be the best fit. Corporations have been around for a long time and are a great way to organize your business.
Protect Your Intellectual Property
Protecting copyrights, trademarks, trade secrets, and patents is vital to the long-term success of your company. Without trademark protection, for instance, many companies would not even exist today. Increasingly, a company’s assets are intellectual property. Imagine if Coca-Cola had not protected its famous recipe with trade secret protection?
The first thing to remember is: Don’t infringe on someone else’s intellectual property. Take the time to see if there are other companies using the name you want or who have claimed a trademark you would like to use. The last thing you want is a cease and desist letter arriving in the mail the second week you are open for business or a letter arriving after you have spent two years developing your brand and building goodwill.
Intellectual property protection is not always as complicated as it seems. Depending on your circumstances, trademarking or copyrighting may be able to provide you adequate protection. In other situations, a nondisclosure agreement may be needed. Take the time to figure out what intellectual property you need to protect and develop a plan of action early.
Draft a Good Operating Agreement
One of the biggest mistakes owners of a company make is failing to clearly define the terms of the agreement from the start. Whether you are running a partnership, LLC, or corporation, the agreement among the owners is essential to the long-term success of your company. It is easy to assume you understand one another and will be able to work out differences, but it is never as simple as it seems.
When partners set out to form a company, it is imperative for them to have a detailed conversation about many issues:
- Who owns what percentage of the company?
- How will the company raise new capital?
- What happens if the company wants to add partners?
- How does a partner cash out and what happens to his or her shares?
- How will the company be managed?
- How will the company be taxed?
The answers to these questions and many other questions are important. Discussing these questions and making tough decisions at the inception of the company is crucial because each of them can affect the success of the venture. Spending the time necessary to craft a good partnership agreement, operating agreement, or bylaws will help your business in the long run.
Sit down, have the talk, and put your agreement in writing.
Don’t Be Afraid of Contracts
Business contracts are as boring as it gets – at least until your money is on the line. If your company does not put “routine” agreements in writing, then you are asking for complications in your business dealings.
There are many reasons people fail to get the terms of an agreement down on paper. Some people think it slows the pace of business or they think it is unnecessary or they think it is insulting to imply the other party may not do what they say, but the truth is people make mistakes.
In Charleston, technology based companies are a huge part of the local economy. Every tech company requires a plethora of contracts, but too often companies fail to put these basic business contracts into writing and end up in trouble. People misunderstand terms or think they have communicated well when they have not. Life happens, and having well documented terms of an agreement down on paper helps everyone understand what is expected.
Be Mindful of Employment Laws
As your company grows, so should your interest in this field. Employment Law is regulated on both a federal and state level, which means business owners have to negotiate with a web of laws and regulations. Once your company begins hiring non-owner employees, it is time to begin thinking about Employment Law.
Among the most notable employment issues facing companies is a failure to understand wages and how to comply with the rules. Failing to properly pay workers can become a costly mistake. Another important issue is Workers Compensation Insurance. Make sure you not only understand your obligations to employees, but that you are also protecting the company by understanding the law.
Maintaining good employee files is essential to the long-term organization of a successful company, so develop some good habits early. Companies expose themselves to needless problems by failing to properly document employee files, even though it is one of the easiest mistakes to avoid. Most companies should keep at least three different files on employees. The first file an employer should keep is a General Employee file, which includes any work related documentation for each employee. These files should include a signed job description, signed employee manual compliant with the at-will provision of S.C. Code 41-1-110, performance reviews, and any documentation of disciplinary action taken. In addition, an employer should maintain a separate Health File for each employee. Lastly, employers should keep I-9s on each employee together in one file.
Another important area of Employment Law involves Employment Handbooks. Employment Handbooks have many useful applications both practically and legally, but if it is poorly drafted, problems may quickly emerge. The most import thing to keep in mind is that South Carolina is an at-will state. A poorly written handbook that does not adhere to certain rules can erode employees’ at-will status and create contractual duties imposed on the employer. Complying with the at-will provision of S.C. Code 41-1-110 are important for following the law.
Finally, independent contractors are an interesting subject in Employment Law. Employers have good reason to prefer independent contractors rather than employees: Because they can avoid employment taxes, workers’ compensation insurance, vicarious liability, maintaining employee files, and a number of other personnel issues. But just because a company calls someone an “independent contractor” does not make it true. The South Carolina Supreme Court weighed in on the issue in Nelson v. Yellow Cab, stating the issue of whether or not a worker is an employee hinges on “a right to control the method and manner in which” a worker operates. Despite the reluctance of many employers to classify workers as employees, there are numerous management advantages that are important to consider as well.
This article barley scratches the surface of considerations necessary to operate a successful Tech Company. The goal is not to provide specific legal advice, but to help spot some of the issues business owners should consider when growing a business. If you take care of legal considerations early, you can focus on more important goals like growing your business.
John Henderson is a corporate attorney with Henderson & Henderson. He focuses his practice on corporate and business law and enjoys helping local startups position for long-term success. For questions, contact him.