LLC Operating Agreement South Dakota | The Complete Guide

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Starting an LLC may involve filing articles of organization with the state and establishing internal ground rules for how your business should operate. Establishing your credibility as a legal entity is a part of the plan.

Every South Dakota LLC is encouraged, but not required, to have an operating agreement to safeguard the company’s operations, from organization to dissolution. It ensures that all LLC members understand their roles and responsibilities. This page guides you in making a South Dakota operating agreement.

South Dakota LLC Operating Agreement Content

An operating agreement is a legal document detailing the LLC’s organizational structure and operational procedures. Topics not restricted to a single member or multi-member LLC will be covered. While these provisions might not influence day-to-day operations, they must be included for legal reasons.

  • Ownership: The operating agreement details who the members are and how ownership is divided, be it a sole proprietorship or LLC. Sole proprietorship refers to a single person with total control over a business, also known as a single-member LLC. Multi-member LLC members can have either equal or varying ownership interests.
  • Management: Your LLC could be member-managed or manager-managed. The former means members can decide regarding contracts with third parties; the latter means only designated managers can do so. Using “manager-managed” instead of “hands-on” can reduce administrative work. Management’s authority is also limited in the Operating Agreement. 
  • Voting: Define each owner’s voting rights and voting thresholds, such as a majority vote, supermajority vote, and unanimous consent. A variety of approvals are needed for each type of decision.
  • Changes in Membership Structure: If someone leaves the company, how will roles and ownership be transferred? A member buyout and/or replacement procedure must be outlined in the LLC’s governing document.
  • Contributions: All types of contributions are accepted. In order to fund their ownership interests, members will have to invest in the collective funds.
  • Equity Splits: Determine equity for each member, taking into consideration things like their contributions, responsibilities, and fairness. Maintaining fairness in your equity split will help prevent future disagreements.
  • Transfers: You may want to consider outlawing transfers of ownership interests without the consent of all owners. It’s always a good idea to include permitted transfers, such as first refusal, drag-along rights, tag-along rights, and estate planning transfers.
  • Business Restrictions: To protect the privacy of the company, including confidentiality obligations. You may also ban the owners from owning competing businesses.
  • Intellectual Property: Detail; the ownership of intellectual property created by members. Make sure all company-created intellectual property is owned by the company. You can find alternative ownership/license structures if necessary. 
  • Taxation: Determine how you will be taxed and plan accordingly. Remember, however, that you must file an LLC annual report and might be required a sales tax. 
  • Guaranteed Payments: Determine if any of the members should receive Guaranteed Payments, which are like a salary, particularly if your LLC is taxed as a partnership.
  • Distribution & Dividends: Explain to all members how the funds will be allocated. A pass-through entity will impose tax distributions regardless of profit distributions.
  • Dissolution: The LLC should be dissolved if all members elect to cease operations. It is important to identify how you will end your business in your operating agreement.

Note that the operating agreement, though not a legal requirement in most states, is vital in the operation of your LLC. Should your members have issues with the business, you can deal with it with guidance from the operating agreement.

Get Help from a Registered Agent

Developing an operating agreement could be tedious at times. Besides, since it deals with how your business operates, then it would be best to have professionals help you with it to make sure you get everything right. Getting help from registered agents would be your best bet. Here are three of our best LLC services that can provide you with registered agents to free you of worries:

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Importance of a South Dakota LLC  Operating Agreement

South Dakota doesn’t require that you draft an operating agreement if you own an LLC. Most states require their businesses to draft an operating agreement to allow them to inspect the structure of the business. You can bypass this step in South Dakota and the LLC will not be subject to any legal penalties.

This step is essential to ensure that the LLC to be shielded from any disputes or misunderstandings. Here are a few reasons why you should create an LLC agreement.

  • To protect your company: The operating contract sets out the rules for an LLC. So, if the members fail to follow the rules, they will be operated in accordance with the regulations of the government. The agreement can save the LLC from the regulations of the government and provide extra benefits.
  • It helps the LLC appear credible when investors research businesses, they look to see how professional it is. And the operating agreement makes the LLC look professional since it shows that the members care about the company and they want to make all the regulations and rules legal too. This helps grow the company by attracting investors.
  • The LLC’s status has to be secured: LLCs are well-known for their limited liability status. If the operating agreement clearly defines this, the government is not able to confused. It’s extremely easy for sole proprietorships to confuse an LLC comprised of a single member, however an operating contract can help establish that they’re distinct.
  • To settle any conflict To resolve any conflicts that may arise over distributions or decisions. Operating agreements outline the requirements, processes, and rules for the company’s members. If a job is needed members are able to consult the operating agreement to find details and move forward.
  • LLC flexibility is aided through Limited Liability Companies. Limited Liability Companies are expected to be flexible since it is part of their nature. This is exactly what the operating agreement does. The operating agreement is an official document that gives the LLC the freedom to operate.
  • For opening bank accounts for business typically, the business owner must have a copy of the operating agreement. If the company doesn’t have this document, it will be difficult to open bank account.

F.A.Qs

Does South Dakota require an operating agreement?

In order to clearly state the purpose of a business as well as its ownership interests, a written operating agreement is strongly advised in South Dakota.

What if an LLC has no operating agreement?

You and other members of the LLC will be unable to reach any agreements if you do not have an operating agreement. Even worse, your LLC must follow the state’s default operating conditions.

Can I write my own operating agreement?

It is required by law in California, New York, Maine, and Missouri, but it is not in South Dakota. Although it is not legally required, creating a written agreement is strongly advised. You may self-notarize and distribute the documents.

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