South Dakota LLC Operating Agreement | A Comprehensive Guide

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South Dakota Operating Agreement

When forming a Limited Liability Company (LLC) in South Dakota, one of the most critical steps is creating and executing an LLC Operating Agreement. This legally binding document outlines your LLC’s ownership, management, and operational procedures, ensuring that your business runs smoothly and is protected from potential disputes and legal issues. Although only sometimes required by state law, having a well-drafted operating agreement is essential for an LLC. This article will explore the content and importance of an Operating Agreement in South Dakota and discuss its key components.

Webinarcare Editorial Team will help you understand the process of having an operating agreement for your South Dakota business. You must be guided by all the factors gathered in this article.

South Dakota LLC Operating Agreement Content

What is an Operating Agreement?

An operating agreement is a legally binding document that outlines a limited liability company‘s ownership structure, management, and operational procedures (LLC). It governs the internal workings of the LLC and establishes the rights, responsibilities, and obligations of its members (owners) and managers.

This includes details such as rules, regulations, and provisions related to the operation of the LLC. The Operating Agreement serves as a guide for dealing with disagreements, bringing in new members, and managing various situations that may arise while doing business. It delivers clarity and ensures smooth functioning while providing legal protection to businesses.

Although not always required by state law, having a well-drafted operating agreement is essential for an LLC. It helps prevent potential disputes among members, ensures smoother business operations, and provides a clear framework for making decisions and resolving issues. It also helps to establish limited liability protection for the members by demonstrating that the LLC is a separate legal entity with its own rules and procedures.

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South Dakota LLC Operating Agreement Content

An operating agreement is a legal document detailing the LLC’s organizational structure and operational procedures. It includes forming the LLC, members and ownership, distribution of profit and losses, management structure, meetings and voting procedure, limitation of liability and indemnification, dissolving South Dakota business, dispute resolution, and amendments and modification.

Article I: Formation of the LLC

The first step in creating an LLC Operating Agreement is to outline the basic information about your LLC, such as:

  • Name of the LLC: Your LLC’s name must include the words “Limited Liability Company” or the abbreviation “LLC” or “L.L.C.” and comply with the South Dakota LLC naming requirements.
  • Principal Office Address: This is where your LLC’s primary business activities will be conducted.
  • Purpose of the LLC: This section should describe the primary purpose of your LLC and the types of business activities it will engage in.
  • Registered Agent Information: Your Registered Agent is a person or entity designated to receive legal documents on behalf of your LLC. The Registered Agent must have a physical street address in South Dakota. It’s essential to choose a reliable and responsible South Dakota Registered Agent, as failure to receive and respond to legal documents can have serious consequences for you to start a business in South Dakota. 

You can serve as your Registered Agent, appoint a friend or family member, or hire the Best South Dakota Registered Agent Services. We reviewed some of the services for you to check out if you still don’t have one.

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Article II: Members and Ownership

This section deals with identifying all the members of the LLC and their ownership percentages. It includes details like names, addresses, and contributions of each member. Details about how increases and decreases in membership are also covered in this section.

  • Initial Members: The names and addresses of each initial member should be listed, along with their respective ownership interests.
  • Ownership Interests: This section should detail each member’s ownership interest percentage.
  • Capital Contributions: Each member’s initial capital contribution to the LLC should be documented, along with any additional contributions that may be required.
  • Additional Members: The agreement should outline the process for admitting new members to the LLC and the rights and responsibilities of these new members.
  • Transfer of Membership Interests: The operating agreement should contain provisions governing the transfer of membership interests, including transfer restrictions and the right of first refusal for existing members.
  • Withdrawal of Members: The process and consequences for members who wish to withdraw from the LLC should be clearly defined. In South Dakota, there is a definite guideline on How to Remove a Member from your South Dakota LLC. 

Article III: Distribution of Profits and Losses

This article explains how the LLC profits and losses will be distributed among the members. It can be based on the ownership percentages or a different agreement stipulated by the members. It lays out the process for distribution and any restrictions on those distributions.

  • Allocation of Profits and Losses: The agreement should detail how profits and losses will be allocated among the members, typically based on their own interests.
  • Distributions to Members: The process for distributing profits to members should be outlined, including the timing and manner of distributions.

Article IV: Management Structure

Your LLC Operating Agreement should outline the management structure of your business. This includes

Member-Managed vs. Manager-Managed: You must decide whether your LLC will be managed by its members or appointed managers. This decision will impact the roles and responsibilities of each party.

A Member-Managed LLC is a type of limited liability company (LLC) where the management and day-to-day operations of the business are handled by its members (owners) directly. In a Member-Managed LLC, each member has the authority to make decisions and take actions on behalf of the company, such as entering into contracts, hiring employees, and managing the finances.

This management structure contrasts with a Manager-Managed LLC, where the members appoint one or more managers to oversee the business operations. In a Manager-Managed LLC, the appointed managers have the authority to make decisions and act on behalf of the company. In contrast, the members typically have a more passive role, focusing on high-level decision-making and strategic planning.

Roles and Responsibilities of Members/Managers: The agreement should define the roles and responsibilities of each member or manager, including their duties, decision-making authority, and any limitations on their powers.

Article V: Meetings and Voting Procedures

This article outlines the rules for conducting meetings and voting procedures. It specifies the quorum required for decision-making, how votes are counted, and how members are notified about meetings. It also includes information about special meetings and emergency decisions.

  • Voting Rights and Decision-Making Process: The agreement should outline each member or manager’s voting rights and decision-making for various business matters.
  • Meetings and Notice Requirements: The operating agreement should specify the frequency of meetings, the process for calling special meetings, and the notice requirements for each type of meeting.

Article VI: Limitation of Liability and Indemnification

To protect the personal assets of your LLC’s members and managers, your operating agreement in South Dakota should address the following:

  • Liability of Members/Managers: The agreement should limit the liability of members and managers for the debts and obligations of the LLC, following South Dakota law.
  • Indemnification Provisions: The operating agreement should include provisions for indemnifying members and managers for actions taken on behalf of the LLC, as long as those actions are within the scope of their duties and do not involve gross negligence or willful misconduct.
  • Insurance Requirements: The agreement should specify any insurance requirements for your LLC, such as liability or property insurance. Small business insurance helps safeguard your business from financial losses, legal claims, and other unforeseen events. This protection allows entrepreneurs to focus on growing and sustaining their businesses within the South Dakota economy.

You may check out the Best Small Business Insurance in South Dakota to learn more about business insurance.

Article VII: Record Keeping and Financial Reporting

This article provides details about the record-keeping and financial auditing procedures. It outlines the importance of keeping accurate and comprehensive records of an LLC’s financial transactions. It also specifies the frequency of financial reporting and distribution to the members.

  • Accounting and Recordkeeping: The operating agreement should outline your South Dakota LLC’s accounting methods and recordkeeping requirements. Effective financial management is important for the success of your South Dakota LLC. Establish a reliable accounting system to track income, expenses, and tax obligations. You can manage your finances using spreadsheets, accounting software, or becoming a CPA in South Dakota.
  • Fiscal Year: The agreement should specify the fiscal year for your LLC, which may be either a calendar year or any 12-month period.
  • Tax Treatment and Filing Requirements: The agreement should specify your LLC’s tax treatment and any required filings with the South Dakota tax authorities. You should include the filing of the South Dakota Articles of Organization, annual fees, and other associated fees that need to be filed.

For the initial and final cost for forming your South Dakota LLC, look up the LLC Cost in South Dakota for additional information. 

Article VIII: Dissolution and Winding Up

This section outlines the circumstances under which the LLC may be dissolved, such as a unanimous decision by members, legal issues, bankruptcy, or achieving its purpose. It also includes information about how the LLC’s assets will be liquidated and debts paid upon dissolution.

Events Triggering Dissolution: The agreement should list the events that will trigger the dissolution of your LLC, such as the death or withdrawal of a member, a unanimous vote of the members, or a court order. 

Some common events include:

  • A unanimous vote of the members to dissolve the business.
  • The death, resignation, or withdrawal of a member unless the remaining members agree to continue the business.
  • The expiration of a specified period or the completion of a specific purpose, as outlined in the operating agreement.
  • A court order mandating the dissolution of the LLC.

Winding Up Process: The operating agreement should outline the process for winding up the affairs of the LLC, which typically involves:

  • Settling the company’s outstanding debts and obligations.
  • Liquidating the company’s assets.
  • Resolving any pending legal disputes.
  • Preparing and filing final tax returns.

Distribution of Assets: The operating agreement should specify how the LLC’s remaining assets will be distributed among the members upon dissolution, typically in proportion to their ownership interests.

Certificate of Cancellation: After the winding-up process is completed, the LLC may be required to file a certificate of cancellation or articles of dissolution with the South Dakota Secretary of State to dissolve the company and remove it from its records formally. 

Article IX: Dispute Resolution

This article provides the protocol for handling any disputes arising between LLC members. It can include stipulations for mediation or arbitration in case of any conflicts. The agreement should include a process for resolving member disputes, such as mediation or arbitration.

Article X: Amendments and Modifications

Your LLC Operating Agreement in South Dakota should include a process for making amendments and modifications, such as:

  • Process for Amending the Operating Agreement: The agreement should outline the process for proposing, considering, and approving amendments to the operating agreement.
  • Required Approval for Amendments: The agreement should specify the percentage of member approval required to amend the operating agreement.

Once your LLC Operating Agreement has been drafted, it should be executed by the initial members or managers and adopted by any additional members who join the LLC.

Role of Registered Agent in LLC Operating Agreement

A Registered Agent is a person or entity designated to receive legal documents and official correspondence on behalf of an LLC. While the primary role of a Registered Agent is to maintain a reliable point of contact for legal matters, some registered agent service providers also offer additional services, such as creating an operating agreement for your LLC. Below are some advantages of having a Registered Agent create an operating agreement for your business:

  • Expertise: A Registered Agent specializing in LLC Formation Services often has extensive knowledge and experience drafting operating agreements. They are familiar with the requirements and best practices for creating a comprehensive and legally compliant operating agreement, which can help protect your business interests and minimize potential disputes among members.
  • State-Specific Requirements: A Registered Agent offering operating agreement services is well-versed in state-specific laws and regulations governing LLCs. They can ensure that your operating agreement complies with the specific requirements of the state in which your LLC is formed, including mandatory provisions and filing requirements.
  • Time-Saving: Drafting an operating agreement in South Dakota can be complex and time-consuming, especially for business owners unfamiliar with legal terminology and procedures. By delegating this task to a Registered Agent, you can save time and focus on other crucial aspects of your business.
  • Customization: A Registered Agent with experience creating operating agreements can tailor the document to meet your business’s unique needs and circumstances. They can help you address specific management structures, financial arrangements, and other critical aspects of your LLC that may not be covered in a generic operating agreement template.
  • Ongoing Support: The Registered Agent services provide ongoing support and guidance in maintaining and updating your operating agreement as your business grows and evolves. This can help ensure that your operating agreement remains relevant and compliant with changing laws and regulations.

While there are advantages to having a Registered Agent create an operating agreement for your LLC, it is essential to carefully review and understand the terms of the agreement before signing. Additionally, it is a good idea to consult with legal and tax professionals to ensure that the operating agreement aligns with your business goals and complies with all applicable laws and regulations.

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FAQs

What is a South Dakota LLC operating agreement?
A South Dakota LLC operating agreement is a legal document that outlines the financial and functional decision-making processes of a South Dakota LLC.
Is it mandatory to have an operating agreement for my LLC in South Dakota?
No, it’s not mandatory to have an LLC operating agreement in South Dakota, but it may be required if you want specific financial and functional decision-making policies in place.
How do I create a South Dakota LLC operating agreement?
You can create a South Dakota LLC operating agreement on your own or hire a legal professional to help you create one.
Can I find templates for South Dakota LLC operating agreements online?
Yes, you can find numerous templates available online that you can use as a start for creating the operating agreement for your South Dakota LLC.
What should an operating agreement for my South Dakota LLC include?
Your South Dakota LLC operating agreement should specify the members’ ownership structure, the distribution of profits and losses, the voting procedures, and any control provisions.
How should I choose a management structure for my South Dakota LLC?
You may choose either a member-managed LLC where all members have control and share responsibility, or a manager-managed LLC where designated managers run most operational functions.
What governs an LLC operating agreement in South Dakota?
Your LLC operating agreement is governed by state laws, local regulations, and the specifications you provide in the agreement itself.
Can a South Dakota LLC operating agreement change over time?
Yes, you may amend an operating agreement by using the same process you used to create it and having all members sign the new agreement.
Can I have multiple versions of the operating agreement for my South Dakota LLC?
No, you should keep a record of every revision to reflect official updates, but only one ongoing version with the most current policies should be in effect.
Do all members in a South Dakota LLC need to sign the operating agreement?
Yes, each and every member of a South Dakota LLC needs to sign the operating agreement.
Is it advisable to consult with a professional before finalizing the operating agreement for my South Dakota LLC?
Yes, consulting a legal professional can be beneficial, as operating agreements can be complex and specific to each LLC’s financial and structural elaboration requirements.
Question:What if there is a conflict between the South Dakota LLC’s operating agreement and state law?
Your South Dakota LLC must adhere to state and local laws above any provisions set out your operating agreement and conflicts should be mitigated according to local jurisdictions’ guidance.
If I have a single-member South Dakota LLC, do I still need to create an operating agreement?
It is not required to create an operating agreement for a single-member LLC in South Dakota, but it is still advisable.
Can I have a different percentage of ownership than profit in a South Dakota LLC?
Yes, a member with a less ownership stake in a South Dakota LLC can get more profits than another member with of a higher ownership stake.
Does South Dakota law require a specific template for an operating agreement for an LLC?
No, while South Dakota state regulations require “Articles of Organization,” outlines the structure and name of your LLC to be filed with the Secretary of State its operating agreement specifications are often determined by the LLC’s structural and financial requirements only.
Can members have different types of ownership rights in a South Dakota LLC?
Yes, members can have different ownership rights such as differentiated shares, asset contributions, and may differ from each other’s percentage ownership based on the agreed liabilities and rights.
What should I consider before creating different classes of membership in my LLC using the operating agreement?
You include must consider the eligibility criteria, varying rights of deductions, and decision-making policies along with separation provisions if a member may wish to quit the LLC or undergo dissolution procedures and require proper buyout methodologies
Can I add restrictions to a member’s ability to transfer ownership or dissolve the membership of my LLC using the operating agreement?
Yes, you can outline your expectations for it including any transferable restrictions, such as limiting challenges to membership rights, voted added requisites such as transfers followed by continuing contractual obligations via the operating agreement.
Does South Dakota allow the modification of the standard rules set out in an operating agreement?
Memberships model contracts required upon any new activities must follow standard JotForm templates.
Do all LLC’s in South Dakota look similar in terms of operating agreement specifications?
No, an LLC’s operating agreement must mold its financial, management needs, debt requirements, contribution methods, investments processes among other policies to legally reflect its unique structure and business setup.
Who signs the operating agreement for a South Dakota LLC?
Every member of an LLC needs to sign the operating agreement in South Dakota including managers whether also acting as members in the company.
Can LLC members themselves also guide/manipulate the company if an operating agreement exists in South Dakota?
Yes since the company runs under member management/control contractual realities might provide ways to tap personal investment funds and thus reducing reliance on initial funding at the onset.
How do I modify the principles/guidelines of my LLC in its operating agreement over time?
LLC’s operating agreements are customizable and customizable through amendments selected processes recording any changes and allowing full member signatures.
What policies decisions are affected by the provisions of the operating agreement in South Dakota?
Distribution policies, management functions, control provisions and voting rights within managing policies usually will be guided by and subjected to like-minded consensuses reflected in the operating agreement’s specifications.
Do non-American citizens have the eligibility to operate an LLC with an operating agreement in South Dakota?
As per reservations and laws, non-U.S. citizens are duly eligible with proper visa with valid statuses to incorporate an LLC accompanied by proper compliance paperwork.Like any incorporated company filling compliances like tax and accounting declarations punctually must also follow standard hiring and procurement policies.
Can my South Dakota LLC survive without an LLC operating agreement?
While a single-member South Dakota LLC can legally operate without a formal LLC operating agreement legal or government regulatory considerations as separate policies followed by traditional incorporation processes like annual filings requirements, adding employees and territory/states need to evaluate operational procedures based on escalating customer or supplier footprint.
How do you resolve misunderstandings over financial decisions made, if any, during business management with interconnected LLC operating agreements between two companies?
South Dakota registered dispute resolution procedures are required under these situations arising over disputes outside agreements predetermined escalation procedures between all members so all operations not guided by by single appropriate output preceded by consultation and stringent accounting protocols such as independent audit opportunities post completion of financial mergers,settlements and business disagreements.
Can South Dakota based LLC’s operating agreement modify geographical footprint limitations allowed under laws?
Also subject to liabilities, obligations, and third party company inclusions by local legal and jurisdiction-specific arrangements whether bound contracts for representation otherwise such limitations.
What is an LLC operating agreement in South Dakota?
An LLC operating agreement is a legal document that outlines the ownership structure and operating procedures of a limited liability company in South Dakota.
Is an LLC operating agreement required in South Dakota?
Although an LLC operating agreement is not legally required by the state of South Dakota, it is highly recommended that an LLC in South Dakota have one.
What happens if an LLC operating agreement does not exist in South Dakota?
If an LLC operating agreement does not exist in South Dakota, the LLC will operate according to the default rules established by the state’s LLC laws.
Can an LLC operating agreement in South Dakota be amended?
Yes, an LLC operating agreement in South Dakota can be amended by the members of the LLC as needed.
How many members can a South Dakota LLC have?
A South Dakota LLC can have one or more members.
What total processing time is required in South Dakota for an LLC operating agreement?
The processing time for an LLC operating agreement in South Dakota can vary but typically takes around 10-14 days.
Do all members of a South Dakota LLC need to sign the operating agreement?
Yes, all members of a South Dakota LLC should sign the company’s operating agreement.
Can a South Dakota LLC have a different legal name than its business name?
Yes, a South Dakota LLC can have a different legal name than its business name, but it must be registered with the state.
How is an LLC taxed in South Dakota?
The state of South Dakota does not have a state income tax, so LLCs in South Dakota are only subject to federal taxation.
Can an LLC in South Dakota elect corporate taxation?
Yes, an LLC in South Dakota can elect to be taxed like a corporation by submitting Form 8832 to the IRS.
What is the difference between an LLC and a sole proprietorship in South Dakota?
An LLC is a separate legal entity from its owners, whereas a sole proprietorship is not.
Can a South Dakota LLC be dissolved voluntarily?
Yes, a South Dakota LLC can be dissolved voluntarily with the approval of at least 50% of its members.
Can a South Dakota LLC be dissolved involuntarily?
Yes, a South Dakota LLC can be dissolved involuntarily by order of a court if it is insolvent, has engaged in fraudulent activities, or for other legal reasons.
Are annual reports required for South Dakota LLCs with operating agreements?
Yes, South Dakota LLCs with operating agreements must file an annual report with the Secretary of State’s office.
How often does a South Dakota LLC with an operating agreement need to file an annual report?
South Dakota LLCs with operating agreements must file an annual report with the Secretary of State’s office every year.
What should be included in a South Dakota LLC operating agreement?
A South Dakota LLC operating agreement should include information about the company’s management structure, the rights and duties of its members, and its financial and accounting policies, among other things.
Can a South Dakota LLC restrict the transfer of membership interests?
Yes, a South Dakota LLC can restrict the transfer of membership interests through specific provisions in its operating agreement.
How are voting rights distributed in a South Dakota LLC with an operating agreement?
Voting rights in a South Dakota LLC with an operating agreement are typically based on the percentage of ownership held by each member.
Can an LLC in South Dakota be managed by members or by managers?
Yes, South Dakota LLCs can be managed either by their members or by designated managers.
Can an LLC member also be its manager in South Dakota?
Yes, an LLC member can also be its manager in South Dakota.
Does South Dakota have any requirements regarding the content of operating agreements?
No, South Dakota does not have any specific requirements for LLC operating agreements beyond those established in state law.
Do South Dakota LLCs with operating agreements need to hold regular meetings?
It is not required by law, but it is recommended that LLCs with operating agreements hold regular meetings to discuss the company’s operations and financials.
Can a South Dakota LLC issue stocks to its members?
No, LLCs in South Dakota do not have the ability to issue stock since ownership is based on the percentage of membership interests held.
Does South Dakota have any residency requirements for members or managers of LLCs?
No, South Dakota does not have any residency requirements for the members or managers of LLCs.
Can non-US residents be members of LLCs in South Dakota?
Yes, non-US residents can be members of LLCs in South Dakota.
How do you register an LLC operating agreement in South Dakota?
To register an LLC operating agreement in South Dakota, it must be included as part of the company’s Articles of Organization and filed with the Secretary of State.
Is an LLC in South Dakota required to have a registered agent?
Yes, LLCs in South Dakota are required to have a registered agent who resides in the state.
What happens if an operating agreement in South Dakota conflicts with state law?
In the event of a conflict between an operating agreement in South Dakota and state law, the law will typically take precedence.

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Conclusion

Having a well-drafted LLC Operating Agreement in place is crucial for the success and protection of your South Dakota LLC. It provides a clear framework for the ownership, management, and operation of your business, helping to prevent disputes and ensure compliance with state law. It is highly recommended to consult with legal and tax professionals when drafting and executing your operating agreement to ensure it meets your specific needs and complies with all applicable laws and regulations.

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