Removing a Member from South Dakota LLC | Things You Need to Know


Steve Bennett
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Remove Member From South Dakota LLC

Limited Liability Companies (LLCs) are popular business structures in South Dakota because they provide flexibility in management and taxation while offering personal liability protection for their members. However, there may come a time when a member of an LLC needs to be removed for various reasons, such as retirement, disputes, or other personal circumstances. Removing a member from an LLC in South Dakota can be complicated, but understanding the legal requirements and following the proper steps can help ensure a smooth transition.

This article will guide you through Removing a Member from an LLC in South Dakota by discussing the legal requirements, preparing necessary documents, and providing helpful tips to avoid potential pitfalls.

Webinarcare Editorial Team will help you understand the process of removing a member. It would be best if all the factors in this article guided you.

How to Remove a Member from South Dakota LLC

What is a Limited Liability Company?

An LLC, or Limited Liability Company, is a type of business structure that offers a mix of features from partnerships and corporations. It provides its owners, known as members, with limited liability about the company’s debts or potential lawsuits, much like a corporation. At the same time, an LLC provides flexibility in management and profit distribution, similar to a partnership or sole proprietorship. LLCs can be owned by one or more individuals, corporations, or other LLCs. However, taxation in an LLC is pass-through by default, which means the profits or losses are reported on the owners’ individual tax returns.

Before you start a removing a member, it is advised that you consult with a legal expert. They will be aware of what’s best for you and your business. You can always start an LLC in South Dakota, if you wish to protect your personal assets from business debts.

– WEBINARCARE EDITORIAL TEAM

Reasons for Member Removal in South Dakota LLC

There could be several reasons why a member needs to be removed from an LLC in South Dakota:

  1. Breach of Agreement: All members are bound by the operating agreement of the LLC. If a member violates the agreed terms knowingly or unknowingly, this can be a reason for removal.
  2. Financial Mismanagement: If a member is found guilty of embezzling funds or other related financial misconduct, they should be removed to protect the company’s financial health.
  3. Criminal Activity: If a member is involved in criminal activity, this can put the entire company at risk. In such cases, removal is crucial to protect the LLC’s reputation and legality.
  4. Lack of Participation: If a member consistently fails to contribute to the business, either through capital, time, or expertise, they might be removed.
  5. Conflict of Interest: An LLC’s members must prioritize the business’s interests. If a member’s activities conflict with these interests, they might need to be removed.
  6. Irresolvable Disputes: Sometimes, members might have disputes that harm the company’s functioning. Removing one or more members involved might be necessary if such disputes cannot be resolved.
  7. Personal Reasons: Personal reasons such as bankruptcy, divorce, or incapacity can also necessitate removing a member from an LLC.

Removing a member from an LLC is a legal procedure. It may require a majority vote from the other members or depend on specific LLC operating agreement clauses. Legal advice from South Dakota Business Attorney should be sought when considering this action.

How to Remove a Member from South Dakota LLC

To remove a member from an LLC, you must follow the guidelines that include reviewing the operating agreement, consulting with a business attorney, obtaining the consent of the remaining members, preparing and executing a written agreement, updating the operating agreement, notifying the South Dakota Secretary of State, and updating the tax and financial records. These are the basic ones, so read the whole article until the end. 

Step 1: Review the South Dakota Operating Agreement

The first step in removing a member from an LLC in South Dakota is carefully reviewing the South Dakota Operating Agreement for your LLC. The operating agreement is the document that outlines how the South Dakota LLC will be managed and governed, including provisions for the removal of members. If the operating agreement contains specific guidelines for removing a member, those guidelines must be followed. If the operating agreement does not address the removal of members, then the default provisions under South Dakota law will apply.

The operating agreement includes information like-

  • About Business
  • Members and management
  • Capital contribution
  • Profit Distribution
  • Change of membership
  • Dissolution

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Step 2: Consult with an Attorney

Given the potential legal and financial consequences of removing a member from South Dakota LLC, consulting with a Business Attorney in South Dakota before taking any action is advisable. A business attorney experienced in South Dakota LLC law can help you understand the legal requirements, ensure compliance, and avoid potential pitfalls.

The qualities of an excellent business attorney can make a significant difference in the success and growth of your business. Here are some key qualities to look for when choosing a business attorney in South Dakota:

  • Expertise in South Dakota Business Law: The best business attorney should have a deep understanding of federal, state, and local laws and regulations governing businesses in South Dakota. In terms of business laws and regulations, a business attorney should be familiar with forming of the South Dakota Articles of Organization so that they will guide you in regulating the South Dakota Secretary of State and other laws that need to abide by.
  • Experience In Your Industry: An attorney with experience working with businesses in your industry will be better equipped to understand your company’s unique challenges and opportunities. They will be familiar with industry-specific regulations and can provide more targeted and relevant advice.
  • Strong Communication Skills: Effective communication is critical to a successful attorney-client relationship. A top-notch business attorney should be able to explain complex legal concepts in clear, easy-to-understand language and be responsive to your questions and concerns.
  • Proven Track Record: A great business attorney should have a history of successful client outcomes. They should be able to provide references or case studies that demonstrate their ability to achieve favorable results for businesses like yours.
  • Strategic Thinking: The best business attorney can think strategically, helping your company proactively address potential legal issues and identify opportunities for growth and success.
  • Commitment to Client Success: A truly exceptional attorney is not just focused on billable hours but genuinely committed to helping your business succeed. They should be willing to invest time and effort in understanding your company’s goals and work diligently to help you achieve them.

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Step 3: Obtain Consent of the Remaining Members

In most cases, removing a member from South Dakota LLC requires the consent of the remaining members. This is typically achieved through a vote of the members, with the required percentage of votes needed for approval varying based on South Dakota’s operating agreement or South Dakota law.

If the operating agreement does not specify the percentage of votes required, you should consult your business attorney or refer to the default provisions under South Dakota law.

Step 4: Prepare and Execute a Written Agreement

Once the required consent has been obtained, the next step is to draft a written agreement outlining the terms of the member’s removal. This agreement should include, but is not limited to:

  • The effective date of the removal
  • The reason for the removal
  • The method of calculating the member’s buyout or distribution of assets
  • Any other relevant terms or conditions

All members, including the departing member, should sign the agreement. This written agreement is evidence of the removal and can be used to update the LLC’s records and filings with the South Dakota Secretary of State.

Step 5: Update the Operating Agreement

After removing a member, South Dakota LLC’s operating agreement should be updated to reflect the change in membership. This may include amending the list of members, updating the ownership percentages, and revising any other relevant provisions. It is crucial to ensure that the updated operating agreement accurately reflects the current structure and governance of the LLC.

Suppose you wonder what the South Dakota operating agreement entails. It includes the following:

  • 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. In South Dakota, if you do not wish to file your LLC right away but want to hold the name that you have decided on, then you can reserve your LLC name for 120 days. You must file a name reservation application with the South Dakota Secretary of State to keep the name. The online name reservation fee costs disclosed, while the mail name reservation fee costs $25.
  • Principal Office Address: This is where your LLC’s primary business activities will be conducted.
  • 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. Choosing a reliable and responsible Registered Agent is essential, as failure to receive and respond to legal documents can seriously affect your business. You can serve as your Registered Agent, appoint a friend or family member, or hire a Professional South Dakota Registered Agent Services.
  • Purpose of the LLC: This section should describe the primary purpose of your LLC and the business activities it will engage in.
  • Duration of the LLC: You may choose to have your LLC exist for a specific period or continue indefinitely.

Step 6: Notify the South Dakota Secretary of State

Depending on the specific circumstances and requirements under South Dakota law, you may need to file a notice of the member’s removal with the South Dakota Secretary of State. This could involve filing the Amended South Dakota Articles of Organization or other appropriate documents. 

The filing fee for amending your Articles of Organization costs $150; however, it varies depending on your specific situation and the nature of the amendments. Consult your business attorney or refer to the South Dakota Secretary of State’s website for further guidance.

Step 7: Update Tax and Financial Records

Finally, updating the South Dakota LLC’s tax and financial records to reflect the member’s removal is essential. This may involve notifying the Internal Revenue Service (IRS) and the South Dakota Department of Revenue and updating the bank accounts, bookkeeping, and other financial records. By profession, you can manage your finances using spreadsheets, accounting software, or becoming a CPA in South Dakota.

Is It Important to Update the Operating Agreement?

It is important to update the operating agreement when you remove a member from your South Dakota LLC. The operating agreement is a key document outlining your LLC’s rules, procedures, and ownership structure. When a member is removed, it is crucial to ensure that the updated operating agreement accurately reflects the current structure and governance of the LLC.

Updating the operating agreement after removing a member may include the following:

  • Amending the list of members to remove the departing member’s name
  • Updating the ownership percentages to reflect the change in membership
  • Revising any provisions related to the management, voting rights, and decision-making processes to account for the change in membership
  • Addressing any other relevant sections that may be affected by the member’s removal

By updating the operating agreement, you can maintain clear and accurate records of your LLC’s structure, which can be crucial for legal and financial reasons and the smooth operation and management of the business.

FAQs

Is a member of an LLC required to consent to being removed in South Dakota?
No, South Dakota law only requires that a majority vote of members be obtained to remove a member.
Can an LLC operating agreement in South Dakota require certain procedures for removing a member?
Yes, an LLC operating agreement in South Dakota can establish specific procedures for removing a member, as long as they do not conflict with state law.
What if the LLC operating agreement does not provide for removing a member in South Dakota?
If the LLC operating agreement in South Dakota does not provide for removing a member, state law will govern the process which generally requires a majority vote of members.
How do I hold a meeting to vote on removing a member in South Dakota?
You need to follow the procedures outlined in the LLC operating agreement or state law. Usually, notice must be given to all owners and a quorum must be present to proceed with a vote.
What if the LLC has only two members and they cannot agree on removing someone in South Dakota?
All statutory protections still apply, so you may consider mediation or petition the court for intervention and have a judge decide whether removal of a member is necessary.
Can an LLC remove a member without cause in South Dakota?
Yes, South Dakota law allows removal of a member with or without cause, subject to any restrictions in the LLC operating agreement.
Can an LLC member be removed for breach of the operating agreement in South Dakota?
Yes, South Dakota law allows removal of an LLC member for breach of the LLC’s operating agreement.
What if a member objects to their removal in South Dakota?
An objecting member may seek legal advice and may take legal measures to challenge their removal under South Dakota law.
Who can remove a member from an LLC in South Dakota?
Generally, only the members of an LLC in South Dakota can remove one of their members, with or without cause.
Is a member entitled to a share of the company’s profits after their removal in South Dakota?
It is unlikely, since the LLC operating agreement may dictate what entitlements a removed member has to receive profits of the LLC after their removal in South Dakota.
Can a removed member in South Dakota regain their ownership interest in the LLC?
The LLC operating agreement in South Dakota might determine the pathway a removed member may take towards regaining their ownership interest. However after the removal, if the judge orders the company to dissolve, it is unlikely the member will have a chance.
What happens to the removed member’s ownership interest in the LLC in South Dakota?
The provisions in the LLC’s operating agreement or state law in South Dakota may determine how such an interest is reallocated or bought out after removal.
What notice must be given in South Dakota to a member the LLC seek to remove?
South Dakota law generally requires written notice about an impending vote for the removal “not less than 10 days before the meeting.”
What happens if a member was removed before their claim against the LLC is settled in South Dakota?
This may depend on the arrangement established by the LLC’s operating agreement or a possible statute of limitations. It is important to seek legal counsel regarding this if attorneys are called.
Can individual members of an LLC be sued for their roles in voting to remove a member in South Dakota?
It is likely that it would take an extreme level of misbehavior for individual members to become personally liable in a lawsuit. But, it is always recommended to speak a qualified attorney when in doubt.
Can a member who was a major contributor or founder of the LLC be removed?
Yes, such member can be removed from an LLC in South Dakota, subject to contractual provisions contained in the LLC operating agreement.
Can a member force an involuntary removal of another member in South Dakot?
Usually not, where no specific agreement releases the member for their interest voluntarily or involuntarily. So a majority vote must be used to remove a member in South Dakota if needed.
What if there is no quorum when trying to remove a member from an LLC in South Dakota?
If the quorum requirement is outlined in the LLC operating agreement, it should be followed to remove of the member. Read the existing statutes here (South Dakota Codified Laws § 47-34A-401 thru §47-34A-415).
Can a member who has resigned be considered ‘removed’ in South Dakota?
The wordings used might differ, but terms used to indicate removal includes being removed or voluntarily resigning. If the operating agreement says nothing to the contrary, or the removed member hasn’t successfully sought a court to invalidate the termination—and assuming that there are no other legal issues at work—the departing member usually stands the chance of retaining most of his or her existing protections under the agreement.
Can a member get any refund or settlement from the withdrawn LLC?
The contractor of the operating agreement determines the measure of monetary proceedings a person who no longer has an equity stake has left behind with the LLC in South Dakota.
Can a corporation be a member of an LLC and then be removed in South Dakota?
Unless otherwise outlined in the LLC operating agreement, a corporation can be removed from an LLC in South Dakota.
Does South Dakota permit the expulsion of non-managers?
Whether a non-manager can be removed depends on the arrangement, it may be subject to the description in the operating agreement regarding suspension of certain members’ market or managerial rights before removing them completely from the business.
What will happen if the expelled member’s ownership interest in the company was paid immediately or negotiated subsequently after it stopped being in their ownership in South Dakota?
After expulsion, the allocated amount allocated to that person’s terminating interests will also need to be allocated between the remaining owners.
Do transferred members have to carry any weightage in voting in South Dakota?
Each transferred equity or business transfer will be counted for purposes of establishing voting strength in South Dakota meetings.
Is disparity treated differently when voting to expel members of an LLC in South Dakota?
The same statute keeping (SDCL 47-34A ) outlines a set of defaults rules to use when an operating agreement fails to provide for managing functions such as approval for member elimination only causes if misconduct, disobedience in performing the assigned duties and acute instant clashes against other property owners are confronted with an expuls ditory vote.
Can criteria for evaluating a termination be different for inducing member expulsion in South Dakota?
Differences in such rules might depend solely on the firm’s recognition and another impact could fall depending on success as well as a business or partnership, against the right of other members in the society. Regardless, it is advised that an expert should advise before concluding on anything.
Are procedures for removing a member from outside of South Dakota also valid in South Dakota?
It is valid only to a certain point.Unless the operating agreement indicates conformity or distinguishably diverse legislation doesn’t guarantee that the legal codes of another state apply. So the safest aporoach in such situation is to follow South Dakota laws!
Should the process be documented in South Dakota?
Unless outlined in the company’s statute, rules should also be launched and the expulsion bonus must also be recorded because some individuals may support litigation contesting placement on permanent expulsion proofs. And can be used as evidence in the court case to dismiss the complaint.
Can Membership removal brings the fall of the LLC according to South Dakota Law?
While member expulsion can have wider implications, the judgment to dissolve is prohibitive as long as at least 50 per cent of first profitability proceeds to capable owners in accordance with the operating agreement according SDCL 47-34A.
How do I remove a member from an LLC in South Dakota?
You need to follow the procedures set out in your LLC operating agreement or the South Dakota LLC Statute.
Can I remove a member of my South Dakota LLC without their consent?
You can only do so if your LLC operating agreement allows for expulsion or if the South Dakota LLC Statute permits expulsion.
What is the process for removing a member from a South Dakota LLC without their consent?
You need to follow the procedures set out in your LLC operating agreement or the South Dakota LLC Statute.
Can I remove a member of my South Dakota LLC for a reason not outlined in the operating agreement?
No, you must abide by the procedures and reasons outlined in your LLC operating agreement.
Is there a time frame for removing a member from a South Dakota LLC?
You need to follow the procedures set out in your LLC operating agreement or the South Dakota LLC Statute.
Can I expect legal disputes when removing a member from a South Dakota LLC?
There is a possibility of legal disputes depending on the circumstances.
What happens when a member disassociates from my South Dakota LLC?
The member’s interest in the LLC is distributed as outlined in your LLC operating agreement.
Do I need to notify my clients if we remove a member from my South Dakota LLC?
It’s not mandatory, but it is good practice if your clients are affected in any way.
Can the LLC buy out the interest of the removed member in my South Dakota LLC?
Yes, if the operating agreement outlines this process.
Is it possible to force a South Dakota LLC member to sell their interest?
You can only do so if your LLC operating agreement allows for this or if South Dakota allows it.
Is a buyout required when removing a member from a South Dakota LLC?
Not necessarily, it depends on your LLC operating agreement and the circumstances of the removal.
Can I remove a member of my South Dakota LLC for nonpayment of dues?
If this is specified in your LLC operating agreement, then yes, you can.
Will my LLC be dissolved when a member leaves?
The LLC will not dissolve if specified in the operating agreement, but it will be affected by the member’s departure.
Can an LLC in South Dakota have members that reside outside of the state?
Yes, it can, and those members have the same rights and obligations as those within the state.
Are South Dakota LLCs taxed for income and expenses at the entity level?
No, but South Dakota LLC members are subject to personal income tax and need to file state income tax returns.
How can I remove a manager from my South Dakota LLC?
You need to follow the procedures set out in your LLC operating agreement or the South Dakota LLC Statute.
Can a manager be removed without just cause from a South Dakota LLC?
Only if it’s allowed in the LLC operating agreement or by the South Dakota LLC Statute.
When do votes of withdrawal from a South Dakota LLC member take effect?
As outlined in your LLC operating agreement.
What happens to a South Dakota LLC’s debts and liabilities when a member leaves?
The terms of your LLC operating agreement dictate how the debts and liabilities are divided among the remaining members.
Who will receive the profits from the ousted South Dakota LLC member’s share?
The profits from the removed South Dakota LLC member’s share will be divided among the remaining members as outlined in your LLC operating agreement.
Will we need new paperwork to show our South Dakota LLC’s new composition?
The Articles of Organization might need to be updated with the newly updated members.
Are LLCs registered at the state or federal level?
LLCs are registered at the state level, with requirements varying by state.
Can I remove a manager or member from my South Dakota LLC if they have not breached the LLC agreement?
It depends on what’s written in your operating agreement in regards to removal.
Will the South Dakota government monitor my decision to remove a member from my LLC?
No, the government will not monitor your decision to remove a member unless legal action ensues later on.
Can non-citizen/non-resident aliens participate in a South Dakota LLC?
Yes, however complicated tax implications might occur.
What are the key provisions of South Dakota LLC law to know regarding forced LLC member dissociation from the entity?
Forced dissociation from a South Dakota LLC typically requires due cause.
Do South Dakota LLC legal statues explicitly outline member removal?
Yes, explicit definitions of member removal is important in various South Dakota laws.
Can I expel an LLC member for no longer carrying their weight?
This depends on the LLC operating agreement specification; however, lacking services can be interpreted as a breach of the operating agreement and lead to a possible expulsion consequence.
Will freezing the ousted member’s fund access violate the law?
Actions vary on the LLC operating agreement guidelines and the type of fund.

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Conclusion

Removing a member from an LLC in South Dakota can be complex and requires careful attention to detail. By following these steps and consulting with an experienced attorney, you can ensure that your LLC remains compliant with South Dakota law and continues to operate smoothly during this transition.

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