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What is a South Dakota LLC Operating Agreement?

To form a South Dakota LLC, you need to file the Articles of Organization. And although you are not required to present your Operating Agreement then, you are encouraged to create one anyway. This document is a contract between you, the other members of the company, and the LLC. 

The Operating Agreement also offers clarity through clear descriptions of the roles of members and managers, profit and loss distribution, and a process to resolve issues and conflicts within the company. 

Why do I need an LLC Operating Agreement in South Dakota?

An Operating Agreement is not legally required to operate in South Dakota. But the U.S. Small Business Administration (SBA) recommends that you create one before you open the doors to your business. 

This important document will help you navigate the internal affairs of your business. With it in place, you’ll have issues sorted in half the time. 

Here’s why your South Dakota LLC needs an Operating Agreement:

• Protects your company’s limited liability status: If you are a business owner, your first job is to establish a separation between you and the business. This applies most especially if you are the sole owner of an LLC. Without an Operating Agreement, you run the risk of being classified as a sole proprietor where your personal assets can also be used to pay off business obligations.
• Clarifies verbal agreements: Managing a company involves a lot of decisions, which could be the source of disagreements if you have partners in your South Dakota LLC. Creating an Operating Agreement that you all agree on and putting it in writing will save you from having to settle conflicts in the future. 
• Protects your LLC from state interference: States set default laws to govern all LLCs. If you don’t have an Operating Agreement, your company will be subject to these rules. These rules are meant to work for all businesses and industries. If you don’t create an Operating Agreement, you are missing out on having customized rules and regulations for your LLC.
• Legitimizes your company: LLCs are not required to keep extensive records or hold annual meetings; the only paperwork differentiating it from sole proprietorships and partnerships is the Operating Agreement. Hence, creating an Operating Agreement for your company gives it credibility and legitimacy. Banks and investors may also ask to see your Operating Agreement before allowing you to open a bank account or agreeing to fund your business. 

What do I include in my South Dakota LLC Operating Agreement?

No one will run their business the same, and every business will have slightly different needs. That’s why it’s highly recommended that you create a comprehensive, customized Operating Agreement for your business. Having said that, there are still important points that every Operating Agreement should include.

Some things to include in your South Dakota Operating Agreement are:

1. Company Information

Start your South Dakota Operating Agreement with your company’s basic information, similar to what you provided in the Articles of Organization.

• LLC/business name
• Physical address where the LLC conducts business
• Management structure
• South Dakota registered agent
• Purpose of the business
• Names and addresses of members

2. Ownership

If you are a single-member LLC, you won’t have a problem defining ownership, as you own 100% of the company. But multi-member LLCs will have to provide the details of each member’s ownership percentage. 

The two common ways that companies allocate ownership percentage is to divide it equally among the members or calculate it according to each member’s capital investment. 

For example, say the LLC needs startup costs of $10,000, and one member contributes $5,000, while two other members contribute $2,500 each. The first member will have a 50% stake in the company, and the other two would have 25% each.  

3. Duties of Members and Managers

A member is an owner of an LLC. However, a member can also be appointed as the manager in a multi-member, manager-managed LLC. On the other hand, a manager doesn’t have to be a member. These are important distinctions that you need to address in the Operating Agreement. 

Define the roles of members and managers and the scope of authority of a manager. What can they decide on? What needs the approval of members? Who can vote on what issues?

4. Management Structure

LLCs can be member-managed or manager-managed. If you opened a bakery, and you and your partners are the bakers and storekeepers, you have a member-managed LLC. It’s a management structure that works for small businesses with just a few owners. 

LLCs with relatively large numbers of owners generally choose the manager-managed model for efficiency and practicality. It is not always possible for all members to be involved in the day-to-day operations of the business. 

In your South Dakota LLC Operating Agreement, you will specify the management structure you want to implement. You can also add instructions on how to change it and when.

5. Voting Rights and Responsibilities

Even if you’re the sole owner of an LLC, you still need to declare that you are the only decision-maker and representative of your company in your Operating Agreement.

Multi-member LLCs should award voting rights to members. This can be done in one of two ways: proportionate to each member’s ownership stake in the company or a count of one vote for each without regard to their ownership interest. Whichever the members agree on should be included in the Operating Agreement.

6. Capital Contributions

Even before you’ve filed the Articles of Organization for your South Dakota LLC, you probably discussed capital with your business partners and how much each member will contribute. 

In this section of your Operating Agreement, you should give a clear breakdown of each member’s contribution to the company to determine their membership interest. List whether they invested money, property, or labor. It’s important to have all of this information in writing, not just for formality’s sake but because the amount of capital contributions from each member is used to determine their share of the profits and losses.

7. Distribution of Profits and Losses

In this section of your South Dakota Operating Agreement, you should include a complete description of each member’s capital contribution, their percentage of ownership, and the calculation of how profits and losses are assigned.

Profits and losses are generally allocated on the basis of capital contributions. So, a member with a 50% stake in the company will also have a 50% share in the profits. Other members will be assigned the same proportion of their investments. 

You can also include provisions regarding profits and losses in your Operating Agreement, such as when members will receive their share, if they will be able to withdraw whenever profits are available, and if a certain percentage of the profits will be rolled over as capital. 

When LLCs accept cash, property, or services rendered as capital contributions, they may agree to pay members who contributed cash a higher percentage of the income until their investments are repaid.

8. Taxation

The IRS classifies a solely owned LLC as a sole proprietorship and a multi-member LLC as a partnership. But as a demonstration of an LLC’s flexibility, members can elect a C corporation or an S corporation status at any time if eligible. 

All three classifications — sole proprietorship, partnership, and the S corporation status — are pass-through entities. This means that the IRS treats the owner and company as one. The owner claims profits and losses, credits, and business deductions on their personal tax returns. 

However, before you file to select a different tax classification for your company, it is advisable that you consult with an accountant to determine if the change will be beneficial to you. Whichever tax classification that the members agree on should be included in your Operating Agreement. 

9. Succession Planning

During the course of the business, members may decide to leave the company, pass away, or become disabled or incapacitated. It’s best to be prepared by providing steps and guidelines that you can follow to deal with these events in your Operating Agreement. 

Here are some questions to consider when drafting succession planning in your Operating Agreement: 

• Can members sell their ownership to other members only?
• Can members sell their ownership to external buyers, and under what conditions?
• If members are allowed to sell their ownership interest to third parties, are current members given the right of first refusal?
• Can members transfer their ownership to their spouse, a relative, or a legal representative? 
• How is the price of the ownership percentage calculated for sale? 

10. Meetings

Meetings are a fact of business life. As members of an LLC, you’ll need to meet to vote on business matters or receive company updates. To avoid excuses, confusion, and wasted time, provide rules for meetings in your Operating Agreement. Mention the frequency of the meetings, how members will receive their notices, and where they’ll be held.

11. Dissolution

Your Operating Agreement should include the process of closing up shop if and when that time comes. You are advised to provide this guideline and the steps for winding up the affairs of the company, because if the debts and obligations of the company are neglected and not resolved before dissolving the LLC, members may become personally liable to the LLC’s creditors.

Your South Dakota Operating Agreement should address:

• Who has the right to initiate closing the business 
• Who can vote to approve the closing of the business 
• What business events can trigger the closing of the company
• How the remaining (after paying all debts and obligations) assets of the LLC will be divided
• Whether the majority vote is enough to approve closing the business or if there needs to be a unanimous vote

12. Severability Provision

Close your Operating Agreement with a severability clause. It’s a standard boilerplate clause that is generally included in contracts. It states that if one section of the Operating Agreement becomes in conflict with the law, it does not make the rest of the document invalid. 

Adding this to your Operating Agreement ensures that a small error won’t render the entire document null.

Get Help Creating Your Operating Agreement

Are you excited to launch your business, but don’t have time to worry about administrative tasks? ZenBusiness can make the process simpler with an existing template to guide you as you draft your Operating Agreement.

To make sure you cover all necessary points relevant to your business, it’s recommended that you also consult a legal professional before signing your Operating Agreement. 

Updating and Revising Your South Dakota LLC Operating Agreement

You are advised to update your South Dakota Operating Agreement whenever you implement changes, such as shifting from being a member-managed to a manager-managed company, welcoming a new member, or selecting a new tax classification. 

As an LLC, you also need to maintain good standing with the state. To remain compliant, you’re required to file the Amended Articles of Organization with the South Dakota Secretary of State every time you make changes to the following: 

• Name of the company/name of the LLC
• The purpose of your business
• Any kind of change related to your registered agent’s information, including if they changed their registered office
• Changes to the tax classification of your business
• Changes to the management structure of your company 

In the state of South Dakota, you are also required to file an annual report with the Secretary of State. This document is due every year on the first day of the LLC’s anniversary month of when the Articles of Organization were filed.

The due date of your annual report is also a good time to revisit your Operating Agreement, even if you didn’t carry out any major changes to your LLC. This is to make sure that the instructions you’ve provided are still relevant to your business operations. 

The best way to make sure that your business remains compliant and in good standing is to partner with ZenBusiness. Let us handle the administrative work so that you can focus on growing your business.