Forming a South Dakota LLC provides business owners with the flexibility to adopt an Operating Agreement (OA) that lays out the internal procedures and rules of your entity. Forming a corporation, on the other hand, poses more difficulty to business owners. This is often due to the strict formalities that corporations must comply with.
Although forming an LLC is easier than forming a corporation and offers more flexibility, LLC ownership transfers do present more difficulty than corporation ownership transfers. Nevertheless, it can be done as long as you know what processes to follow.
Want to know how to transfer ownership of an LLC in South Dakota? Check out our guide below. To learn more about setting up an LLC in general, visit our South Dakota LLC formation page.
LLC Ownership Transfers vs. Corporation Ownership Transfers
The ownership interest in a corporation vests in the shares of stock. A corporation issues shares of stock to its owners, who are referred to as shareholders. These ownership shares of stock are freely transferable and may easily be sold to eligible third parties.
For LLCs, on the other hand, ownership interests belong to the individual members themselves. An LLC ownership interest isn’t freely transferable without the consent of all LLC members. The lack of formalities required for LLC formation makes the sale and transfer of ownership more complicated than transferring corporate stocks.
First Things First: South Dakota Operating Agreements
An Operating Agreement provides details about the structure of your LLC, including information such as:
- How profits and losses will be distributed
- Rights and obligations of LLC members
- Events triggering the dissolution of the LLC
- Directions for partial or full transfers of LLC ownership
- Terms to include in a buy/sell agreement
South Dakota law doesn’t require LLCs to adopt an Operating Agreement. However, having one in place is still a great idea. This is because, in the absence of an Operating Agreement, default South Dakota LLC statutes govern the operations of your LLC, which may not always be best for your business and its needs.
If you’re scared to start from scratch when drafting your Operating Agreement, we’re here to help. ZenBusiness’s Operating Agreement template provides business owners with a strong starting point to include various provisions that may be necessary during the course of operating your LLC.
Ways to Transfer LLC Ownership in South Dakota
There are two options for transferring LLC ownership for a South Dakota LLC: (1) a partial transfer and (2) a full transfer.
Partial Transfer in South Dakota: The Buyout Provision
For a variety of reasons, an LLC member may decide he or she wants to leave the business. This is generally referred to as a partial transfer of ownership.
When this occurs, you might consider drafting a buy/sell agreement. Such an agreement allows the remaining members to purchase the departing member’s interest in the LLC. The Operating Agreement, if your LLC has one, will likely outline the terms of the buy/sell agreement. After the buyout is executed, the remaining LLC members distribute the LLC interest equally among themselves.
Alternatively, an LLC member may decide to transfer his or her interest in the LLC to another party. When an LLC member transfers his or her LLC interest, the transferee receives the distributions and other benefits that the member would be entitled to. Importantly, however, the transferee won’t receive any management rights of the departing LLC member in the transfer.
The remaining LLC members can consent to the transferee becoming an LLC member with full management rights, but this isn’t required. Unless the Operating Agreement provides otherwise, this can only be accomplished with the full consent of all members of the LLC.
Full Transfer: Selling Your South Dakota LLC
LLC members may also choose to sell the business to a third party. To effectuate a full transfer of an LLC, you must:
- Determine whether the buyer wants to purchase the entire LLC or just its assets
- Obtain consent to sell the LLC from all LLC members
- Draft a buy/sell agreement according to the instructions in your Operating Agreement
Transferring an entire business to a third party carries legal and financial consequences if done incorrectly. Seek the assistance of an experienced corporate attorney if you need more legal help concerning LLC sales and transfers.
Other Possible Issues
Of course, the scenarios above aren’t the only ones that may arise. Below are some other possible issues to be aware of related to the transfer of LLC ownership in South Dakota.
Death of a Member
When an LLC member passes away, it’s important to know how to proceed. Generally, a member’s transferable interest will pass to their spouse, children, or other next of kin. However, it’s important to remember that this transferable interest only includes rights in distributions and other benefits of the deceased owner. Specifically, this transferable interest doesn’t include ownership or management rights in the LLC.
Often, the best option moving forward is to proceed with a buyout of the deceased member’s ownership interest. Many Operating Agreements address the process for dealing with the death of a member in more detail. As in most cases, having a comprehensive OA is the best way to prevent confusion and disputes and help ensure that a clear and fair process is in place.
In some cases, many members may want to transfer their respective interests, but there may not be agreement by all of the members to do a full transfer. In these situations, dissolution and reformation might be a better option to pursue.
Dissolution provides those who want to take their investment and leave the opportunity to do so. Then, once you complete the dissolution, those members who want to continue may then form an entirely new entity. This also allows potential new members to join the business venture at that time.
File proper change of ownership paperwork in South Dakota
No matter how you proceed, it’s important to provide proper notice to the state of any changes in ownership. Whether it’s a full dissolution, dissociation of an existing member, or addition of a new member, don’t forget to report all such changes to the South Dakota Secretary of State.
Let ZenBusiness help form, operate, and grow your South Dakota LLC
Knowing how to proceed with the transfer of LLC ownership in South Dakota isn’t always easy or intuitive. But one thing is almost always certain — having a detailed and comprehensive Operating Agreement can go a long way toward making the transition smooth.
Don’t know where to begin when it comes to drafting an OA for your South Dakota LLC? Use ZenBusiness’s South Dakota Operating Agreement template to help you get started today. If you’re just starting out on your business journey, take a look at our full slate of formation and compliance services to see how we can help you get your LLC off the ground and running smoothly.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
- Can I sell my interest in an LLC?
Yes, LLC members do have the ability to sell their own interests in the LLC. However, the process is more complex than selling an individual interest in a corporation, and you may need approval from all current members before doing so.
- Can an LLC issue new membership interests?
An LLC may issue new membership interests in the LLC. Generally, however, this is only possible with the consent of all other LLC members, unless the Operating Agreement indicates otherwise.
- How do I change ownership of an LLC with the IRS?
While you must report information related to tax classification and the dissolution of the business to the IRS, this isn’t the case for changes in ownership of the LLC. Instead, make sure all state forms are filed and up to date.
- Can an LLC member have no ownership interest?
No, all LLC members will have an ownership interest in the LLC. However, there are some situations, such as in the aftermath of the death of a member, in which a transferee could have an interest in a member’s distributions or benefits without having an actual ownership interest in the LLC.