So, you're considering establishing your limited liability company (LLC) in South Dakota. Where should you start? While there are numerous details, filing for Articles of Organization might be the most essential step in your business formation process. This step will take your South Dakota business from an exciting idea to a legitimate LLC.
However, there's another document that you might discover before or after filing for incorporation — an LLC operating agreement.
While an operating agreement isn't legally required to start a South Dakota LLC, drafting this document will benefit your organization. This article explains why this is the case and offers a step-by-step drafting checklist for this valuable document.
Key Takeaways
South Dakota state law doesn't require drafting an operating agreement to set up your LLC.
An LLC operating agreement is widely recommended for all LLCs due to its many legal and financial benefits.
As a small business owner, you can write the operating agreement yourself, use a template, or hire a reliable company like Swyft Filings to ensure compliance.
What Is an LLC Operating Agreement?
An LLC operating agreement is a legal document that defines how your LLC operates. This document is internal, meaning you don't have to submit it to the South Dakota Secretary of State. But the nature of this document doesn't make it any less legally binding for you and all the members of your South Dakota business.
Technically, you could create an oral operating agreement, as the South Dakota Codified Law clearly states that this document "need not be in writing."[1] But the whole point of this agreement is to help you avoid legal trouble, and, unfortunately, an oral contract won't get you far in this regard. It simply lacks the necessary level of enforceability a written operating agreement provides.
But what should be written in an operating agreement? In short – all the rules and procedures for your South Dakota LLC. This agreement covers every important scenario your LLC might face, from admitting new members to dissolving the company.
The content of this document and its implications should catapult it to the top of your LLC formation list of priorities, together with filing for Articles of Organization and requesting an Employer Identification Number (EID) from the Internal Revenue Service (IRS).
State Requirements
South Dakota law doesn't require a business to craft an operating agreement, but other government agencies and financial institutions might.[1] Let's say you want to open a business bank account or are undergoing a tax audit. Your bank and the IRS, respectively, will need to see a copy of an operating agreement to proceed.
While the state of South Dakota does not require the operating agreement, it has numerous legal and organizational benefits. All LLCs should consider drafting one.
LLC Operating Agreement Benefits
As an aspiring business owner, you'll be encouraged to create an operating agreement every step of the way when launching your South Dakota LLC. Why is this so? Check out some benefits of crafting an operating agreement, and you'll immediately get an answer.
Reinforcing Your Limited Liability Status
Maintaining your limited liability status is all about proving a legal separation between the LLC and you as its owner and other members. And what better way to do this than to outline the roles and responsibilities of each LLC member in written form?
You should also open a business bank account to keep your business and personal spending separate.
Protecting Your LLC From State Interference
The State of South Dakota has default LLC laws governing all organizations without an operating agreement. While these laws aren't meant to harm your LLC, they're too general and might not align with your specific business needs.
An operating agreement allows you to "override" default laws in specific situations and have greater control over the company's affairs.
Preventing Disputes Among Members
External factors aren't the only ones that can disrupt your LLC's operations. Unfortunately, no matter how much you trust your LLC members, misunderstandings, disagreements, and conflicts can sometimes emerge.
Without the operating agreement, these disputes could drag on and potentially harm your business entity. However, you can resolve disputes quickly and fairly with a clearly and concisely written contract.
Who Needs an Operating Agreement?
Whether you run a domestic limited liability company, are a foreign LLC, or want an S corp or a C corp tax classification, your company would benefit from an operating agreement. Otherwise, your LLC might run into legal troubles in the future or be forced to comply with the state default rules.
But does every business entity need an operating agreement? The answer is no. This agreement only exists in the process of LLC formation. In other words, business owners looking to start a sole proprietorship, partnership, or corporation don't need it.
Drafting Your South Dakota LLC Operating Agreement
Do you want to craft the simplest LLC operating agreement possible? Just include your South Dakota LLC name, other basic information, and details of the LLC members and initial capital contributors. However, keep in mind that this is the bare minimum.
You'll want to create a comprehensive operating agreement to protect yourself, your members, and the organization itself. Use an operating agreement template if the idea of DIY-ing it scares you, but remember that these templates are typically pretty generic. For a fully customized and compliant legal document, working with a full-service LLC agency like Swyft Filings is the way to go.
Let’s check out the essential sections to include in a South Dakota LLC operating agreement.
Step 1: Provide Business Information
Like the Articles of Organization, the LLC operating agreement must contain some basic information about your business. Moreover, most of this basic information will overlap between the two documents.
You'll want to include details like:
LLC name
Registered agent and registered office
Official place of business
LLC's duration
LLC's purpose
Step 2: List LLC Members
In South Dakota, you don't have to list your LLC members on the Articles of Organization.[2] This isn't the case for the LLC operating agreement. Each member of an LLC must be listed with their legal name, address, and title.
Besides these basic details, the agreement should also include the following:
Membership interest: What percentage of the LLC does each member own?
Member contributions: What amount of money, property, and labor did each member invest in the LLC initially?
Member duties: What is the member's role and scope of authority in the LLC?
Voting rights: Who can vote on what issue within the LLC? What are the voting rights based on? What constitutes a win?
Distribution of profits and losses: How are profits and losses allocated in your LLC? Is it based on capital contributions or ownership percentage? When can members receive the profits?
These extensive details make it easy to separate your personal assets and avoid personal liability. Plus, you can quickly resolve any dispute about profit distribution and similar topics.
Step 3: Decide Member-Managed vs. Manager-Managed
The management structure is among the most important sections to include in an operating agreement. After all, this section dictates your LLC's day-to-day operations.
Opt for a member-managed model, and the chosen LLC members will run the business. They will also have the authority to enter legally binding contracts on behalf of the LLC.
Go for the manager-managed LLC structure, and one or more appointed managers will run your LLC. LLC members will vote these individuals into their positions while keeping other voting rights.
If you want a simple, cost-effective solution that allows you to remain fully in control, choose the member-managed mode. However, if you want to streamline your daily business operations and grow your LLC, then the manager-managed model might be the way to go.
Step 4: Layout Administrative Operations
With this section, you'll define the proper handling of various scenarios that might unfold while operating your LLC. Some of the most common provisions within this section include the following:
Tax clarification: How will your LLC be taxed?
Member meetings: How often will meetings be held? How will the members be informed? Where will the meetings take place?
Succession planning: What is the procedure for dealing with members who can no longer be a part of your LLC?
Dissolution: What is the procedure for closing your LLC? What can cause this event? How will the remaining assets be divided?
Step 5: Add and Remove LLC Members
It's highly unlikely your LLC member list will remain the same forever. New members might join the team, while others might leave or become unable to fulfill their obligations to the organization.
With clearly defined succession planning from Step 4, the latter shouldn't be an issue. All the members will immediately know whether the leaving member can sell their ownership to other members only, what it takes to sell it to external buyers, and whether the buyer can be their spouse, relative, or legal representative.
As for new members, the most crucial consideration is the amount of buy-in for joining the team.
While these two situations differ, all members must vote on and approve any membership changes.
Create Your Operating Agreement Through a Filing Service
Given the importance of an operating agreement and the sheer scope of its content, it's perfectly understandable to feel intimidated by the idea of creating this document on your own. The good news is that you don't have to.
Entrust Swyft Filings with this critical task, and get back to running your business full-time. Our LLC operating agreement service is the most affordable option on the market, and we can help you file for LLC.
FAQs
Is an LLC operating agreement required in South Dakota?
No, an LLC operating agreement isn't required in South Dakota. However, crafting this document is highly recommended for multiple legal, financial, and internal reasons.
How does an LLC operating agreement help protect my assets?
An LLC operating agreement helps protect your assets by separating you and your LLC legally. Without this document, your personal assets can be seized to pay off debts and other business obligations.
Who needs access to this document once it's drafted?
Only LLC members need access to the operating agreement once it's drafted. Afterward, you might need to show a copy of this document to a bank, investors, the IRS, or other government agencies.
How do I edit information on this document if membership changes?
If membership changes, you should draft a new operating agreement reflecting these amendments. However, the new document will only be valid if all the LLC members sign it.
What other legal documents do I need drafted for my South Dakota LLC?
To start an LLC in South Dakota, you'll need an Articles of Organization. Besides legal documents, you'll also need to choose the business name, select a registered agent, get an EIN, and potentially obtain a business license.
---
Bibliography
South Dakota Legislature. "Codified Law 47-34A-103." Accessed June 30, 2023.
South Dakota Secretary of State. "Articles of Organization." Accessed June 30, 2023.
