Forming a South Dakota LLC takes a lot of planning. Between the Articles of Organization, Annual Reports, potential tax registrations, and more, there’s a lot to consider. And paperwork and startup costs aren’t the only necessary tasks. You’ll also want to set up your LLC to run smoothly and avoid legal troubles after it’s been registered with the state.
That’s where the LLC operating agreement comes in.
What is an LLC Operating Agreement?
An operating agreement gives your business structure and official procedures. It designates ownership, establishes operations, defines member responsibilities, and provides legal protection. Essentially, it lays out everything someone might need to know about your LLC. And it’s an internal document, so there’s no filing or fees involved.
Whether you’re starting a multi-member or single-member LLC, we strongly recommend completing an operating agreement. It’ll benefit and protect you for as long as you’re in business.
Am I Required to Have an Operating Agreement in South Dakota?
Not technically. The South Dakota Codified Laws Section 47-34A-103 says that “members of a limited liability company may enter into an operating agreement, which need not be in writing.” That said, an operating agreement is extremely important for your LLC. It governs your company’s activities, protects your assets, and legitimizes the LLC to courts, banks, other businesses, and more.
Without an agreement on file, your LLC will lack the stability and security necessary for its success, so you should seriously consider adopting one.
Benefits of Creating an Operating Agreement
You want what’s best for your business. Months or years in the future, you want it to be a profitable and thriving endeavor. Having an operating agreement in place will set up your LLC for sustained success.
It requires some legwork, but it’s well worth it. Just look at some of the benefits:
- Officially designates how the ownership is split up (the percentage each member/manager owns), so there are no disputes.
- Standardizes office and company operations to improve efficiency
- Outlines the procedures for member additions and resignations, registered agent changes, dissolutions, and more, so there is no confusion.
- Avoids South Dakota’s “default rules,” which define baseline procedures for any LLC without an operating agreement and aren’t necessarily the best for your business.
- Grants you greater respect from South Dakota courts.
Free South Dakota LLC Operating Agreement
You’ve decided to draft an operating agreement, you’re faced with the daunting task of writing a complex legal document, and you’re thinking: “what have I gotten myself into?” Your first move might be to explore the Secretary of State website for resources, but unfortunately, you won’t find any there.
This doesn’t mean, however, that they don’t exist. A simple Google search will reveal that there are plenty of free resources and templates online, which can help you structure the agreement’s content. While most of these templates are good options, we recommend this one, created by Northwest Registered Agent. It’s an ideal jumping off point to get you started.
Whether you’re using a template or starting from scratch, here’s a quick and easy guide for what to include:
Owner or Member Information: Names and mailing addresses.
Company Information: Your LLC’s name, registered office, and principal office.
Registered Agent Information: The name of your registered agent, their address, and contact information.
LLC Formation: The date you filed or will file your Articles of Organization with the Secretary of State.
Business Purpose: The type(s) of business your LLC will be doing in South Dakota.
Term: How long your LLC in South Dakota will be valid, typically until you file for termination.
Capital Contributions: The amount of money each member has invested in the LLC.
Profits, Losses, and Distributions: How income and debts are allocated among members and methods for distributing funds.
Ownership Percentage: How much of the company each member owns.
Management and Roles: The managerial structure and decision-making processes, naming who is in charge or certain operations.
Compensation: How members/managers are compensated and reimbursed.
Bookkeeping: Accounting procedures and member account policies.
Tax Treatment: Whether your LLC will be taxed as a Sole Proprietorship, Partnership, S-Corporation, or C-Corporation.
Member Additions: The procedure for bringing on new members – how they will be admitted, if they’re entitled to income, any expenses they will owe, their roles, etc.
Member Withdrawal: Procedures for the resignation, expulsion, retirement, or death of an existing member.
Amendment Procedures: How your LLC will approve changes to the operating agreement. Usually, it’s through a majority vote by the members.
Dissolution: What happens when you terminate your LLC. How your members will split up the remaining assets or debts.
You don’t always need to include all of the above. If any don’t apply to your LLC, feel free to leave them out. Still, it’s a good idea to cover as many bases as possible. Even if you’re a single-member LLC, you should consider including as many sections as possible to accommodate future changes. Otherwise, years into the life of your business, you may run into a dispute over something you didn’t include, and you won’t be able to fall back on the operating agreement.
Done with your draft? Take a deep breath and pat yourself on the back – your operating agreement is almost official. It just needs approval from each of your LLC’s members before it can take effect. Once everyone signs off, store the document in a safe place, as you’ll likely need to revise it later. Don’t worry about submitting it to the Secretary of State. It’s an internal document, so you can just keep it with your other business documents.
Making Changes to Your Operating Agreement
For better or worse, your business is going to change. As you begin doing business in South Dakota and, hopefully, raking in profits, the LLC will grow and evolve. It will develop different needs and more complicated processes. Keep everything running smoothly but updating your operating agreement as changes occur.
First, all LLC managers/members must approve the change. To seek approval, follow the guidelines you already outlined in your operating agreement for ratifying amendments.
Because it isn’t recorded with the state, modifying your agreement is as simple as making changes to the Word document or PDF you keep in your own files.
For example: your registered agent resigns and, following South Dakota law, you appoint a registered agent service to take their place. Simply pull up your electronic file, enter the new agent information, save it, and print a copy. Make sure you keep a draft of the previous document as well so you can track the changes you’ve made, just in case the state ever has any questions.
Hiring an Attorney
Worried that you might miss a critical detail? Uncomfortable with legal minutiae? If you want to ensure your operating agreement provides for all possible outcomes and disputes, you might consider hiring an attorney to review it or write it entirely.
Some attorneys have a flat rate for drafting an operating agreement; others bill by the hour. Either way, you’ll only need their assistance for a limited period of time. Use a site like Avvo to find the right fit for your business. Avvo’s database lets you sort by location, rate, and more – it even shows a few South Dakota lawyers that specialize in LLCs.
Hiring an LLC Formation Service
The LLC formation process, with its forms and fees, might make you want to throw up your hands and surrender. Don’t do that! Instead, consider hiring a business incorporation service.
A company like IncFile or LegalZoom can quickly take care of all your necessary filings. Plus, they’ll create a customized operating agreement for you!
Given the amount of time you would spend drafting an agreement from scratch, a formation service is worth it. Not only will you receive a meticulously researched and crafted operating agreement, but you’ll also be able to spend more time growing your business, planning your next move, or just relaxing.
Want more information on the services that can help you through this process? Check out our Best LLC Services guide.
Your operating agreement has a wide-ranging authority of your LLC’s activities and conduct, but it’s still constrained by state law, which dictates what it can and cannot do.
South Dakota Codified Laws Section 47-34A-103 states that an operating agreement has authority to govern “the affairs of the company and the conduct of its business, and to govern relations among the members, managers, and company.” Most aspects of your business fall under this broad umbrella, giving your agreement a fairly broad influence over your LLC.
However, there are certain things that it cannot govern or change. Section 47-34A-103 also provides specific operating agreement limitations. Your agreement may not:
- Eliminate the duty of loyalty under § 47-34A-409 or § 47-34A-603
- Eliminate the obligation of good faith and fair dealing outlined in § 47-34A-409 (but it may define performance review standards)
- Change the right to expel a member defined in § 47-34A-601
- Change the requirements associated with winding up the LLC’s business defined in § 47-34A-801
- Restrict the rights of anyone not associated with the LLC
Most importantly, be sure that your operating agreement doesn’t authorize any activities deemed illegal by state or federal law, and know that nothing you include in the agreement will make your LLC exempt from business maintenance requirements like the registered agent or Annual Report.
This might seem like a lot of guidelines to follow, but listen to the state laws and use this guide as you draft your document, and you’ll end up with an effective, detailed agreement.