How to Form a LLC in South Dakota

A limited liability corporation (LLC) is a type of business entity that combines the tax advantages of a partnership, mainly pass-through taxation, with the limited liability characteristics of a corporation. The LLC form of business is often used by small- to medium-sized companies with a small number of owners, referred to as “members.” The South Dakota Business Corporation Act defines an LLC’s legal structure and rights, and responsibilities.

What Are the Requirements for an LLC?

LLCs are generally required to have operating agreements. These agreements define the rights and responsibilities of the members of the LLC. Under South Dakota law, an operating agreement may not do any of the following:

• Eliminate the duty of loyalty that the members have to the LLC,
• Eliminate the obligation of good faith and fair dealing that members have toward each other and the LLC;
• Vary the right to expel a member or vary the method to close the business of the LLC; or
• Restrict the rights of certain people associated with the LLC in a manner not condoned by the state’s law.

An operating agreement is an enforceable legal document that an LLC should have a knowledgeable lawyer draft. A lawyer can tailor the agreement to the specific wishes of the owners, something a template found online cannot do. In addition to preparing an operating agreement, a lawyer can help ensure that owners have identified the best structure for their business purpose.

What Paperwork Is Required to Form an LLC in South Dakota?

To form an LLC in South Dakota, a person must also file Articles of Organization with the South Dakota Secretary of State as follows:

• Select a Name: The name must include an indicator of the company’s status as an LLC, such as “Limited Liability Company,” “LLC,” or “Ltd. Co.” and it must be different from the names of all other businesses registered in South Dakota;
• Select a Registered Agent: The registered agent could be the person forming the LLC, another member, or someone outside the LLC, such as a professional registered agent. It is legally required to appoint a registered agent and provide their name and address on the Articles of Organization;
• Business Purpose: Stating the purpose of the business in the Articles is optional;
• Address: A street address for the business must be designated in the Articles;
• End Date: Designation of an end date for the LLC is optional;
• Organizer Information: The name and street address of the organizer must be identified;
• Management: There is a box to check that indicates whether the LLC is going to be managed by its members or by professional managers;
• Manager Information. If the LLC is to be managed by professional managers, the name and address of each one must be identified;
• Extra Provisions: The organizers can attach extra information or provisions to the articles. This is optional;
• Organizer Signature: Each person involved in completing and submitting the articles form must sign and date it.

It usually takes 3 to 5 business days for the state to process the paperwork if it is submitted by mail, but online filings are processed immediately. Once the state has approved the paperwork, the LLC is official.

What Benefits Does South Dakota Offer LLCs?

South Dakota provides LLCs with the same benefits that most other states do. Notably, LLC members can avoid corporate income taxes, as income is passed through to members and taxed to them individually. This eliminates double taxation. Members are also given certain personal liability protections from the debts and legal liabilities of the LLC.

What Disadvantages Does an LLC Have in South Dakota?

Reportedly, South Dakota law gives some significant advantages to LLCs and little in the way of disadvantages. Personal liability protection is significant, and the business structure is flexible.

An LLC is required by South Dakota law to file a report with the state each year to keep the state informed about who owns the LLC and how to contact the business. There is a $50 fee to file online or $65 by mail or in person. The report must be filed in the same month as the month in which the LLC was formed.

Is an Operating Agreement Legally Required?

An operating agreement for an LLC is not legally required in South Dakota. However it is highly recommended to have one. It is advisable to draft or have it drafted during the startup process.

The operating agreement is a legal document that specifies the terms of a limited liability company (LLC) according to the members. The standard LLC operating agreement is a 10- to 20-page contract document that sets up LLC guidelines and rules.

An operating agreement must be submitted during the incorporation process In states such as California, Missouri, and New York. Again, however, it is not required in South Dakota, only strongly recommended.

An operating agreement is similar to a partnership agreement in that it protects the status of a company. It comes in handy in the event of misunderstandings and dissension among the members. It helps in carrying out the business according to the rules set by the members.

Companies that do not have effective operating agreements fall under the default rules established by state law. These rules may be very general and unhelpful. They are not tailored to the needs of a particular enterprise.

For example, if there is no operating agreement, some states may provide that all profits in an LLC are to be shared equally by each member regardless of each member’s capital contribution. The members of an LLC may want a different distribution of profits. If so, they need an operating agreement.

An agreement can also protect members from any personal liability that could potentially arise if it appears they are operating as a sole proprietorship or a partnership.

An operating agreement establishes a legal boundary between the LLC and the owner or owners, so the owner is not held accountable for the LLC’s debts or liabilities. Otherwise, creditors to the LLC may pursue the owner’s assets.

An operating agreement also allows an owner or owners to specify what happens if one or all of them exits the business for whatever reason. In addition, it should contain governance procedures such as the frequency of meetings and voting.

The best LLC operating agreement would contain provisions that address the following issues:

• Interests: Each member’s ownership interest as a percentage;
• Rights and Responsibilities: The members’ responsibilities and voting rights;
• Allocations: The profit and loss allocation among members;
• Meetings and Voting: The rules for holding meetings and taking votes;
• Management: The issues related to the management of the LLC;
• Buyouts: The rules regarding buyouts when a member wants to exit and sell their share. This would include what happens in the case of a member’s death;
• Dissolution: How and under what circumstances the LLC can be dissolved.

Just as one size does not fit all, the state rules that apply in the absence of an agreement may not produce the result members desire. A comprehensive operating agreement is the best way to ensure the right outcomes. Although it’s best to include an operating agreement in the initial stages of an LLC’s existence, if that opportunity has been missed, it’s never too late to put one in place, provided all members agree to it. The document can also be modified at a later stage with the guidance and help of an attorney.

Where Can You Find the Right Lawyer?

The formation and operation of an LLC can be challenging. You want to be sure to get it right from the beginning and avoid problems later on. You should consult an experienced local South Dakota corporate lawyer to discuss the requirements for forming an LLC in the state and any legal issues you encounter. In addition, your corporate lawyer can draft an operating agreement that reflects your wishes for the operation of your business.