Operating Agreement LLC South Dakota

A South Dakota Limited Liability Company (LLC) Operating Agreement is an essential internal contract that outlines how the LLC will be governed. This document establishes the company’s ownership structure, management rules, and internal procedures. Sometimes called a South Dakota Operating Agreement or South Dakota LLC Company Agreement, it is the exclusive legal record documenting ownership and membership rights.

Although many entrepreneurs draft the agreement before filing formation documents, the Operating Agreement remains an internal governance tool designed to structure the LLC’s operations and clarify how members interact and make decisions.

Is a South Dakota Operating Agreement Required?

South Dakota law does not require LLCs to adopt an Operating Agreement. Under South Dakota Codified Law § 47-34A-103, an Operating Agreement “need not be in writing,” and creating one is optional.

Even though it is not legally mandated, a written Operating Agreement is strongly recommended. Without one, the LLC automatically defaults to the statutory rules in SD Codified Law § 47-34A, which may not reflect the members’ intended structure, ownership arrangements, or decision-making procedures.

Why a South Dakota Operating Agreement Matters

Maintains limited liability protection A written Operating Agreement helps demonstrate that the South Dakota LLC is a separate legal entity. This is particularly critical for single-member LLCs because, without clear documentation, the company may appear similar to a sole proprietorship. The Operating Agreement helps prove to courts, creditors, and regulators that the business operates independently from the owner’s personal affairs.

Establishes internal rules and expectations Without an Operating Agreement, South Dakota’s default LLC statutes control matters of voting, distributions, rights, duties, and dispute resolution. These may not align with how members actually want to operate the business. A written Operating Agreement allows the members to customize almost every internal rule as long as it complies with state law.

Required by financial institutions and third parties Banks, lenders, accountants, and other organizations often request a copy of the Operating Agreement to open business bank accounts, issue financing, verify ownership, or confirm managerial authority.

Key Provisions to Include

A complete South Dakota Operating Agreement typically includes the following provisions:

• Basic Company Details: Includes the LLC name, business purpose, duration, effective date, and federal tax classification. South Dakota LLC names must include “Limited Liability Company,” “LLC,” or an accepted abbreviation.
• Registered Agent and Office: The name and address of the South Dakota registered agent responsible for receiving legal notices. Any changes must be filed with the South Dakota Secretary of State.
• Member Information: Names, addresses, contribution amounts, and membership interest percentages of all members.
• Capital Contributions: Initial cash, property, or other contributions made by each member. Members are not entitled to interest on their contributions.
• Management Structure: Specifies whether the LLC is member-managed or manager-managed. Defines the authority of managers or appointed officers if applicable.
• Profit and Loss Allocation: Details how profits and losses will be distributed among members. Distributions may only occur if the LLC remains able to satisfy liabilities.
• Tax Election: Federal tax selection (disregarded entity, partnership, S corporation, or C corporation). Proper IRS filings are required for certain elections, such as S corporation status.
• Voting Procedures: Outlines voting power, required thresholds for decisions, and quorum requirements. Voting is typically based on membership interest unless otherwise specified.
• Transfers of Interest: Rules governing how members may be added, removed, bought out, or transfer their ownership interests, including procedures for withdrawal, death, or expulsion of a member.
• Records and Bookkeeping: Procedures for maintaining company records and required documentation, including financial statements, IRS filings, and state filings.
• Compensation: Terms explaining compensation for members, managers, or appointed officers, if applicable.
• Dissolution: Events that trigger winding up and guidelines for distributing remaining assets and completing final filings with the South Dakota Secretary of State.
• Amendments: Procedures for modifying the Operating Agreement. Amendments typically require unanimous written consent unless the agreement states otherwise.

Management Options for South Dakota LLCs

South Dakota LLCs may operate under one of two management structures:

Member-Managed (default)

Members participate in daily operations, make business decisions, and may legally bind the LLC. Voting power is typically proportional to ownership percentage.

Manager-Managed

Members appoint one or more managers to handle daily business operations. Managers may or may not be members. Members take a more passive, investor-level role but retain control over major decisions such as adding members, removing managers, or approving major financial actions.

Creating and Maintaining the South Dakota Operating Agreement

Drafting and Signing

The Operating Agreement is an internal contract. It does not require state approval, notarization, or filing with the South Dakota Secretary of State. It becomes legally binding once signed by all members.

Recordkeeping

The agreement should be kept with the LLC’s business records at its principal office. Each member should keep a signed copy for personal reference.

Amending the Agreement

The Operating Agreement may only be amended through written consent of the members. When revisions are made, the LLC should:

• Prepare an updated version
• Circulate it to all members
• Obtain all required signatures
• Store the updated document with company records

If amendments affect information that appears in state filings (e.g., registered agent, manager information), the LLC must file the appropriate update with the South Dakota Secretary of State.