What Is An LLC Operating Agreement?
The term LLC, which stands for Limited Liability Company, refers to the most popular business structure among SMBs and startups today. It’s easy to form and provides a myriad of benefits, from limited liability protection to pass-through taxation. For an LLC to function properly, however, its members need to create an Operating Agreement.
An Operating Agreement is an internal document that serves as an operating manual for your LLC. It contains details and provisions that are crucial to your South Dakota LLC’s daily operations. This document also provides information about your company and its members and presents guidance on how your business handles things.
Does South Dakota require all LLCs to have an Operating Agreement?
South Dakota does not require LLCs of all sizes to have Operating Agreements to be formed and approved for business. However, operating your company without one deprives you of many benefits that will greatly help your business thrive and grow.
What Are The Advantages Of An Operating Agreement In South Dakota?
An Operating Agreement gives your South Dakota LLC the following advantages:
It cements your limited liability status
An Operating Agreement cements the limited liability status you get from your LLC. It does this by acting as a formal document separating the company from its members. In effect, it limits the members’ liabilities from the LLC’s responsibilities.
It clarifies your business’s goals and processes
The details included in your Operating Agreement are meant to provide your company with a simplified and clear view of your LLC’s goals. The document also includes instructions teaching you and your co-members what to do in certain situations. And if ever problems do arise, your Operating Agreement will also contain steps on how to solve them.
It reinforces accountability in the company
An Operating Agreement becomes binding the moment you and your co-members sign it. Everyone is meant to follow the regulations mentioned in the document. If someone violates the rules in the Operating Agreement, it can be used to hold them accountable.
It gives you more control over your company
The state’s laws will govern your South Dakota LLC if you don’t have an Operating Agreement. But you can override the state’s rules and run your business according to your preferences using one. While governing your LLC according to the state’s rules isn’t bad, being able to run your business according to your tastes makes it easier.
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How Much Is A South Dakota LLC Operating Agreement?
Crafting your Operating Agreement on your own comes at no cost. But if you plan to hire a lawyer in South Dakota to help you with it, you need to prepare around $200. While you might be able to save by creating your Operating Agreement by following our tips, don’t hesitate to consult a lawyer if things get confusing. The peace of mind is absolutely worth it.
What Are The Limitations Of An Operating Agreement In South Dakota?
Your Operating Agreement gives you many benefits, but it does have some limitations preventing it from doing some things. For example:
It cannot completely prevent problems from happening
A carefully crafted Operating Agreement can help you prevent certain issues from arising in the company and help you solve problems when they appear. But no matter how thorough an Operating Agreement is, it has no control over all circumstances and cannot completely prevent problems from happening.
It does not allow you to go beyond state laws
While an Operating Agreement allows you to override South Dakota’s laws, you cannot use it to create provisions violating any existing regulation enacted by the state. Your Operating Agreement is only tailored to help your company function in a way that’s easier for you.
It’s open to loopholes
Although an Operating Agreement is binding, it does not disrespect your members’ free will. This means that while it can be used to demand accountability, they are still the ones choosing to follow the rules or break them. You can prevent them from violating the agreement by carefully wording it so there are no loopholes to be exploited.
What Should You Include In A South Dakota LLC Operating Agreement?
Your Operating Agreement should include all the details necessary for your LLC to function properly. Consider your personal preferences when it comes to doing things inside the business. You will also need to note the size of your company, the industry it belongs to, and the products or services you offer clients.
You must then specify how your LLC will be managed then provide a description of the members’ responsibilities. After this, provide detailed instructions on how your company does its work. These must cover a variety of internal processes, all of which are necessary for your LLC to function.
Below are some parts to look out for in this section:
Distribution of profits and losses
Handling meetings and voting procedures
Record keeping and financial reporting
Limitation of liability and indemnification
Finally, don’t forget to include provisions allowing changes to your Operating Agreement so it can be adjusted as your business grows!
How To Form An Operating Agreement
We now proceed to create your own customized Operating Agreement. Make sure to include all details about your company and its internal processes. You can follow our tips below to create one for your LLC, but if it becomes too challenging or confusing for you, you should get a lawyer’s help in crafting it.
Your LLC’s details
Begin by including details about your LLC. These details should be identical to the ones used in the Articles of Organization you submitted to the South Dakota Secretary of State when forming your LLC.
Said details should include the following:
- The name of your LLC
- The address of your LLC
- Your Registered Agent’s name and address
Your LLC’s purposes and duration
Next, you must indicate the purposes for your LLC’s formation in the state of South Dakota. You must also specify your company’s expected duration if it is not meant to run after it achieves its said purposes. LLCs close by default after they reach their goal, but indicating otherwise allows them to continue for longer.
Your LLC’s membership details
After this comes details about the members of your LLC, as well as how your company handles its membership issues. Start by providing the following:
- Members’ names and addresses
- Individual capital contributions and ownership percentages
Then, insert provisions regarding changes in your LLC’s membership, such as instructions for adding new members and transferring membership interests. Don’t forget to discuss the process of withdrawing one’s membership from your LLC, as well as the consequences withdrawing members will face.
Details about your management structure
At this point, you should indicate how your LLC will be managed. There are two management structures for LLCs: member-managed and manager-managed.
- Member-managed: LLCs with this structure are managed daily by the members themselves.
- Manager-managed: LLCs with this structure are managed by a manager appointed for the role. The members-only get involved when necessary, such as when company-wide decisions have to be made.
Operating Agreement should also provide each member’s roles and responsibilities, establishing clear expectations and defining task boundaries. It also prevents potential management misunderstandings, as well as overstepping of authority.
Profit and loss distribution
Instructions on handling your company’s profits and losses must be included in your Operating Agreement. These are typically distributed to members according to ownership percentages. Including these details prevents potential disputes about them from occurring and helps solve such issues if they ever arise.
Meetings and voting procedures
Next, describe how the members of your LLC can organize and conduct meetings and special voting sessions. Meetings keep everyone updated and share important announcements. Voting comes into play when decisions need to be taken. Your LLC’s Operating Agreement should clearly explain how these processes work within your company.
Record keeping and financial reporting
Your Operating Agreement must provide a clear overview of your company’s accounting procedures. Describe how financial transactions are tracked, records are maintained, and business finances are reported. Clarify the chosen tax classification for your LLC—whether it’s a sole proprietorship, partnership, or corporation. Additionally, the company’s fiscal year must also be specified here.
Instructions for resolving disputes must be included in your Operating Agreement. This is because disputes can arise at any time, even if you have already provided clear instructions on how the business works.
Amendments and modifications
As your business grows, you’ll find the need to update your Operating Agreement to accommodate its growth. Inserting provisions allowing for amendments and modifications to the document lets you introduce changes to how your company does things. You should also include severability clauses so you can remove certain parts of the document if they are ineffective or even counterproductive.
Dissolution and winding up
Finally, your Operating Agreement should include details on handling dissolution. There are a number of reasons why your LLC can be dissolved aside from achieving its purposes and providing instructions to help you weather the process. You must also provide guidance on winding up or settling matters prior to closing your company. This will help you distribute assets to members after they get liquidated.
Why is an operating agreement needed?
Enforceable in Court
The terms outlined in a written LLC operating agreement is usually enforceable in a court of Law.
Opening Bank account
Certain financial institutions require you to produce an operating agreement to verify whether you have “signing power” for the LLC.
If the terms of compensation, roles, and responsibilities are mentioned in the operating agreement, it avoids disputes among LLC members in the future.
Preserve limited liability status
Especially if you are a single-member LLC, having an operating agreement helps ensure your liability status is upheld in court.
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Frequently asked questions
South Dakota does not require LLCs to have an Operating Agreement, no matter how many members they have. Single-member LLCs just tend to benefit from the document more because it better establishes their limited liability status.
No. Operating Agreements do not expire and remain valid until the LLC it is created for gets dissolved. This means you won’t have to create a new document or process its renewal every few years.
Yes, if you included provisions allowing changes to be made to your Operating Agreement. Changes have to be approved by all members before they can be applied, however. Make sure to include provisions for amendments and modifications.