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Gold miners in the Black Hills and motorcycle accessory salespeople in Sturgis can form a South Dakota LLC to insulate their personal assets from any liabilities incurred by their business.

HOW TO FORM A SOUTH DAKOTA LLC

Pick a Name

In South Dakota, every limited liability company name must be distinguishable from the name of every other business entity on the records of the Secretary of State, as well as including either “limited liability company” or “limited company,” which can be abbreviated.

Register with the State

To legally carry out business, your LLC must file articles of organization with the Secretary of State. The name of the LLC, the address of the designated office, the name and address of the registered agent, the name and address of the organizer, the duration of the company, whether the company will have managers and, if so, their names and addresses, and if one of the members will be personally liable for the obligations of the LLC. A $150 filing fee accompanies this filing.

Draft an Operating Agreement

Under South Dakota law, a written or oral operating agreement between the LLC members will govern the internal affairs of the members and managers of an LLC. While it is not explicitly required, we recommend that you have a written operating agreement for your LLC.

Continue Your LLC

EIN: Any South Dakota LLC with employees or multiple members will need an EIN from the I.R.S. A few incorporation services can be hired to obtain this for you as well.

Annual Report: Every South Dakota LLC must send the Secretary of State an annual report with the LLC name, the address of its principal office, the name and address of its registered agent, and the names and addresses of managers (if any). The filing fee for this document is $50.

WHY FORM AN LLC IN SOUTH DAKOTA?

The Benefits and Advantages of Creating a South Dakota LLC

Introduction

South Dakota Has a Growing Economy

Each year, South Dakota forms over 2,500 new LLCs.  South Dakota has over 11,000 active LLCs.  The U.S. Chamber of Commerce ranks South Dakota first for having a “sensible, predictable regulatory environment” and for small business survival rate; second for business tax climate and tax environment for mature firms; fourth for productivity growth and per capita income growth; and seventh in export growth and “growth, productivity, and livability,” which was determined by considering long-term and short-term job growth.

Advantages of Forming a South Dakota LLC

The South Dakota LLC Act gives members contractual freedom to create voting and non-voting classes of membership and to customize their capital contributions and shares of profits and losses.  Section 47-34A-404.2 provides new classes may be created in the future, and the rights and duties of new classes may be senior to those of existing classes.  The ability to create voting and non-voting classes of membership facilitates everything from complex, multi-million dollar business deals to succession planning in family businesses and estate planning by gifts of non-voting interests.  The ability to specify a method for allocating profits and losses in an LLC agreement that is greater or lesser than a member’s portion of capital contributions gives members contractual flexibility to tailor their income and risks of loss to further their big-picture asset management plans.

Duration

The Act provides for an LLC’s unlimited life.  A South Dakota LLC may have a perpetual duration.  An LLC’s existence can therefore outlive its members’ lifetimes.

Dealing with Business Partners

The South Dakota LLC Act gives members contractual freedom to customize the duties each party to the LLC agreement owes to the other parties.  Section 47-34A-409 has default rules that members and managers owe limited fiduciary duties of care and loyalty.  The duty of care requires them to refrain from “engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.”  The duty of loyalty requires them to not compete with the LLC or take a business opportunity away from the LLC, not deal with the LLC in a manner adverse to it or on behalf of parties who have an interest that is adverse to it, and act as trustees of the LLC’s property.

But the Act gives members and managers contractual freedom to vary the default rules.  Section 47-34A-103 provides that an LLC agreement may (1) “[i]dentify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable”; and (2) “[s]pecify the number or percentage of members or disinterested managers that may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty.”  The second item is a “safe harbor” provision for “interested” transactions, which are transactions between an LLC and one or more of its members or managers.  These rules give majority members and the LLC certainty in business planning and the ability to take advantage of mutually beneficial opportunities.

Preventing Unwanted Business Partners

The South Dakota LLC Act allows members to protect their control of an LLC.  An LLC agreement may prohibit members from transferring their distributional interests.  But if an LLC agreement does not prohibit it, a transfer does not dissolve the LLC or entitle the transferee to participate in management or to become a member.  Instead, the transferee may receive only the distributions to which the transferor would have been entitled, and the non-transferring members must unanimously consent to the transferee becoming a member.

Creditors Only Get Passive Rights, Not Control Rights

Section 47-34A-504 provides that if a judgment creditor of a member obtains a charging order against the member’s distributional interest, the charging order is only a lien on the interest.  The judgment creditor has only the right to receive distributions which would otherwise be paid to the member.  The judgment creditor does not have a right to participate in management.  A court may not foreclose on the lien.  Section 47-34A-504 is the judgment creditor’s exclusive remedy.

Furthermore, section 47-34A-601 states that a person ceases to be a member of an LLC when the person makes an assignment for the benefit of creditors, becomes a debtor in bankruptcy, or fails to contest a petition seeking the appointment of a trustee, receiver, or liquidator over his or her property.  These events are considered “events of dissociation.”

South Dakota Registered Agent

A South Dakota LLC must continuously maintain an agent for service of process in the state.  A commercial registered agent service may act as a South Dakota registered agent.

Conclusion

Because of the advantages of forming an LLC in South Dakota, over 2,500 new LLCs are formed in the state each year.
Should you wish to have more flexibility and protection, you may instead form a Delaware LLC even if you operate in South Dakota.  What are the advantages of a Delaware LLC?  (Delaware LLC Advantages).  We can then help you file an application for registration to do business in South Dakota with your Delaware LLC (Form Delaware LLC).

South Dakota LLC Act Statutory References
§ 47-34A-101“Definitions”
§ 47-34A-103“Effect of Operating Agreement; Nonwaivable Provisions”
§ 47-34A-202.1“Organization”
§ 47-34A-202.2“Certificate of Organization”
§ 47-34A-203“Articles of Organization”
§ 47-34A-211“Annual Report for Secretary of State”
§ 47-34A-404.1“Management of Limited Liability Company”
§ 47-34A-404.2“Classes and Voting”
§ 47-34A-405“Sharing of and Right to Distributions”
§ 47-34A-409“General Standards of Member’s and Manager’s Conduct”
§ 47-34A-501“Member’s Distributional Interest”
§ 47-34A-502“Transfer of Distributional Interest”
§ 47-34A-503“Rights of a Transferee”
§ 47-34A-504“Rights of Creditor”
§ 47-34A-601“Events Causing a Member’s Dissociation”
§ 47-34A-1002“Application for Certificate of Authority”
§ 47-34A-1008“Effect of Failure To Obtain Certificate of Authority”
§ 59-11-6“Appointment of Registered Agent”