How to Form an LLC in South Dakota!

Forming an LLC in South Dakota can provide a number of legal benefits.

Freedom of Contract

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 that 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.

Perpetual 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.

Benefits for 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.

Protections Against Unwanted Parties

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 Cannot Obtain Controlling 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.”

There are some additional steps you will need to take after you form your South Dakota LLC to finish setting up and maintaining your business.

Get an EIN Number

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.

File Annual Reports

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.