Corporate Dividend and Distribution Requirements in South Dakota

At a glance

Requirements one by one

Governing law, entity, distribution, and scope

South Dakota Codified Laws § 47-1A-140(4), (6) defines the covered domestic business corporation as a South Dakota corporation for profit and gives “distribution” a broad transaction scope. It includes direct or indirect money or other-property transfers and debt incurred for shareholders with respect to their shares. The listed forms are a declared or paid dividend, purchase, redemption, other share acquisition, distributed debt, and another form. The corporation's own shares are excluded from the property-transfer definition and instead use the separate share-dividend section.

Board, committee, shareholder, and charter authority

Under S.D. Codified Laws § 47-1A-640, the board may authorize and the corporation may make a distribution, subject to article restrictions and the financial limits in §§ 47-1A-640 to -640.5. Section 47-1A-825 permits creation of a board committee subject to the chapter, articles, and bylaws. Section 47-1A-825.1 lets the committee approve distributions only according to a board-prescribed formula or method or within board-prescribed limits.

Section 47-1A-732(2) supplies a separate private-ordering route: a qualifying shareholder agreement may govern authorization or making and may permit a distribution not proportional to share ownership, but the agreement remains subject to §§ 47-1A-640 through -640.5.

Cash, property, shares, debt, repurchase, and redemption forms

The § 47-1A-140(6) definition reaches direct and indirect money or other- property transfers, incurred shareholder debt, dividends, purchases, redemptions, other share acquisitions, distributed debt, and other forms. It excludes the corporation's own shares from the property-transfer definition. S.D. Codified Laws § 47-1A-623 governs those share dividends separately.

Surplus, net-profit, equity, and capital-source test

Sections 47-1A-640 through -640.5 state no separate surplus, retained-earnings, net-profit, stated-capital, or other lawful-source test. The statutory financial limits are the two post-distribution tests in § 47-1A-640.1, along with article restrictions and the applicable class or series terms.

Liquidity, balance-sheet, liability, and preference test

Both § 47-1A-640.1 tests apply after giving the distribution effect. First, the corporation must remain able to pay debts as they become due in the usual course of business. Second, total assets may not be below total liabilities plus the amount needed on a hypothetical dissolution for preferences superior to those of the recipients, unless the articles permit otherwise.

Financial statements, valuation, reserves, and reliance

Section 47-1A-640.1 permits the board to base its determination on financial statements prepared using accounting practices and principles reasonable in the circumstances, fair valuation, or another reasonable-under-the-circumstances method. Sections 47-1A-640 through -640.5 state no separate reserve formula or special rule for relying on particular officers, employees, committees, or experts. Selecting a method and applying it to the corporation's facts remain outside this survey.

Record date, measurement date, payment delay, and revocation

The board may fix the distribution record date. For a distribution other than a purchase, redemption, or other share acquisition, § 47-1A-640 makes the authorization date the default when the board fixes none. Section 47-1A-623 uses the same authorization-date default for a share dividend.

S.D. Codified Laws § 47-1A-640.2 measures a purchase, redemption, or other share acquisition at the earlier of the money or property transfer or debt incurrence and the end of the seller's shareholder status. Other distributed debt is tested when distributed. An ordinary distribution paid within 120 days is tested when authorized; one paid later is tested when paid. These provisions state no general distribution-revocation rule.

Class, series, equal treatment, stock distribution, and fractions

S.D. Codified Laws § 47-1A-601 ordinarily gives shares within a class or series identical preferences, rights, and limitations but permits holder-level variation expressly written into the articles. Section 47-1A-623 makes a share dividend pro rata by default. Issuing one class or series on another requires authorization in the articles, approval by a majority of votes entitled to be cast by the class or series being issued, or no outstanding shares of the class or series being issued.

S.D. Codified Laws § 47-1A-604 permits fractional shares, money for their value, shareholder disposition arrangements, or scrip in registered or bearer form. The section does not state separate voting, dividend, liquidation, or expiration rights for the scrip.

Distribution debt, priority, liquidation, insolvency, and boundaries

S.D. Codified Laws § 47-1A-640.3 puts compliant distribution debt at parity with general unsecured debt unless an agreement subordinates it. S.D. Codified Laws § 47-1A-640.4 excludes debt from balance-sheet liabilities when its terms make principal and interest payable only to the extent a distribution could then be made; every principal or interest payment on debt issued as a distribution is itself retested on the payment date.

Section 47-1A-640.5 expressly removes liquidation distributions under §§ 47-1A-1402 through -1501 from this framework. This survey does not apply those liquidation rules or decide insolvency, creditor, fiduciary, accounting, tax, or valuation questions.

What trips people up

The governing rule is split across six code sections. Authority and the default record date begin in § 47-1A-640, but the financial tests, measurement dates, debt rules, and liquidation exclusion continue through § 47-1A-640.5.

The 120-day period changes the measurement date. It is not permission to ignore an intervening restriction or proof that a later payment is lawful. The statute tests an ordinary distribution at authorization only when payment occurs within that period; otherwise it uses the payment date.

Conditional distribution debt receives two linked treatments. Its stated payment condition can keep it out of the balance-sheet liabilities, but each actual principal or interest payment is treated and measured as a new distribution.

Common questions

Does South Dakota require a distribution to come from surplus or retained earnings?

No separate surplus or retained-earnings source test appears in §§ 47-1A-640 through -640.5. The board still must apply both post-distribution tests, the articles, and the affected share terms.

May a committee authorize a distribution?

Only within the structure in § 47-1A-825.1. A committee may authorize or approve according to a formula or method, or within limits, prescribed by the board.

May one class receive a different class as a share dividend?

Section 47-1A-623 permits that only if the articles authorize it, a majority of votes entitled to be cast by the class or series being issued approves it, or no shares of that class or series are outstanding.

Does a shareholder agreement avoid the financial tests?

No. Section 47-1A-732(2) permits a qualifying agreement to govern distributions, including disproportional distributions, but expressly keeps the arrangement subject to §§ 47-1A-640 through -640.5.

Statutes and sources

• S.D. Codified Laws § 47-1A-140(4), (6) — covered corporation and distribution definition. South Dakota Legislature (accessed September 4, 2026).
• S.D. Codified Laws §§ 47-1A-601, -604, -623 — class and series terms, fractions and scrip, and share dividends. South Dakota Legislature class- terms text, fraction text, and share- dividend text (accessed September 4, 2026).
• S.D. Codified Laws §§ 47-1A-640 to -640.5 — authority, record date, financial tests and valuation, measurement dates, distribution debt, and liquidation exclusion. South Dakota Legislature authority text, financial- limits text, measurement text, debt-parity text, conditional-debt text, and liquidation-exclusion text (accessed September 4, 2026).
• S.D. Codified Laws § 47-1A-732(2) — shareholder-agreement authority and retained financial limits. South Dakota Legislature (accessed September 4, 2026).
• S.D. Codified Laws §§ 47-1A-825 to -825.1 — committee creation and the board-formula-or-limits restriction. South Dakota Legislature committee text and powers text (accessed September 4, 2026).